FAQ About Living Trusts

What Is Probate and Why Does Everyone Want To Avoid It?

When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration where the assets of the deceased are managed and distributed. If your loved one owned his or her assets through a properly drafted and funded living trust, it is likely that no court-managed administration is necessary, though the successor trustee needs to administer the distribution of the deceased. The length of time needed to complete the probate of an estate depends on the size and complexity of the estate as well as the rules and schedule of the local probate court.

Every probate estate is unique, but most involve the following steps:

• Filing of a petition with the appropriate probate court
• Providing notice to heirs under the will or to statutory heirs (if no will exists)
• Petitioning to appoint an executor (in the case of a will) or an administrator for the estate
• Inventorying and appraising estate assets
• Paying estate debts
• Selling estate assets
• Paying estate taxes, if applicable
• Distributing assets to heirs

Will I Lose Any Control Over My Property If I Create a Revocable Living Trust?

Creating a Revocable Living Trust and transferring your assets to the name of that trust will generally not affect your ability to control such assets. During your lifetime, you have complete control over all of your assets so long as you are mentally competent. As the trustee of your trust, you may engage in any transaction that you could before you had a living trust.

There are also no changes in your income taxes. If you filed a 1040 before you had a trust, you can continue to file a 1040 when you have a living trust. There are no new Tax Identification Numbers to obtain. Because a living trust is revocable, it can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, the individuals you designate will be able to transact on your behalf according to the instructions you have laid out in the living trust. Upon your passing, the living trust can no longer be modified and the successor trustee(s) you have designated will then proceed to implement your wishes as directed.

Do I Have to Transfer All My Assets to My Living Trust?

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your living trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts, and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death account (POD for short) or an “in trust for” account (a “Totten Trust”) with a named beneficiary also pass to that beneficiary without having to be titled into your trust. It is important, however, to seek the counsel of an experienced estate planning attorney who can advise on and assist with transferring necessary assets to your trust.

If I Transfer Title To Real Property to My Living Trust, Can the Bank Accelerate My Mortgage?

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your living trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act, is that it does not provide for such protection for residential real estate with more than 5 dwelling units.

What is a Living Trust and Why is Funding Important?

A living trust, sometimes referred to as a revocable trust, is a legal arrangement where the grantor (the person who establishes the trust) transfers control of assets to a trustee (such as a bank) for the benefit of beneficiaries. Properly funding a living trust involves titling assets in the living trust's name or designating the living trust as the beneficiary. This step is crucial because assets not funded into the living trust may remain part of your estate, potentially negating some of the intended benefits of the living trust in estate planning. Funding your living trust is generally “homework”, which needs to be addressed after you execute your estate plan.

What Happens if Assets are Not Titled Correctly to the Living Trust?

Failing to title assets correctly to a living trust can undermine your estate plan. For example, life insurance proceeds may not go to desired beneficiaries if the policy's beneficiary designation isn't updated after major life changes like divorce. To ensure assets are appropriately titled, consult with an estate planning attorney who can assist in drafting legal documents and overseeing the proper funding of your living trust.

How Often Should I Review and Update My Living Trust?

We recommend reviewing your estate planning documents, including living trusts and beneficiary designations, annually. Life events such as marriage, divorce, births, or acquiring new assets can impact your estate plan. Regular reviews with your advisors help ensure your trust is up to date and aligned with your wishes.

What is a Pour-Over Will and Why is it Important?

A pour-over will is a critical component of every living trust-based estate plan. This will ensures that any assets not retitled into the living trust during your lifetime are transferred into the living trust upon your death, albeit through the probate process. A pour-over will acts as a safety net to capture any assets inadvertently left out of the living trust, supporting the overall goals of your estate plan.