Live or Let Probate, Part 3
Well, if you have stayed with me this long, and I hope that you have, then you will know that this is the final article regarding the best way to avoid the probate process for your estate. Up to this point we have covered the pros and cons of the probate process, the writing of a Last Will and Testament, and the process of listing a beneficiary on your assets. Now we turn to one of the most important steps of the estate planning process, especially as it relates to the avoidance of the probate process, which is the creation of a Revocable Living Trust.
Now, what exactly is a Trust? Isn’t it only a legal process that “rich” people partake in? Are they a new legal process? Is it worth it for me to create a trust? The answers to all of these gripping questions will be answered below:
- In the simplest form, a Revocable Living Trust is just a contract. You might ask yourself, “well, who is making the contract?” The answer is also quite simple: in most circumstances, you are making the contract with yourself, but the terms of this contract with yourself have to be very clearly indicated in the actual trust agreement. Here are the main points to consider:
Parties to the Contract– In a standard Revocable Living Trust, you will indicate that you are the Grantor/Settlor on one side of the contract and you are also the Trustee on the other side. The Grantor/Settlor is the individual who creates the trust agreement and is responsible for transferring all of the assets into the trust name or names the trust as a beneficiary. The Trustee is then responsible for receiving the property and administering it in such a way as to protect and benefit the Grantor/Settlor. This is a fairly simple expectation in a standard Revocable Living Trust as you will be both parties and one can hopefully assume that you would act in such a way as Trustee that would benefit yourself as Grantor/Settlor. Obviously, if you are married, the terms would be slightly altered to name you and your spouse as Co-Grantors/Co-Settlors and as Co-Trustees.
The one caveat to mention here is that some people will name another person as the Trustee under their trust agreement. There are several reasons to do this, such as trying to avoid nursing home expenses, limiting liability issues, or for tax purposes. However, as I have cautioned many of my clients, this is a very serious step to take, as you are losing the ability to control the assets in the trust, as you will not be the Trustee. Do you want your house to be sold and you are not the person to make this decision? It is a foreseeable outcome when you name someone else as the Trustee. However, as stated before, the Trustees main responsibility is to take care of the Grantor/Settlor, so choose wisely as to whom you are possibly and literally placing your “trust” in to take care of your assets.
- So, what assets should you place in your trust? Do you have to be wealthy to create a Revocable Living Trust? The answer to these questions is related and, for the most part, revolves around your real estate. Every state has a legal “benchmark” indicating what value a property must be at in order to be subject to the state probate laws. Each state is different, thus why it is important to speak with an estate planning attorney to know what the exact amount is for what assets you might have that will be subject to the probate process upon your passing. However, the good news is that when you transfer your property into the trust name, you no longer have to worry about the probate value. Anything that is titled into the name of your trust will not be subject to the probate laws of your state upon your passing. This is why most people create a Revocable Living Trust and the most important asset that they will convey to their trust is their home. It is very likely that your home will be subject to the probate laws, thus when you transfer your home to the trust, via a deed, this is no longer a concern. As mentioned above, when your home is owned by the trust, you are still in complete control of all aspects of your home as Trustee of your trust agreement and your real estate will not see the inside of the probate courtroom. It is important to note that you can still buy and sell future real estate in your trust as the trustee, but you will always want to remember that your trust agreement is the legal owner of the real estate.
- It is also important to know that your trust can be named as an owner of your financial accounts or as a beneficiary of those accounts, just like a person. So, in addition to deeding your property into your trust, it is important to either transfer the ownership of your accounts to your trust, or name the trust as the beneficiary of the account. I actually prefer naming the trust as a beneficiary, as it allows more flexibility during your lifetime and will still be conveyed to your trust, but either situation is favorable. However, it is important to discuss this step with your attorney, financial planner, or accountant, as there are some very negative tax implications that can occur when you name your trust as the beneficiary of some of your tax deferred accounts, such as IRAs. If you have life insurance, I always encourage that my clients name their trust as the beneficiary, as it is not taxable and it is an easy way to assure that there will be some liquid funds in your trust upon your passing. Your trust will be administered when you die and there will likely be some expenses during the administration, such as funeral expenses, final medical bills, and real estate expenses, thus having these liquid assets available for the acting Trustee will be essential.
- In addition to your Revocable Living Trust, you will need to create a Pour-over Last Will and Testament. This is due to the fact that you likely have some property that cannot be conveyed to your trust either by a change of ownership or via beneficiary designation; this is your personal property. Your personal property, such as clothes, furniture, jewelry, etc. does not have title work, thus cannot be conveyed to your trust. This is why the Pour-over Will is essential. In the Pour-over Will you will have the opportunity to indicate where you would like your personal property to go upon your death and you will include a pour-over provision that will indicate that if any of your real property was somehow overlooked and not conveyed to your trust, the real property will “pour-over” to your trust estate at the time of your death and be distributed according to the same provisions as your trust agreement. However, the pour-over provision will only apply to property that does not exceed the probate benchmark in your state, thus why it is still essential to transfer your property to your trust during your lifetime, as mentioned above.
So, the moral of the story is that if you plan accordingly and use good stewardship with the assets that the Lord has entrusted to you, your estate should never be subject to the probate laws. However, important planning and decisions must be made during your lifetime and YOU are the only person who can accomplish it. We have now started a new year and a new decade, if you haven’t completed this important step, then why not? It could be one of the most important decisions you have ever made.