If you have established a revocable living trust (which we will refer to simply as a trust), congratulations! You are on the right track in creating a comprehensive estate plan. However, you 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 is ensuring that, when you pass away, there are no accounts or property in your sole name without a current beneficiary designation. Taking this one step further, ensuring that the provisions of the trust you created will govern the management and ultimate distribution of your accounts and property after you pass away requires that you have either properly transferred ownership of your accounts and property to your trust or named your trust as the beneficiary.
What kinds of things go through probate?
Under what conditions will your loved ones have to go to probate court to administer and distribute your accounts and property after your death? Here are a few examples:
- Your accounts and real estate are titled in your sole, individual name (without a payable-on-death (POD) or transfer-on-death (TOD) designation)
- You own accounts and real estate jointly with someone else as a tenant in common
- Your retirement accounts have no named beneficiary
- Your life insurance policies have no named beneficiary
How can you ensure that your accounts and property avoid the probate process?
The following types of accounts and property will automatically avoid probate after you die and, therefore, do not need to be funded into your trust; however, you can choose to have some types funded into your trust at death:
Accounts and real estate owned as joint tenants with rights of survivorship.
- Your interest in the accounts and real estate will transfer to the surviving owner automatically at your death by operation of law.
Accounts and real estate owned by a married couple as tenants by the entirety.
- Your interest in the accounts and real estate will transfer to the surviving spouse automatically at the time of your death by operation of law, leaving them the sole owner of the property.
Life insurance, if you have designated a beneficiary on the policy.
- In many instances, you may choose to name your trust, if you have created one, as the beneficiary of your life insurance policy. Naming your trust as the beneficiary will cause the life insurance proceeds to flow into the trust at your death.
Retirement accounts, 401(k)s, and annuities.
- If you 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. You might also consider naming your trust as the beneficiary of the retirement account so that the account will flow into your trust at the time of your 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 your death by operation of law.
What happens if you forget to fund your trust?
Life is ever-changing, and you could overlook an account or property when funding your trust. Or you could take all of the steps necessary to ensure that all of your current assets are in the trust at the time of your death but then acquire new accounts or property and forget to fund the new items into your trust. If one of these situations arises, your loved ones may have to open a probate process at your death to handle any accounts or property that were in your sole name without a beneficiary designation.
Ideally, when you created your trust, you 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 your trust during the probate process. So, even if your loved ones end up having to go through probate, the accounts or property will eventually end up funded into your 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 trust remains the sole vehicle for managing and distributing all of your accounts and property.
What is the next step?
Ask a qualified estate planning attorney to confirm that your trust is fully funded and that all your accounts and property are aligned with your estate plan. Remember, creating a revocable living trust is just the first step to probate avoidance, and proper ownership is the ultimate key.
