What is Probate and why does everyone want to avoid it?

When a loved one passes away, his or her estate often goes through a court-managed process called “probate.”  Probate deals with the transfer of title at death.  The probate court is the only institution on earth that can change the title to a deceased person’s property.  The probate process deals with the affairs of a deceased person and his or her estate administration where the assets of the deceased are managed and distributed.  If your loved-one owned his or her assets in a well-drafted and properly funded Living Trust, it is likely that no court-managed administration is necessary.  However the successor trustee needs to administer the distribution of the deceased.  The length of time needed to complete the probate of an estate depends on the size and complexity of the estate and the local rules and schedule of the probate court.

Every probate estate is unique, but most involve the following steps:

  • Filing of a petition with the proper probate court
  • Notice to heirs under the Will or to statutory heirs (if no Will exists)
  • Petition to appoint Executor, now known as the “Personal Representative” (in the case of a Will) or Administrator for the estate
  • Inventory and appraisal of estate assets by Personal Representative
  • Payment of estate debt to rightful creditors
  • Sale of estate assets
  • Payment of estate taxes, if applicable
  • Final distribution of assets to heirs

What is a Living Trust?

A Living Trust can be used to hold legal title to one’s assets and provide a mechanism to manage them. You (and your spouse) can be the trustee(s) and beneficiaries of your trust during your lifetime.  You also designate successor trustees to carry out your instructions as you have provided in case of death or incapacity. Unlike a Will, a Trust usually becomes effective immediately after incapacity or death. Your Living Trust is “revocable” which allows you to make changes and even to terminate it.   One of the great benefits of a properly funded Living Trust is the fact that it will avoid probate and minimize the expenses and delays associated with the settlement of your estate.

What are the advantages of having a Living Trust?

Like a Will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a Will.  A Living Trust allows for the immediate transfer of assets after death without court interference.   It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process.  With a properly funded Living Trust, there is no need to undergo a potentially expensive and time-consuming public probate process.   Wills are public documents where anyone can read them.  A Living Trust is private only accessible to the beneficiary and taxing authorities.  In short, a well-thought out estate plan utilizing a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.

Will I lose any control over my property if I create a Living Trust?

Creating a revocable Living Trust and transferring your assets to the name of that trust will not affect your ability to control such assets.  During your lifetime when you are mentally competent, you have complete control over all your assets.   You may engage in any transaction as the trustee of your Trust that you could before you had a Living Trust.  There are no changes in your income taxes.  If you filed a 1040 before you had a trust, you continue to file a 1040 when you have a Living Trust.  There are no new Tax Identification Numbers to obtain.  Because a Living Trust is revocable, it can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, your Successor Trustee of your Living Trust stands in your shoes.  This allows the Trustee to transact business on your behalf according to the instructions you have laid out in the Living Trust. Upon your passing, the Living Trust can no longer be modified and the successor trustee(s) you have designated will then proceed implement your wishes as directed such as transfer of  your assets to your beneficiaries.

Do I have to transfer all my assets to my Living Trust?

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust.   Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. All of these assets should have their beneficiary designations closely coordinated with their Living Trust.  Bank accounts, brokerage accounts, savings accounts, certificates of deposit and all other assets owned by the maker(s) of the Living Trust should be retitled in the name of the Living Trust.  When you do your estate planning, it is important to seek the counsel of an experienced attorney who is familiar with the intricate regulations of retirement accounts and can coordinate the appropriate beneficiary designations with your overall estate plan.

If I transfer title to real property to my Living Trust can the bank accelerate my mortgage?

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your Living Trust as long as you continue to live in that home.  The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide protection for residential real estate with more than five dwelling units.  However, we find that most clients who do own residential property with more than five dwelling units tend to own them through a business entity and not directly in their individual names and hence are not concerned with the five dwelling exception.