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Probate and Living Trusts
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What is Probate?
When John Doe
dies, with an account, stocks, etc. in his name alone -- how do
we get them to his successors? He is the only one authorized to
sign for them. After his death, banks would prefer that he not
come in to sign.
The first step of probate is to appoint someone as executor (if
named in a will) or administrator (if not) -- to get letters of
office announcing to banks etc. that they are safe in taking this
person's signature to release John's assets. When you think of
the process of getting the third party off the hook, a lot of
steps start to make sense. It then becomes the executor's job to
get control of assets, pay claims and expenses, and distribute
the assets to the parties entitled -- as spelled out in the will.
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Wills and Living Trusts
There are several ways you may set up trusts for your family to
function after your death.
You may establish irrevocable trusts and make gifts during your
life.
You may set out the terms of the trust in your will -- a
testamentary trust.
You may set out the terms in a separate document, called a trust
agreement. Your will may then name that trust as beneficiary of
your estate (and do the same with your insurance). Your probate
estate "pours over" into the trust, referred to as a pour-over
trust. If you are going to have post-death trusts anyway, you
might as well use a separate trust agreement -- it is easier to
amend, and more private, than a will.
The next level is a living trust. And here we must be careful in
terms, because two different approaches are often confused.
You may have a trust agreement very similar to a pour-over trust,
but instead of beginning at your death, it provides terms for
management of your assets in event of your incapacity. See below.
This is a living trust.
In addition to the trust agreement, you may retitle your assets
in the name of the trust. This is a *funded* living trust.
Both of these last two are referred to as living trusts.
Sometimes there is confusion between the two. Only the latter
will avoid probate -- but that may not be necessary. On the other
hand, I find the first -- the unfunded living trust -- good
protection against incapacity.
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What About Incapacity?
I am very concerned about a client's incapacity and use living
trusts to provide for that. If you become incapacitated, the
successor trustee(s) has the power to take over your assets,
manage them, distribute for you, etc. But a trustee can only
manage the assets which are in the name of the trust. This would
get us back to the need to register assets in the name of the
trust -- back to the complication.
However, there's a solution -- sign a power of attorney to your
various successor trustees, authorizing them (and therefore
authorizing third parties to cooperate with them) to transfer
assets from your name to that of your living trust. Result -- you
can ignore the trust while living a normal life, but it is there
to spring into action when needed.
As part of this planning, I prefer that you have a co-trustee
instead of just successors. When you rely on successors, it
becomes necessary to stop and prove to the bank, etc. that the
circumstances have occurred under which the successor takes
office and may act (e.g. a doctor's certification). When you have
a co-trustee, they are always authorized to act and can therefore
do so immediately.
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Should You Avoid Probate?
I WANT TO COMMUNICATE AS CLEARLY AS POSSIBLE THAT THIS IS A VERY
STATE-SPECIFIC QUESTION -- and even when relevant may be of low
priority.
There have been many books and articles written about the horrors
of probate. I wrote some myself twenty years ago. This is simply
not applicable in Illinois today. Of my ten highest priorities
for a client, avoiding probate comes about twelfth. The factors
which may delay distribution (getting assets, paying taxes, etc.)
will be the same whether an estate is probated or not. Probate
itself -- the process of court procedures to get an executor
appointed and reporting to the court is at worst an
inconvenience.
For smaller estates joint tenancy, simple trusts, payable on
death accounts, may, if appropriate and convenient, avoid the
process.
You avoid probate by having your assets in the name of the trust.
This involves pre-death transfers and paperwork which may be more
trouble than the probate you are seeking to avoid. And unless
virtually everything is so transferred, you'll need probate
anyway. From my work across the country, it appears that most
states have simplified their probate procedures.
In other states, it is still a problem. Even then, however, if an
estate is large enough to have tax issues, it is best to focus on
solving those, and if necessary supplement those actions with
probate avoidance steps.
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Questionable
Living Trust Arguments
Having seen scores of presentations
and arguments, I've found that there are many similarities -- and
many errors and misrepresentations.
The most important basic idea to grasp is that "avoiding probate"
means avoiding certain court procedures and costs. That's all.
If the deceased owed money at death, those debts still have to be
paid.
A funded living trust does not avoid the need (and cost) of
filing a tax return, or avoid taxes. If it includes the right
terms, it may save taxes -- but that's not because it's a funded
living trust -- the same results would come if those terms were
in a will, or an unfunded living trust.
The living trust will not avoid the job and expenses of gathering
assets, suing debtors, disposing of property, etc. If you see sales material pointing out the costs of the above,
I suggest you question whether you're being oversold.
Be wary of the illustration that shows the estates of famous
people diminished 50% or more by debts and taxes. The living
trust won't change this. You may in fact need estate planning or
tax planning, but if somebody is concentrating on selling you a
particular tool, you should doubt whether they can really solve
*your* problems.
Be wary of the story of the man who died without a will and it
cost a big chunk of his estate to distribute to a bunch of
distant heirs. This would probably have been solved with a will
-- it doesn't illustrate the need for a living trust.
In general, be wary of presentations based on scaring you.
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