When you have a revocable trust, does that always mean that your estate will avoid the probate process when you die? You may be surprised to learn that the answer is “No.”
Why is that? First, let’s review what the probate process is. Many people think that “probate” means “taxes.” Probate is not a tax. Probate is actually a court process where your last will is admitted to court (authenticating that there are no other wills that supplant it), your personal representative is appointed to handle all estate matters (in some states this person is called your ‘executor’), your creditors are cleared, taxes are paid, accountings are filed, and eventually the beneficiaries receive their inheritance.
While revocable living trusts are designed to avoid the probate process, you actually have to transfer your assets into the trust to make that so. Unfortunately, many people believe that they transferred their assets into their trust when they really haven’t. I’ve found that a common misconception is that if you create a list of your assets and attach that list to your trust, then you have accomplished a transfer. That won’t work.
The correct way to transfer your assets into your trust requires a change on the title to those same assets. Suppose that Ted Turner owns thousands of acres of ranch land in Montana that he wants to put into his revocable trust. He needs to sign a deed that transfers his Montana ranch to the trustee of the trust. Most of the time the person who creates the trust acts as his or her own trustee. So the deed in this example would likely be to: Ted Turner, Trustee for the Ted Turner Revocable Trust dated July 1, 2010 (assuming that is the day that Ted signed his revocable trust).
The same holds true with Ted’s certificate of deposits, bank accounts and brokerage accounts. Ted needs to complete forms with his financial institutions that change the name on the account to Ted Turner, Trustee for the Ted Turner Trust. If he or his lawyer does not go through this exercise, then Ted hasn’t transferred his assets into his trust, and those same assets will therefore have to go through the probate process on Ted’s death.
Your wealth needn’t rise to the level of Ted Turner’s by the way, to benefit from a revocable trust. If your net worth exceeds $250,000 then you should take the time to consider whether a revocable trust is right for you. This depends largely not only on the value of your net worth, but on the types of assets that you own, and the facts of your individual and family situation.
Many people worry that once they transfer their assets into their revocable living trust, then they’ll lose control over those assets. This simply isn’t true. Since by definition the grantor of a revocable living trust can amend or revoke the trust at any time, he or she controls the trust and the trust assets as long as they are alive and competent. Generally speaking, the grantor of a revocable living trust can consume, sell and transfer any asset at any time without restriction.
It is not uncommon for people who have revocable living trusts to die with assets outside of the trust requiring a probate. This isn’t the end of the world. When you have a revocable living trust, your will becomes something known as a “pour over will.” If you read the provisions of your pour over will carefully, you’ll see that your will doesn’t really say who is to get what from your estate.
Instead, you’ll find that the will directs distribution of those probate assets into your revocable living trust. Your will acts as a “safety net” – catching the assets that should have been transferred into your revocable living trust during your lifetime – transferring them at your passing into your trust.
This highlights another benefit to revocable trusts. Note that the pour over will doesn’t say who gets what from your estate – and how they get it. It simply says to transfer any probate assets into your trust for distribution in accordance with its terms. All wills are public documents since they have been filed with probate court. Anyone can go down to the courthouse and see your will after your death. In contrast, trusts are private documents. They are not filed publicly. So even if you have assets subject to probate at your death, if you have a trust the general public will not be able to easily see who your beneficiaries are, and what they are receiving. In today’s world filled with scam artists – this is a rather important benefit to trusts.
There are certain assets that should not be transferred into your revocable living trust during your lifetime. If you were to try to transfer your IRA account into your trust, for example, you would likely have to recognize all of the taxable income inherent within the IRA. Since IRAs name a beneficiary they do not go through the probate process at your death and therefore do not – and in fact should not – be transferred into your revocable living trust. Generally speaking, annuities also are not funded into revocable trusts for much the same reason.
If you are wondering whether the right assets have been properly transferred to your trust, you should visit with your estate planning attorney to review your current situation. Bring with you copies of your current deeds, brokerage, bank, financial statements and copies of any annuity, life insurance and IRA accounts along with their beneficiary designations.