Most people understand that they can avoid probate using a revocable living trust, but they don’t really understand how that works.
First, it’s important to understand what property passes through probate and what property doesn’t. The purpose of a probate is to determine what is to be done about property you own in your own name that isn’t otherwise disposed of. We call that “probate property.”
Anything you own in your own name, such as your car, your personal property or your individual bank account, is probate property. The probate code tells us what to do with it if you are disabled or if you die. That’s probate property.
On the other hand, if an asset is disposed of by contract or otherwise by law, it isn’t probate property.
Here are some examples of “non-probate property”:
- Life insurance passes under the policy to the beneficiary by contract, so life insurance proceeds aren’t subject to probate unless the estate is the beneficiary.
- Retirement accounts pass in accordance with your beneficiary designation, so, that passes to your designated beneficiary without going through probate – unless you don’t designate a beneficiary and the retirement plan says your estate is the default beneficiary.
- Joint property, such as joint bank accounts and real estate held as joint tenants, passes by law to the surviving joint owner.
So, how does a revocable living trust avoid probate? Your trust is a method of changing the legal ownership of your property so it is held by your trustees and not by you individually. You change the name of the owner of your property to the name of your trustee or trustees – even if you are the only trustee.
Once the legal ownership of the property is changed to your trust the property is no longer “probate property.” The terms of the trust determine how your property is to be disposed of when you die. For example, if you are the sole trustee of your trust, the trustees you have designated in the trust instrument take over for you automatically when you die. Their job is to carry out the instructions you wrote in the trust document.
The process of changing the ownership of your property to your trust is called “funding.” A “fully funded” living trust is one that holds title to all of your property – bank accounts, personal property, real property, etc. You can also make your trust the beneficiary of your life insurance, and even, if the trust is carefully drafted, the beneficiary of your retirement accounts. That way, your trustees receive the proceeds and use them to carry out your instructions.
If you want to establish an estate plan that works, properly funding your revocable living trust is critical!
Funding can be a complicated and time consuming process. Banking, financial institutions and insurance companies need instructions and their own specific forms to make the changes you want. Deeds have to be prepared, and the approval of your mortgagee may be needed. Insurance policies should be updated. We don’t suggest you do that on your own. After hearing too many “war stories” about funding from our clients, we made it all part of our process, and we help coordinate the funding for you.
If you’d like to find out more about how to establish an estate plan that works, call us for an appointment or click the “Contact” button on the right and send us an message.