When a person dies, any asset acquired or accumulated during life by the decedent, cash, securities, real property and so on is transferred to persons named in his/her will or who is entitled to take ownership thereof under law of intestacy(when no will is left). Probate is a legal proceeding in which the final financial affairs and asset conveyance to beneficiaries of a decedents estate is presided over by a court of law. A will does not avoid probate.
In aggregate, the probate filing fees, lawyer fees and statutory fees involved with the probating of an estate can consume a sizeable chunk (10-20%) of a decedents liquidated assets. In most states, an estate with a value of $100,000 or less is handled through “small estate law”outside of probate court, and at much less expense. However, there is a legal instrument (a legally executed written document) which avoids probate or small estate law procedures altogether called a revocable living trust.
A trust is basically an entity created by a grantor(s)/trustor(s) (person(s) establishing a trust) who via instrument (trust deed/agreement) transfers and assigns property to a trust entity- this entity is like a corporation having its own identity independent of the trustors. The trustor(s) also or usually become the trustee(s) for the trust giving them full and exclusive fiduciary control over the use and transfer of assets deeded to the trust, as well as the right to any income generated by the assets held in trust. In this way, the trust passes all of its income to the trustees who report that income on their personal income tax returns, avoiding the necessity to file separate income tax returns for the trust entity.
The trust instrument also names successor trustee(s) who will assume management and fiduciary responsibility for the trust when the last remaining grantor trustee becomes deceased. A properly constructed trust will also provide for the successor trustee to take over management of the trust in the event the living trustor(s) becomes incapacitated, avoiding court appointed conservatorship. In the case of a trust involving substantial asset value, banks, attorneys and trust administration firms may also be appointed as successor trustees. In the case of a joint marital living trust, also referred to as an A/B living trust, when one spouse passes the serving spouse becomes the automatic successor trustee.
It is also noteworthy to mention here that an A/B trust, if properly constructed, executed and managed, can reduce the overall affect of estate tax on a decedents estate. This is essentially accomplished by dividing the trust into two separate trusts called Successor and Survivor trusts at the time of the first spouses passing. The allocation of assets to the successor trust becomes irrevocable, but the surviving trustor retains management control an the right to income from assets allocated to the successor trust. The surviving spouse or trustor, of course, retains full control of assets allocated to the survivor trust and the revocable nature of the survivor trust is maintained.
A living trust also names beneficiaries who are persons that will inherit ownership of trust assets upon the death of the last living trustor and winding up of trust affairs including settling all liabilities. The beautiful thing about a living trust is the fact that all aspects of its management and execution are a private affair and if properly constructed totally avoids necessity of public probate proceedings. The reason for this probate avoidance, is that upon the death of the last surviving trustor the transfer of control to a successor trustee and assignment of all trust assets to its beneficiaries has already taken place in a legal sense and there is nothing left to probate.
Most people seeking a living trust will retain an attorney as council, and to draft a living trust instrument for them. The lawyer, or his paralegal will use a software supported boiler plate (template) to construct the trust instrument and then charge a big price tag, usually thousands of dollars. In today’s world, a person(s) seeking a trust can save a whole lot of money by using the same kind of boiler plate software themselves, or go to a reputable paralegal firm providing trust instrument writing services. Nolo Press is a long established firm providing do it yourself living trust preparation software for $89. The online service legalzoom.com is another example of a firm providing living trust instrument preparation services for around $300.
No matter how an individual or married persons go about preparing a living trust, the benefits with respect to estate tax offset and probate avoidance are substantial. It boils down to how much of your estate will pass to the beneficiaries you designate and how much will be absorbed by legal and tax expense.
The information contained in this article is based on the author’s professional knowledge and experience as tax practitioner and paralegal.