A living trust is a unique estate planning tool because it effectively transfers ownership over specified assets and property to someone else through a third party, while giving the original owner a varying degree of control while the assets remain in the third party’s care.
This is important in the context of estate planning at least in part because of the probate process, an otherwise unavoidable legal process by which a county’s court determines the validity of a will and oversees its execution (i.e. the distribution of a decedent’s assets).
Because a trust allows you to separate yourself from your own assets, they are effectively no longer yours and need not be a part of the probate process. This goes for both living trusts (which go into effect immediately) and testamentary trusts (wherein you retain full ownership and control until you pass away).
However, the process for creating and implementing a living trust is neither simple nor cheap. It takes time and resources to manage a trust and “fund” it, which means amending ownership documents to transfer specified assets and property to the trust (i.e. “Trust of Jane Doe” rather than “Jane Doe”).
In doing so, some of us may “set it and forget it”, effectively creating and funding a trust, but then neglecting to amend it over the years. Some may make mistakes and forget to fund certain assets into a trust. What happens then?
The Probate Process
The probate process begins when a decedent’s friend, attorney, or relative presents a petition to start probate to the local courts, alongside the decedent’s death certificate. If there is a will, then the probate process will center around legitimizing the will.
If there are multiple wills or evidence to suggest that a will is illegitimate, the probate court will focus on hearing all arguments and deciding on how the decedent’s assets should be distributed.
And if no will exists, then anything not otherwise accounted for must be distributed according to the state’s intestate laws, regardless of what the decedent’s wishes might have been (as there is no legitimate way of knowing them), and regardless of how the next of kin feel about it.
Because probate is a matter of public record, many make it a priority to avoid as much of the probate process as possible to ensure that information about their assets and properties do not become known to the public, to protect their privacy and the privacy of their family and loved ones.
In California, the probate process can take a long time. It often requires the services of an attorney, which can also make the process more costly the longer it takes – and it takes longer based on the complexity of the estate.
Trusts are therefore an excellent tool for helping more complicated estates – such as estates that exceed the federal estate tax exemption limit, estates with properties and assets in different states or countries, and estates with assets that cannot be easily managed or kept in inventory.
Another option is to trim down an estate to the point where it can opt for an accelerated probate process, which in the state of California requires an estate with a total value of $166,250 or less. If a person chooses to opt for only partially funding their property into a trust, however, they will still need a plan for everything else in their estate. That is why it is still important to have a will.
Living Trusts and Pour-Over Wills
Wills and trusts are often compared with one another, but many estate plans put both to good use. Whenever someone devises an estate plan that relies on living trusts to avoid the costs and delays of the probate process, they are advised to create a pour-over will which effectively declares everything else in that person’s position as part of the aforementioned trust.
Such a testamentary document can act as insurance to make sure anything left unfunded is still “poured” into the trust retroactively. That may include assets that were forgotten, as well as new acquisitions which had not been added yet.
Otherwise, a regular will can also play an important role, especially if you have minor children. While trusts can do a great many things, they cannot assign guardianship to an underaged child.
If you have someone in mind to take care of your children should something happen to you and your partner, you will need a will to declare your pick. The probate court still has the final say, but unless your choice is found to be incompetent or dangerous, your wish will usually be heeded.
Some Things Cannot Be Probated
Some things go into neither a trust nor a will. Both tools ultimately serve to help you determine where your assets and properties should go after you die, while minimizing the costs and hassle your family must go through along the way.
But some assets can be immediately funded into a person’s possession or bank account, by way of a beneficiary designation. These include life insurance policies, leftover money in retirement accounts, any accounts and properties marked as “transfer/payable upon death”, and more.
Such designations are useful for trimming down how much of an estate goes through the probate process. Other examples of things that cannot be probated include:
- Household goods
- Property held in joint tenancy or similar arrangements
- Community property (in California and other community property states)
- US savings bonds
- Wages and salaries
- Money left in the pension plan
Amending a Living Trust
Ultimately, the best way to avoid leaving assets unfunded is to regularly amend your estate plan. It is typically recommended to check up on your estate plan every few years, or whenever a major life event occurs (such as a death in the family, or a new birth, or a separation).
It is possible to amend a trust in cooperation with an attorney by preparing and notarizing an amendment form for your trust, which includes all the necessary information to legitimize the amendment. Regardless of whether you only utilize trusts or make use of both a trust and a will, it is always best to work with an experienced estate planning attorney.
While it is possible to draft and notarize the necessary paperwork yourself, it is unideal. The financial repercussions of a single simple clerical error can be immense, and DIY estate planning kits are never specific enough to account for the myriad of unique circumstances involved in each case.