Should I avoid probate? What are the pros and cons of utilizing a revocable living trust?
By Steve and Kiley Stuchlik, Attorneys at Law
Last month we explained what probate is. This month, we are discussing whether you should employ strategies to avoid probate and the pros and cons of utilizing a revocable living trust as a planning tool that can avoid probate.
The type of your assets is an important consideration because some “non-probate” assets pass “automatically” outside of a probate proceeding via a beneficiary designation form or transfer on death designation. Investment accounts, for example, can be set up to pass by a payable on death designation. Thus, this type of asset will not be subject to a probate proceeding as long as you properly execute the beneficiary paperwork before your death.
With respect to real property, probate can only be avoided by employing a strategy such as: transferring title to the trustee of your revocable living trust; executing a survivorship deed; executing a transfer on death deed (not allowed in Idaho)*; or via executing and recording a devolution on death (aka “community property”) agreement with a legal description of the real property, for real property located in Idaho (this works to pass property from one spouse to another without administration, not for transfer to children or other heirs). *One should be careful not to engage in DIY estate planning through the executing a deed without first contacting an attorney as there are ownership and tax consequences to consider.
Value of Your Assets
The value of a decedent’s assets affects what probate administration proceeding, if any, will be required in order to transfer a decedent’s assets. Idaho and Oregon, for example, both have more expedient administration proceedings for estates where the value of the decedent’s assets is under certain threshold amounts. Thus, to determine whether you should employ a probate avoidance strategy, the value of your assets should be considered.
Location of Your Assets
Although the primary place of probate administration will be the state of the decedent’s domicile, if the decedent died owning real property in the decedent’s name in other states, a probate proceeding (often referred to as an “ancillary probate”) will need to be carried out in each such state in which the decedent owned real property. Those proceedings will be necessary for the decedent’s Personal Representative to have the legal authority to transfer title to that real property per the decedent’s will or per the intestate laws of succession, for a decedent who died without a will.
As we explained last month, some states, such as Idaho, are more “probate friendly,” meaning that court costs are relatively lower and the proceedings are relatively informal and expedient. Accordingly, if you own real property solely in Idaho, it’s likely that executing a will and having that property administered through a probate proceeding upon your death, will be a good option. On the other hand, if you own property in another less probate friendly state or in multiple states, it’s likely that employing a probate avoidance strategy, such as creating and funding a revocable living trust during your lifetime, is a better option for you.
Goals for Your Legacy
If your goals for your legacy involve retaining control over assets and/or people after your death or potentially limiting estate tax liability (you should also consult with a qualified tax advisor about these concerns), then trust planning may be necessary. Trust provisions can restrict when beneficiaries will receive assets and what those trust assets can be used for, among other limitations. You can also designate who will be in charge of managing trust assets and distributing them to your beneficiaries. Trust provisions can be included in your will and become effective upon your death or they can be included in a revocable living trust and become effective during your lifetime. If you have concerns about becoming incapacitated, a trust may be able to provide more robust planning for your incapacity then you would be able to accomplish through other means, such as by executing a durable financial power of attorney. While a probate proceeding is a public proceeding, a trust administration is a private proceeding. Thus, if you want to control beneficiaries and/or property or plan for your incapacity and you wish to keep those plans private, avoiding probate through the use of a revocable living trust is the best option for you.
2. The pros and cons of utilizing a revocable living trust.
A revocable living trust (RLT) is an agreement that you as the trust creator (“Trustor”) enter into with yourself in your capacity as “Trustee”—the person designated by the agreement to manage your assets. This agreement, generally referred to as a “Trust Agreement” or “Trust”, must be created during your lifetime and is legally in effect as of the date you execute it. You can designate a co-trustee or alternate trustees to manage your assets in the event of your incapacity or death. Married couples typically create a joint RLT with both spouses as the Trustors and initial Co-Trustees.
In order for the RLT to accomplish the purpose of avoiding probate upon your death, your RLT must be funded. An RLT is funded when ownership of your assets is transferred from your name personally into your name as Trustee of your RLT, during your lifetime. Various transfer mechanisms such as deeds, vehicle title transfers, retitling of bank accounts, re-issuance of insurance, etc. must utilized (a person should always seek competent legal advice when funding a trust to avoid potential pitfalls).
The creation of a RLT does not eliminate the need for a will. A will is needed to nominate guardian(s) for minor children and to act as a catch-all transfer mechanism for any assets that you did not transfer to yourself in your capacity as Trustee of your RLT during your lifetime (commonly referred to as a “Pour-Over Will”). Your will should direct the personal representative of your estate to transfer all assets to the surviving or successor Trustee of the RLT upon your death so that they can be added to the trust estate and managed according to the terms of your Trust Agreement.
Upon your death, the Successor Trustee is generally directed to either distribute the trust property to your beneficiaries, or to continue to hold and manage the trust property for the benefit of your beneficiaries. Like a will, a RLT can provide for the distribution of property upon your death. Unlike a will, it can also: (a) provide you with a vehicle for managing your property during your lifetime; (b) authorize the Successor Trustee to manage the property and use it for your benefit should you become incapacitated; and (c) allow your heirs to avoid initiating a probate proceeding upon your death (provided the RLT was fully funded). That being said, a RLT will still need to be administered upon the surviving trustor’s death and trust administration is similar to probate administration and may require the assistance of an attorney.
To summarize, the following are the pros and cons of utilizing a RLT:
If you are considering a revocable living trust or other probate avoidance strategy, we are happy discuss your situation and help you decide what is the best option for you. As always, we are here to help.