Staying Out of Probate

One of the Key Advantages to Revocable Living Trusts

A revocable living trust can play an extremely helpful role in estate planning. Revocable living trusts have the potential to greatly reduce administrative expenses, time, and effort while providing privacy to your family. These trusts are, however, often misunderstood, and sometimes rendered useless by incomplete planning.

Also subject to misunderstanding is the role that a trust plays in helping to minimize or avoid the probate process. As we will explain, probate is very much worth avoiding. But also note that a revocable living trust is a legal arrangement that can have far-reaching effects, and you should consult with legal counsel before you create one.

What is a Revocable Trust?

Like a corporation, a trust has an existence separate from that of its creators. Revocable trusts are commonly used to avoid the probate process at death. They are also used to provide a framework for care and financial management in the event of incapacity. Revocable trusts are often structured to minimize estate taxes, but it is possible to obtain the same results by careful planning without the trust structure.

In the typical revocable trust, the trust creator describes the terms of the arrangement in writing, including retaining the right to amend those terms or revoke the entire arrangement at any time. A trustee, the party that interprets those terms and manages the trust, is named. A successor trustee is named or the means of identifying a successor trustee are described if the initial trustee is unable to serve. Beneficiaries are designated. Frequently, the trust creator serves as both trustee and beneficiary of his or her trust.

The trust’s terms should detail the actions the trustee is to take on behalf of each beneficiary. The terms should also specify powers vested in the trustee and the circumstances that will bring about the trust’s termination. Once the trust is created and assets are transferred to trust ownership, they no longer belong to the transferor – they belong to the trust, and are governed by the terms of the trust.

Why Should I Avoid Probate?

Probate is a formal, court-supervised procedure established by each state to protect the rights of citizens to transfer property at death. Probate ensures that the creditors of a deceased person have a venue for recovering their claims. The universal problem is that it is cumbersome, time-consuming, expensive, and public. Legal counsel is usually required. Probate proceedings are public domain, and probated wills become a matter of public record; anyone can read a probated will merely by visiting the courthouse. A listing of the assets of the deceased is added to the probate file. Family assets (and their values) become public knowledge (in some jurisdictions, the inventories of estates are even published in local newspapers). State laws establish mandatory minimum time periods for estate administration, regardless of the size of the estate.

It is the probate court’s responsibility to ascertain the validity of the decedent’s will, appoint a party to represent the estate (an executor or personal representative), and to make sure that the decedent’s taxes and debts are paid. The court also sees that the decedent’s property is distributed according to the terms of the decedent’s will or, if there is no will, in accord with a distribution scheme devised by the state legislature of the deceased’s state of residence.

Ownership of real estate in different states creates a probate headache. A separate probate proceeding, known as ancillary probate, is required in every state in which a deceased person owned real estate.

How Much Does Probate Cost?

Probate expenses vary from jurisdiction to jurisdiction. Some studies place them as high as 10% of the estate’s gross value. Costs will vary depending on complexity of the estate plan, assets owned by the decedent and location. The actual court filing fees for estate administration are only a small part of the total cost. Professional fees, such as the cost of legal representation and the executor’s fee usually constitute a major portion of the total expense.

Even if a court supervised probate is avoided, some duties of estate administration may be required. Death tax returns must be filed by the trustee. Income taxes for the decedent for the year of death must be filed and assets transferred.

How Do Trusts Avoid Probate?

Assets held in the name of a deceased person must pass through the probate process. Correctly structured, assets held in a revocable living trust are not owned by the decedent; they are owned by the trust. The trust does not “die” when its creator does. A successor trustee may have taken over, but the trust itself is still a viable entity.

Wills do not avoid probate at all. Testamentary trusts, since they are created under the terms of a will, actually have no effect until they are probated. But assets owned by a revocable trust should not be subject to the jurisdiction of the probate court. This includes real estate held in the name of the trust even if it is located in another state.

Your existing will does not cover assets placed into a correctly designed trust. To completely coordinate your estate plan, when a trust is created, a new will (or a codicil amending an existing will) is usually prepared. A will prepared in conjunction with a revocable trust is known as a “pour-over” will. This type of will provides that anything you own outside the trust will pass to the trust when the probate process has been completed, and will thereafter be controlled by the terms of the trust. Assets will be subject to probate to the extent that they pass through the will, but often times, for example with certain personal property, this cannot be avoided due to the nature of the assets. An executed Assignment of Personal Property document can also be helpful in avoiding probate.

There are many advantages to a revocable living trust, with probate minimization or overall avoidance likely being the most important to those not subject to estate taxes. There are many other advantages to the use of a trust, but saving time, money and privacy are the most-often cited reasons for using such a vehicle. For more on what a trust can do to protect your legacy, talk to your Financial Advisor.

Baird Trust does not provide individualized legal advice or draft legal documents. Please consult your attorney regarding your personal situation.