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Are Living Trusts Effective at Avoiding Probate?

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Avoiding Probate

“The longest Will ever admitted to probate was 1,066 pages, and 95,940 words long! It was bound in 4 volumes. (Frederica Evelyn Stilwell Cook). It went to probate in 1925.” Even if your estate does not warrant a 1,066 page will you should provide for your heirs and estate with proper planning.  The administration of your estate after your death does not have to be a cumbersome, painful process.  Avoiding probate can save time, money and unnecessary headaches.  There are some distinct advantages to creating a living trust instead of a will.  One of those advantages is avoiding probate.

Why would you want to avoid probate?  The probate process is a court procedure that involves establishing the validity of the will and administering the will as requested by the deceased.  The validity of the will and the nominated administrator of the will have to be affirmed by the court.  Creditors of the deceased have to be notified and paid.  Assets may need to be appraised and sold prior to being distributed to heirs.  Every individual state has its own laws regarding probate.  If an estate goes to probate it will incur court costs as well as lawyer fees.  Some people choose to try and administer estates through probate without legal assistance although this is not advisable.  While hiring a probate attorney will cost money, there are many legal filings and deadlines that need to be met and the assistance of an attorney can be extremely helpful.  If you are able to avoid probate altogether you can also avoid probate fees and legal costs associated with probate leaving your heirs with more to inherit.  Probate also takes time.  Going through probate and all the required legal steps can be a lengthy process.  When going through probate, beneficiaries of the estate may wait a year or more depending on the complexity of the estate to collect their inheritance.  In addition, probate is processed in open court.  It is a public process so the details of the estate, debts and distribution become public knowledge.  The details of your will become part of the public record and available to anyone that cares to review it.  Probate is a slow, public and potentially expensive process.

How does a living trust avoid probate?  If probate does not sound like the best option for you, you can create a living trust and transfer assets to it.  A living trust is similar to a will in that it is a legal way to document your wishes for your estate after your death.  A living trust is a basically a holding vehicle for your assets.  Some assets such as pensions and annuities should be put into the trust for tax reasons; rather than pass them by beneficiary designation.  The trust holds your assets during your lifetime and then transfers them to your beneficiaries after your death.  You will appoint a successor trustee to handle the distribution of your assets as dictated in the trust.   Your living trust bypasses the probate process altogether, “Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee… simply transfers ownership to the beneficiaries you named in the trust.  In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.” A living trust is an excellent way to avoid the expense and time that probate incurs.   Because your trust never goes to court, it is never made part of the public record.  In this way, the terms of your living trust are able to remain private.

Living trusts are very effective at avoiding probate and beyond those already listed have some additional advantages.  If you create a revocable living trust you can move assets in and out of the trust as you wish throughout your lifetime.  A living trust also allows your chosen representative to act on behalf of your estate in the event of your becoming incapacitated.

There are a few instances when a living trust will not help you avoid probate.  For instance, if you create a living trust but do not put your assets in the trust, then those assets will go to probate at the time of your death.  That is why Living Trusts are usually created in conjunction with a special type of will known as a “pour-over will.”  A pour-over will is a last will and testament that serves as a safety device to capture any assets that are not transferred to or included in a living trust and that do not pass by beneficiary designation or survivorship.  An important part of creating a living trust is that it needs to be “funded,” meaning that your personal assets must be transferred into the trust document via the trust document and/or re-titling the assets in to the trust’s name. While “funding” a living trust can be an easy process, sometimes assets don’t always make it to the trust for a variety of reasons.”

Work with your estate planning professional to determine if a living trust is right for you.  Not all assets automatically go through the probate process and depending on the size and items within your estate this may or may not be the proper estate planning vehicle for you.

Understanding Probate – Generally

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When people hear the word “probate” they think of long-drawn out court hearings, expensive fees, and delayed distribution of estate assets. While these things could happen, they aren’t the norm for most estates that are probated. There are two types of probate proceedings for handling a decedent’s estate, informal probate and formal probate.

Probate is a legal proceeding in which the validity of a deceased person’s will is proved, an inventory of the person’s assets is prepared, assets of the estate are valued, the debts of the decedent and expenses of administering the estate are determined and paid, and the remaining assets are paid to beneficiaries in accordance with the decedent’s will or, if he or she does not have a will, as provided under the law. Contrary to what many people think, if a person dies without a will, his or her assets do not automatically pass to the state. State law that determines which family members receive the decedent’s property if he or she doesn’t have a will, or if his or her will does not dispose of all of his or her assets. This law can be overridden by simply having a valid will that disposes of all property of the estate.

