Probate and Living Trusts




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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