Everybody these days seems to want to avoid probate.
First, let me say that while there are benefits to avoiding probate, probate itself is not necessarily always a bad thing. Probate is the process by which we gather the deceased’s assets, pay the deceased’s creditors and distribute the remaining assets to the deceased’s heirs. There is a reason we have been doing probate for centuries: it provides an orderly process for winding up and concluding the affairs of the deceased. So don’t fret if you find yourself in probate; it’s not the end of the world.
So, if probate is so great, why does everyone and his/her uncle want to avoid it? Well, the truth is that probate has become an expensive and cumbersome process. The accounting fee charged by the clerk of court alone can be as high as $6,000.00. Throw in lawyer fees, executor fees and accounting fees and pretty soon it can get pricey. Plus probate can tie up your asset for months, if not years, often at a time when your family members may need financial help.
OK, if probate is so bad, but I have to go through it in order to pass my wealth to my heirs, how do I get around it? Well this is where we work a little legal magic. What we do is we give all your assets away. That way when you die, you don’t own anything and thus you avoid probate.
Yep, we give it all away. The key, however, is who we give it to. What we do is we create a “revocable trust” (also known as a living or “inter vivos” trust) to give your assets to. A trust (living or otherwise) is simply an arrangement by which one person (the “grantor”) gives his or her property to another person (the “trustee”) who holds the property for the benefit of a third person (the “beneficiary”). Under the law, the trust is treated as a separate legal entity. So, if we give your property to the trust before you die, because the trust (and not you) owns the property at death, the property bypasses probate and passes on to your heirs in accordance with the terms of the trust.
Well, that makes sense, but you may be wondering “who is this trustee and why would I give him or her my property?” Well, this is where it gets really neat. You see, you get to be the trustee. You heard me right. By giving your property to yourself (albeit as trustee of your trust) you avoid probate because technically, your trust, not you, owns your property at death. Not only are you the trustee, but you are also the trust beneficiary and the trust is fully revocable so if you change your mind about something, you can pull your property from your trust at any time.
This is the basic concept of how the living or revocable trusts works. There have been books and books written on all the nuances of the living trust, but you get the idea. Over the next few weeks, we will talk a lot more about the living trust and what it can do, so stay tuned as we explore the benefits and flexibility of a well drafted living trust.