Do I need a will or a trust?
A trust is considered the gold standard in estate planning, and in most situations a trust is what I recommend to people. However, there are instances where a will would be more appropriate.
Who needs a will?
Young Couples. Because all estate planning is an exercise in risk management, sometimes younger couples, who are, statistically speaking, unlikely to die anytime soon, will opt for a will rather than a trust. For a couple in their twenties or early thirties, who have only one or two young children and few assets, a will can make a lot of sense. A will is used to nominate a guardian or conservator for their children (often the most important issue to a couple with young children), and because they have few assets, there are usually fewer concerns about how to dispose of those assets: they will just go to whoever gets the kids, and that person will use them to raise the children. If the assets are small enough that you would expect them to be used up before the children reach 18, then there isn’t usually any reason to worry about complicated provisions for distributing them to children as they come of age.
For example, Steve and Peggy are 27 and 25. They have two young children, ages 4 and 2. They own a home, but only have $20,000 in equity. They each have a life insurance policy for $75,000, plus another $5,000 in their bank accounts. They both die suddenly, and Peggy’s parents get the kids. If they are named as both guardians and conservators for the children, her parents will aget access to the value of the estate, which is worth about $175,000. That’s not a small sum of money, but it’s probably not enough to raise two kids to the age of 18 all by itself, once you start thinking about the cost of food, clothing, school activities, doctor visits, braces, etc., all spread out over the next 16 years. And if they had a will instead of a trust, there will be some expenses associated with probate, which can reduce the estate by a little, plus two funerals to pay for. So, we expect all the money to be gone long before the kids reach 18. The money will be helpful to Peggy’s parents, but there’s no need to worry about how to distribute it to the kids after they are grown, and so maybe Steve and Peggy don’t bother with a trust.
Likewise, the complications and expense of probating an estate (which can usually be avoided with a trust), are less of a concern for Steve and Peggy, because they’re not actually planning on dying and needing probate. Given the cost difference between a will and a trust, they decide to risk just doing the bare minimum; they can always revise their estate plan later.
Small Estates. Relatively small estates are often better served by a will based estate plan, especially where there is no real property to worry about. These estates are usually fairly simple to administer, and will have liquid assets (cash on hand) to manage expenses and pay for probate. For estates under $100,000 and without real property, it is usually unnecessary to do probate anyway. A typical example might be Scott. He is divorced (never remarried), and has one daughter, Cassie. He had a good job and was able to retire comfortably, but never bought a home, preferring the simplicity of renting an apartment. When he dies, he has $150,000 in a bank account, plus $500,000 in a 401k, and a car and some personal property. Cassie will need to probate the estate, but Scott has left instructions with his will about which lawyer to use, so his daughter has no trouble finding an attorney, who charges a reasonable fee and takes care of probating the estate. It takes about six weeks, and then his daughter can move the money into her own accounts, clean out his apartment, pay any last medical bills, and the estate is all wrapped up.
Cheapskates. Setting up a will is usually significantly cheaper and easier than setting up a trust. It is not at all unreasonable to figure that your kids are going to get all your stuff, and they can darn well figure out and pay for probate. This can be illustrated by Hank. Hank did well in life, founding a successful company and retiring early. His wife passed away years ago, and he never remarried. He has one daughter, Hope. He owns a townhome in the city, and a vacation home out of state. He also still owns significant stock in his company, as well as a generous 401k and several valuable, vintage cars (his hobby). He owns some undeveloped land in the west that he inherited from a relative, but doesn’t do much with. All told, his net worth is $4.5 million. When he dies, he leaves everything to his daughter. She has to hire lawyers in three different states to administer the property in each state that it is located in, plus get in touch with an auto dealer to take care of the cars, and real estate agents in three states to handle the property, on top of handling the funeral and burial arrangements. But no one feels bad for her (least of all Hank), because she just inherited $4.5 million dollars.
In all seriousness, cost is an important consideration, and it is almost always better to have something than nothing. If a trust is out of reach for financial reasons, there is nothing wrong with a will. People have been using wills since Roman times, and if it was good enough for Julius Caesar, it will work fine for you.