A living trust is a legal entity created during your life to hold title to your assets. Living trust are popular tools for avoiding probate.
What is Probate?
Probate refers to the court-supervised process of winding up a person’s final affairs. In the typical probate proceeding, a judge will recognize the validity of your will and authorize your executor to collect your assets, pay your debts, and distribute the balance to the beneficiaries. Probate is a court-supervised process and almost always requires the assistance of a probate attorney.
Why Would Someone Want to Avoid Probate?
There are several reasons for avoiding probate, including:
- Saving Money. Probate can be expensive, often costing thousands of dollars in legal fees. Expenses increase with the size and complexity of the estate.
- Minimizing Hassle. Probate is time-consuming. Your executor must inventory estate assets, file accountings with the court, notify (and possibly negotiate with) creditors of the estate, open estate bank accounts, and transfer assets to your heirs. This can be quite a burden on the friend or family member handling the estate.
- Avoiding Delay. Probate ties up your assets in court. Courts are reluctant to allow assets to be transferred until the estate is closed. At a minimum, the executor must wait until all creditors have submitted claims, a process which could take several months. This delays the distribution of your assets to your heirs.
- Protecting Privacy. Once a will is filed, it becomes a matter of public record. Anyone who wishes can go to the courthouse and obtain a copy of your will. Some people would prefer to keep the final disposition of their assets private.
Because states have different probate laws, the expense and hassle required to transfer property after a person’s death can differ from state to state. But the reasons stated above are enough for most people to want to avoid probate.
The Key to Avoiding Probate
All probate avoidance techniques—including living trusts, life estate deeds, lady bird deeds, and transfer-on-death deeds—depend on one principle:
Probate can only be avoided by arranging your assets so that there is nothing in your name that does not automatically pass to someone else at your death.
This single principle is behind every probate avoidance tool.
How Living Trusts Work
Living trusts remove assets from your personal name so that the asset is not considered part of your probate estate at death. Here’s how it works:
- You must first create and sign a trust agreement. The agreement is between yourself as the one who set up the trust (called a settlor or grantor) and yourself as the person responsible for managing the assets (called a trustee). During your lifetime, you are also the person (or one of the people) who benefits from the assets (called a beneficiary).
- All of your assets are transferred into the living trust during your lifetime. This removes the assets from your estate so that they need not go through probate at your death.
- Because you serve as trustee of the trust, you call the shots. Even though the assets are placed into the trust, you keep complete control over the assets as though you still held them in your own name. Because you retain full control over the trust, including the right to revoke the trust and “undo” the transfers of assets, living trusts are commonly known as revocable trusts.
- If you become incapacitated, the person you have named to serve as successor trustee steps in to manage the assets for your benefit under the terms of the trust.
- When you die, there is no need to probate your estate since the trust owns all of your assets. The person you name to serve as successor trustee either distributes the assets to the people or organizations described in the trust or continues to hold them in the trust for the benefit of those people or organizations, depending on how the trust is structured.
The beauty of this arrangement is that it avoids probate without sacrificing control of your assets—a win-win situation for many people.