A pour-over will with a testamentary trust should never be used as your primary estate planning document. A pour-over will is an estate planning tool that directs your assets to be put into your trust after you die. You can use a pour-over will to fund a testamentary trust that is created by your will or to fund your living trust that was created while you were living. A pour-over will is a good idea to have in place as a backstop in case you forgot to put assets into your living trust while you were alive. But if your primary estate plan is to use a pour-over will to fund a testamentary trust, you have a poor estate plan.
A friend’s Pour-Over Will Debacle
Recently a friend’s father passed away, he was 79 years old. The deceased man and his wife who is 76 and still living have an estate worth approximately $10 million. About $5 million of the estate is in traditional investments like stocks, ETFs, mutual funds etc., and the other $5 million is spread across four real estate properties owned in four different states. His father died with a pour-over will as his only estate planning tool. Even though the family has had a financial advisor for many years, trusts were never recommended or discussed.
This couple live in Illinois which is one of the few states that still has an estate tax. Because Illinois does not allow portability of their $4m estate planning exemption, it was important for this family to preserve both the husband and wife’s $4m estate planning exemptions by having the first spouse to die fund an irrevocable trust with $4m of assets.
Instead of creating living trusts that become irrevocable upon the death of the grantor, this family relied exclusively on a pour-over will for trust funding combined with a testamentary disclaimer trust created through the husband’s will. Because his assets were in his name when he died and his trust was not yet in existence, his assets must now go through probate court to be placed into his testamentary disclaimer trust.
Off to Probate Court We Go
The surviving spouse is now busy getting death certificates, arranging for property valuations and focused on administrative tasks. Instead of mourning the loss of her husband and focusing on her family, she is distracted by a daunting administrative workload and meetings with attorneys. She and her lawyers will need to run a probate process for real estate in four different courtrooms in four different states. The legal costs for this mess could easily exceed $50,000 and I would not be surprised if the final bill ended up being over $100,000. Given the amount of the assets and multiple states I expect this administrative nightmare will take well over a year to finish.
Pour-Over Wills with Testamentary Trusts Always End in Probate
A testamentary trust that is created through your will can only be funded when you are dead. If you have assets in your name when you die, the only way to get those assets into your trust is through the probate court.
Lawyers Love Probate Administration Gravy
Despite what any attorney tells you, probate court should always be avoided. The only person who wins when your family must probate your assets is your lawyer, racking up the billable hours. Many estate lawyers say probate is no big deal but that is because they have a conflict of interest. Lawyers get paid handsomely to perform administrative work if you die and probate is required. A large probate administrative job will bring in far more revenue for an attorney than drafting a pour-over will with a testamentary trust. In the case of my friend’s parents, they paid about $1,500 for their pour-over will with testamentary trust. Now an attorney stands to gain as much as $100,000 or more for simple administrative work.
Fund Your Living Trust!
If you need a trust, fund your living trust while you are alive. By placing your assets into your trust while you are living, you are guaranteeing that your beneficiaries will avoid probate. Your lawyer will not be happy because they will not have much work to do when you die but your family will be saved from the emotional, mental, and financial toll that probate court wreaks on families.
Ethan S. Braid, CFA
President
HighPass Asset Management
Denver, CO