One Way to Avoid Probate

When an individual dies, all individually registered assets that do not have a beneficiary designation are passed to heirs through the legal process called probate. One way to avoid some of the expenses and hassles of probate is through the use of a revocable living trust.
Revocable trusts, also called living trusts or inter vivos trusts, are established through a written document called a trust agreement. In this document, the grantor provides instructions to the ‘trustee’ specifying how to manage his or her assets during life, and the eventual distribution of the estate at death. The trust agreement provides the grantor the right to revoke or change the trust, which allows the grantor to maintain complete control of the assets in the trust until death. Normally, the grantor then transfers all non-qualified assets, real estate or other property that does not already have a beneficiary designation to the trust by changing the title on these assets.

It is important to note that grantors of revocable trusts should also execute a ‘pour-over’ will. A ‘pour-over’ will allows any assets that the grantor has not yet transferred to the revocable trust at the time of death to be ‘poured-over’ to the trust. Since individual assets outside of the trust will be subject to probate, it is important that the grantor transfer as many assets as possible to the trust during his or her lifetime.

One main advantage of a revocable trust is the avoidance of probate, achieved because the assets in the trust will pass per the terms of the trust instead of a will. Probate can be lengthy and expensive, making revocable trusts desirable for some individuals. Also, since probate is a public process, revocable trusts can be a means of keeping estate affairs private. This is important for public figures and can also be useful for decedents who are disinheriting or providing minimal inheritance for a family member. In addition, if an individual owns property in more than one state, they will be subject to ancillary probate, which is a probate process in a different state from where the decedent resided. Ancillary probate can further increase the expense and time period of settling an estate, and can be avoided by transferring the ownership of the property to the trust.

Another advantage associated with these trusts is their revocable distinction, which means that the grantor can choose to revoke or alter the trust during his or her lifetime. However, this will not create any tax savings, since control of the assets dictates their inclusion in their taxable estate at death, which will not reduce federal estate taxes. Also, a revocable trust can provide specific instructions for the successor trustee in the event the grantor becomes disabled or incapacitated, acting like a durable financial power of attorney.

While there are several valid reasons to set up a revocable trust, there are also several disadvantages that potential grantors should be aware of. Costs for setting up revocable trusts which include attorney fees for writing the trust document can far outweigh the cost of executing a simple will for clients with a minimal amount of assets. At the grantor’s death, there may be additional costs in the distribution of assets that may negate the savings that would have been realized from the avoidance of probate in the first place. Also, gaining access to the funds in a revocable trust can be complicated and time-consuming for beneficiaries, and a revocable trust could actually cause more problems if the trust is not implemented properly.

Because of the considerable costs that may accompany revocable trusts, many financial advisors recommend other forms of will substitutes, including Transfer On Death (T.O.D.) and Payable On Death (P.O.D.) designations. T.O.D. and P.O.D. accounts allow securities or bank accounts to automatically pass to a beneficiary upon the death of the decedent, thus avoiding probate without the cost of a revocable trust.

Revocable trusts may be an effective and efficient estate planning tool for certain individuals. Always talk with your personal financial advisor before considering a revocable trust.

If you would like to learn more about Hefren-Tillotson and our Masterplan process which can help identify if a revocable trust would benefit your financial situation, please call my office at (412) 258-1109.

Kevin C. Krul is First Vice-President and Financial Advisor with Hefren-Tillotson. He may be reached at 412-258-1101 or kkrul@hefren.com. The Wexford office of Hefren-Tillotson is located at 4001 Stonewood Drive.