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One of the principle aims of a good estate plan is to avoid excessive probate costs. Any Last Will and Testament that includes provisions for asset distribution must go through the legal process of probate, which resolves claims and then distributes assets. As part of this process, a surrogate court must first confirm the validity of the will; the probate then interprets the will, deciding upon an executor if none is named, and adjudicates the interests of the deceased, the heirs, and any other parties who may have claims against the estate.
The complexity and costs of the probate process vary from state to state, and in some cases it may be relatively quick and harmless. But in other cases the process can take as long as a year and costs can be a minimum of 3 to 5 percent of the total estate, sometimes even 7 percent or more. These costs include appraisal costs, personal representative fees, court costs, “surety bond” costs, legal and accounting fees, and more. Many of these costs are set by law and can’t be avoided, although legal and accounting fees can sometimes be negotiated down. But the best solution is to avoid the process entirely.
Assets That Are Transferred Automatically
Many of your assets may pass on to beneficiaries automatically. If you and your spouse or partner jointly own your financial accounts — bank accounts, brokerage accounts, mutual funds, and the like — these will pass automatically to the surviving party, who only needs to show a death certificate to the financial institution to have the deceased’s name removed from the account. Be sure to set up such accounts as “jointly owned with right of survivorship.” The death benefit from an insurance policy generally passes directly to the beneficiary, without the need for reference to a will. And retirement accounts such as IRAs that can only be held individually allow you to name a beneficiary, to whom the account is transferred on your death. Be sure to confirm with each financial institution that assets in the account can pass to a joint owner or named beneficiary without probate, as there may be special provisions.
Avoid Probate- ‘A Revocable Living Trust’
For all your assets that don’t fall into these categories, a simple document can be used to name beneficiaries and avoid probate at the same time: a revocable living trust. A trust document is essentially an agreement whereby one party agrees to hold property for the benefit of another; there are various kinds of trusts for various purposes, but all must have a grantor (the party who creates the trust, usually also the person who funds the trust); a trustee (the party entrusted to hold the assets); a beneficiary (the party who benefits, whether drawing interest from the trust’s assets for a period of time or eventually acquiring the principal of the trust); and principal (the assets held in the trust).
A revocable living trust is “living” because the grantor — the person creating the trust — is still alive when the trust goes into effect. It is “revocable” because the grantor has the right to revoke the trust, or amend its terms, at any time. Other kinds of trusts are “testamentary,” not taking effect until the grantor dies, or “irrevocable,” unable to be revoked or amended, but these kinds of trusts don’t concern us here.
A revocable living trust created for the purpose of avoiding probate has a grantor, a trustee, and a beneficiary just like any other trust — but, in most cases, they are all the same person. The grantor creates the trust, files the trust such that it becomes effective, and transfers all his or her assets into the trust. At this point, the grantor can continue using all the assets in the trust — bank accounts, retirement accounts, titled property, and so on — as though nothing had happened. As the beneficiary, the grantor can take full advantage of the trust’s assets, even spending them down to nothing; the assets are in no way “locked away.” However, the trust also names secondary beneficiaries — who will become primary beneficiaries once the grantor, and principle beneficiary, dies.
It can be a chore transferring assets, but the financial institutions holding your accounts can help with the process. The accounts will be renamed; instead of simply “[name of grantor],” the account will be named something like: “Revocable Living Trust for the Benefit of [name of grantor].” To avoid probate, all of your named accounts should be transferred, as well as life insurance policies; stocks and bonds held as certificates; monies owed to you if documented; business interests; any titled property such as real estate and vehicles; oil, gas, and mineral rights; royalties, copyrights, trademarks, and patents; and even tangible personal property and household goods.
A Will Is Still Required
You still need a will, although your will should work in conjunction with your trust. Such a will is called a “pour-over will”; it has language providing that any property not named in the revocable living trust should be included in the trust, to be distributed to secondary beneficiaries as per the terms of the trust. Even if you believe you’ve included all your assets in the trust, you may have forgotten something, or you may acquire something and not have time to amend the trust. At the very least, a pour-over will will ensure that all of your personal property and household items will be distributed as per the terms of the trust and not left hanging in limbo. You may also need a will to name guardians for minor children, or for other purposes.
If you are establishing a living trust as grantor (and beneficiary), you might consider having another person act as trustee — a responsible adult child, for instance. At the very least, name a successor trustee who will take over in that capacity should you become incapacitated. The trustee will then be able manage the assets in the trust on your behalf. If you create a financial power of attorney document and name a financial proxy to manage your affairs should you become incapacitated, the same person should be named as your alternate (or primary) trustee.
Once you pass away, the trust’s secondary beneficiaries — your heirs — can usually transfer the assets in the trust to their names simply by contacting the financial institutions holding the accounts and presenting copies of the trust along with a death certificate. Further documentation might be required, but in most cases the assets will transfer quickly and — best of all — free of charge.
Although you can prepare wills, powers of attorney, and other simple documents on your own with software programs or forms downloaded from the Internet, do not attempt to draft a revocable living trust — or any other trust document — on your own. These documents must be worded precisely, and filed properly, for them to have validity. Find a good estate lawyer and discuss your needs with him or her. For a modest or average-sized estate, total costs might run from just under $1,000 to a few thousand dollars. These costs will vary depending on your location and the caliber of lawyer you engage. But in any case, the costs will be far less than what your heirs would pay in probate costs and other fees associated with settling your estate. If you have even very modest assets to pass on, it’s well worth at least considering a revocable living trust.