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How to Avoid Probate: Creating a Revocable Living Trust

How to Avoid Probate: Creating a Revocable Living Trust

Last updated on: August 27, 2012 at 8:00 am by Darren

How to Avoid Probate: Creating a Revocable Living Trust 2012-08-27T08:00:39-05:00 Darren

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In a previous post, I wrote about why you should avoid probate. What I didn’t mention, however, were practical steps you can take to do this.

While there are several ways to avoid the probate process, in this post I’m going to mention one of the more well-known methods – through the creation of a revocable living trust.

The Basics

As just mentioned, a revocable living trust is a tool that allows you to avoid probate. You create one simply by preparing a document known as a Declaration of Trust.

In the trust document, you name the people or institutions that you want to inherit each item of your trust property. If you’re married and you and your spouse own property together, you’ll likely want to create one trust together.

A big benefit of a living trust over simpler probate-avoidance methods is that you can name alternate beneficiaries – people who’ll inherit if your first choice doesn’t survive you. You can even name alternate beneficiaries for your alternates, if you want an added layer of contingency planning.

Once you’ve signed the document, you transfer your property – including but not limited to real estate, stocks, bank accounts, and vehicles – to the trustee, who becomes the legal owner. This step is crucial. If you don’t transfer ownership to the trustee in writing, the trust document has no effect at your death.

You are the trustee of your revocable living trust, which means that you keep complete control of all the trust property. As trustee, you can transfer property in and out of the trust, change your beneficiaries, or even revoke the trust completely.

Holding property in trust has no major effect while you’re alive. For all practical purposes, it’s as if you still owned it. The property is treated the same way it was before it was placed in a trust – both by the government when it assesses income or estate taxes, and by creditors when they’re looking to collect on debt you owe.

After you die, the person you named in your trust document as the successor trustee takes over. He or she transfers the trust property to the people or charities you named as beneficiaries.

In most cases, the whole transfer process can be handled in a few weeks – at little or no cost. When all the trust property has been transferred, the trust no longer exists.

Why Create a Revocable Living Trust?

The main reason for setting up a revocable living trust is to save your family money and time by avoiding probate. But there are other advantages as well.

For instance, it’s difficult to attack a living trust in court. That’s because your ongoing involvement with a living trust after its creation is proof that you were competent to manage your affairs.

Having a living trust is also useful if you were to someday become incapable of taking care of your financial affairs due to a physical or mental illness. If you’ve made a trust with your spouse or partner, he or she has authority over all the trust property.

If you’ve made an individual trust, you can give authority to your successor trustee – whose normal job is to take over as trustee at your death – to step in and manage your property if you’re unable.

This feature can be of great help to family members who are overwhelmed by caring for someone who’s been struck by a serious illness or accident. But without the authority stated in a living trust document, family members usually must go to court to get authority over the incapacitated person’s finances – a painful, public process.

Most trust documents require that before a successor trustee can take charge of trust property, your incapacity must be certified in writing by one or two physicians. Once that determination has been made, the successor trustee can use all property in the trust for your health care and support.

You’ll Still Need a Will

As powerful as it is, a living trust doesn’t eliminate the need for a will. That’s because even if you try to transfer everything to a trust, there’s always a chance you’ll acquire property right before your death.

But one way you can manage this is through a pour-over will. This will directs that all your remaining property be poured over to your trust. That property, however, must go through probate on the way to your trust.

Have you created a revocable living trust to avoid probate?

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