Informal Probate:

This is the type of probate proceeding is used when the will being probated has not been challenged and there are no significant issues that need to be decided by the probate court. The vast majority of estates settled in the probate court use the informal probate process. During an informal probate, the court is much less involved than in a formal probate. Many cases don’t even require an appearance in court. All required documents can be filed with the court by mail.

Formal Probate:

This is the process that is initiated when there is a dispute regarding the estate such as whether a will is valid, who should serve as the personal representative, etc. If there are conflicting interpretations of a will, a formal probate will most likely be used to confirm the true meaning of the will.

Will all of my property have to go through probate if I don’t have a trust?

Probably not. Some assets pass on the death of the owner automatically by operation of law. There are two primary types of assets that pass by operation of law: “survivorship assets” and “beneficiary designation assets.” It is important to coordinate your will or trust with beneficiary designation assets in order to avoid unintended results.

Survivorship assets are titled the names of multiple owners and pass automatically to the surviving owner(s) when one of the owners dies. Here are some examples of survivorship assets:

  • Bank and financial accounts or other property titled in joint tenancy with right of survivorship pass automatically by law to the surviving joint tenant when one of the joint tenants die.
  • Bank and financial accounts or other property titled as community property with right of survivorship pass to automatically to the surviving spouse when one of the spouses die.

Beneficiary designation assets remain the sole property of the owner until his or her death, when the assets are paid to one or more beneficiaries the owner designated in writing. Beneficiary designations can be changed or revoked by the asset owner for so long as he or she is able to do so. Here as some examples of beneficiary designation assets:

  • Life insurance policies and annuities pass after the insured’s death to beneficiaries designated in a beneficiary designation form that is signed by the owner of the policy or annuity and filed with the issuing company.
  • Retirement funds, such as IRAs, Roth IRAs or 401k accounts pass after the account owner’s death to beneficiaries designated in a beneficiary designation form that is signed by the owner and filed with the plan administrator or IRA sponsor.
  • Financial accounts that have TOD (Transfer on Death) or POD (Payable on Death) designations pass after the account owner’s death to beneficiaries designated in a beneficiary designation form that is signed by the account owner and filed with the financial institution at which the accounts are located.
  • Real estate that has one or more beneficiaries designated in a deed signed by the owner of the real estate and filed with the county passes on the death of the owner to the beneficiaries designated in the deed.

Survivorship Assets and Beneficiary designation assets are not for everyone:

While survivorship titling and beneficiary designations are very efficient means of passing assets on death, they are not always appropriate. For example, if an elderly parent titles a bank account in joint tenancy with rights of survivorship with a child so the child can write checks for the parent, the entire balance of that account will pass to the child, which may not be what the parent intended. In such case, other children of the parent may be unintentionally excluded as beneficiaries; a power of attorney may have a more appropriate means of providing the child the ability to pay bills without affecting the distribution of the account balance at the death of the parent. Using beneficiary designations to pass assets to a beneficiary who is too young to properly manage or prudently spend them can result in more harm than good. The lawyers at Bredemann & Shellander PLC can help you decide if survivorship titling is right for you or who should be named as beneficiary of your beneficiary designation assets.

Probate: Separating Fact From Fiction

You may have heard that probate is expensive, time consuming and by the time it is over, there won’t be much of the estate left to distribute. However, that is not the case for most estates that go through probate. Fees for probate, especially informal probate, are modest and lawyers can only charge reasonable fees for the services they provide while assisting in a probate proceeding. Of course, expenses can escalate if there are disputes.

You may also be under the impression that probate takes a long time and that your assets will be tied up indefinitely, not reaching your intended heirs for months or years. This may be true in extreme situations but it is not the norm. One step of the probate process is giving notice to creditors of the decedent to provide them with an opportunity to file a claim against the decedent’s estate. Creditors have a limited time to file claims against the estate. Some Personal Representative are reluctant to distribute assets of an estate until the statutory claim period has expired out of concern that there will not be enough assets left after the distribution to pay creditors.

If you have questions about probate, or you want to talk to an attorney about how you can minimize the amount of assets that will need to go through probate, feel free to reach out to us at Bredemann & Shellander PLC. (LINK). Our lawyers have handled hundreds of probate cases.

We are happy to look over your existing documents or help you create an estate plan that will ensure that all of your wishes are carried out and your loved ones are taken care of when you are gone. Give us a call at 480-998-0999 to schedule a consultation.

The article above is intended for education purposes only and should not be considered legal advice. If you need legal advice, contact an attorney regarding your situation.