What is Probate and why does everyone want to avoid it?
When a loved one passes away, his or her estate often goes through probate where the assets of the deceased are managed and distributed. You may want to avoid probate due to the costs and the delays of probate, which slows distribution of your assets to your heirs, and to maintain privacy. The best way to accomplish all of these objectives is by using a living trust.
The costs and delays of probate, including delays in distributing your assets, are less of a concern in Texas than in most states as long as you have a valid will and your estate qualifies for independent administration (which requires little court supervision of the administration of the estate). However, privacy remains an issue because the probate process usually involves the following steps:
- Filing of an application for probate of will and for issuance of letters testamentary with the proper probate court (or if applicable, county court at law).
- Notice to heirs under the will.
- Heoaring to admit the will to probate and to appoint the executor.
- Filing of an Inventory, Appraisement and List of Claims by the executor. After the filing and approval of the Inventory, Appraisement and List of Claims, the probate court is seldom involved in the administration of the estate unless the executor seeks to take action that is not specifically authorized in the will.
- Payment of estate debts to rightful creditors.
- Sale of estate assets, if necessary.
- Payment of estate taxes, if applicable.
- Final distribution of assets to heirs.
If you do not leave a valid will or if the will does not provide for independent administration, probate will be substantially more burdensome because dependent administration and substantial court supervision will be required. This means that the costs of the probate will be much higher and the length of time required to complete the probate will be much longer.
If the assets of the deceased were owned through a well drafted and properly funded living trust, no court-managed administration of any kind is necessary. The trustee would manage the trust assets and, when required by the trust, distribute those assets.
Whenever a living trust is used, it is extremely important that a pour-over will be executed in conjunction with the living trust to distribute probate assets that cannot be transferred to the living trust, to appoint an executor for your probate estate and to nominate a guardian for any minor children.
What is a Revocable Living Trust?
A properly drafted Revocable living trust (RLT) is a powerful estate planning tool that allows you to remain in control of your assets during your lifetime, have them managed during incapacity, and efficiently and privately transfer them to your loved ones at death according to your wishes.
Sometimes referred to simply as a Living Trust, an RLT holds legal title to your assets and provides a mechanism to manage them. You would be the beneficiary and serve as the trustee of your trust during your lifetime. You also designate successor trustee(s) to carry out your instructions for how you want your assets managed and distributed in case of death or incapacity.
For the Living Trust to function properly, you need to transfer many of your assets to your Living Trust during your lifetime. The fact that the trust is “revocable” means that you can make changes to it or even terminate it at any time.
What are the advantages of having a Living Trust?
Like a will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a will. A Living Trust allows for the immediate transfer of assets after death without court interference. It also allows for the management of your affairs in case of incapacity, without the need for a guardianship. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time consuming public probate process. In short, a well thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.
Will I lose any control over my property if I create a Revocable Living Trust?
Creating a Revocable Living Trust and transferring your assets to the name of that trust will generally not affect your ability to control such assets. During your lifetime when you are mentally competent, you have complete control over all of your assets. As the trustee of your trust, you may engage in any transaction that you could before you had a Living Trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you can continue to file a 1040 when you have a Living Trust. There are no new Tax Identification Numbers to obtain. Because a Living Trust is revocable, it can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, the individuals you designate will be able to transact on your behalf according to the instructions you have laid out in the Living Trust. Upon your passing, the Living Trust can no longer be modified and the successor trustee(s) you have designated will then proceed to implement your wishes as directed.
Do I have to transfer all my assets to my Living Trust?
Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death account (POD for short) or an “in trust for” account (a “Totten Trust”) with a named beneficiary also pass to that beneficiary without having to be titled into your trust.
If I transfer title to real property to my Living Trust can the bank accelerate my mortgage?
Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your living trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide for such protection for residential real estate with more than five dwelling units.