If your client has established a revocable living trust (which we will refer to simply as a trust), they are one step ahead. They are on the right track in creating a comprehensive estate plan. However, they are only halfway there. Many people believe that because they took the time to create a trust, their estate will automatically avoid probate, and they will not have to take any additional steps. Unfortunately, this assumption creates a false sense of security.
The key to probate avoidance for your client is ensuring that, when they pass away, there are no accounts or property in their sole name without a current beneficiary designation. Taking this one step further, ensuring that the provisions of the trust created will govern the management and ultimate distribution of the accounts and property after they pass away requires that they have either properly transferred ownership of their accounts and property to their trust or named their trust as the beneficiary.
What kinds of things go through probate?
Under what conditions will your client’s loved ones have to go to probate court to administer and distribute their accounts and property after their death? Here are a few examples:
- Their accounts and real estate are titled in their sole, individual name (without a payable-on-death (POD) or transfer-on-death (TOD) designation)
- They own accounts and real estate jointly with someone else as a tenant in common
- Their retirement accounts have no named beneficiary
- Their life insurance policies have no named beneficiary
How can your client ensure that their accounts and property avoid the probate process?
The following types of accounts and property will automatically avoid probate after they die and, therefore, do not need to be funded into their trust; however, they can choose to have some types funded into their trust at death:
- Accounts and real estate owned as joint tenants with rights of survivorship. Their interest in the accounts and real estate will transfer to the surviving owner automatically at their death by operation of law.
- Accounts and real estate owned by a married couple as tenants by the entirety. Their interest in the accounts and real estate will transfer to the surviving spouse automatically at the time of their death by operation of law, leaving them the sole owner of the property.
- Life insurance, if your client has designated a beneficiary on the policy. In many instances, they may choose to name their trust, if they have created one, as the beneficiary of their life insurance policy. Naming their trust as the beneficiary will cause the life insurance proceeds to flow into the trust at their death.
- Retirement accounts, 401(k)s, and annuities. If they have designated a beneficiary on the account or the plan has default rules requiring that the account be distributed to a specific person or group of people if there is no named beneficiary, the account will go to that person or people. They might also consider naming their trust as the beneficiary of the retirement account so that the account will flow into their trust at the time of their death.
- POD and TOD accounts and, in some states, TOD or beneficiary deeds for real estate. Accounts or real estate with these types of designations will automatically transfer to the named beneficiary upon their death by operation of law.
What happens if they forget to fund their trust?
Life is ever-changing, and your client could overlook an account or property when funding their trust. Or your client could take all of the steps necessary to ensure that all of their current assets are in the trust at the time of their death but then acquire new accounts or property and forget to fund the new items into their trust. If one of these situations arises, your client’s loved ones may have to open a probate process at their death to handle any accounts or property that were in their sole name without a beneficiary designation.
Ideally, when your client created their trust, they also created a pour-over will, which instructs the judge in a probate administration to transfer all of the accounts and property in probate to their trust during the probate process. So, even if your client’s loved ones end up having to go through probate, the accounts or property will eventually end up funded into the trust and managed according to the trust instructions. While this situation is not ideal and in many states may be very expensive and time-consuming, the ultimate outcome is that your client’s trust remains the sole vehicle for managing and distributing all of their accounts and property.
What is the next step?
Have your client seek a qualified estate planning attorney to confirm that their trust is fully funded and that all their accounts and property are aligned with their estate plan. Remember, creating a revocable living trust is just the first step to probate avoidance, and proper ownership is the ultimate key. Have them call us at 708.448.5169 and we would be happy to guide them to taking the right steps to avoid probate.
