Avoid Probate – Overview
Avoid probate and the time delay and expense if a loved one passes away or becomes incapacitated. Here comes the probate trick. When your bank account is owned by your trust, i.e., it is in the name of your trust, and you die, did the owner of the account die? No, you, the trustee, the manager of the account died. The trust, that is the owner of the account, did not die. Will the account be probated? No! The owner isn’t dead. Just the manager is dead. When the president, the manager, of IBM dies, does IBM have to probate all of its assets? No, the stockholders get together and elect a new president.
When you opened the account at the bank in the name of your trust, the bank, by letting you open the account, recognized your trust and agreed to recognize the trustees named in your trust. Of course the trust document has a section in it that appoints a new trustee, the “successor trustee,” to act when you are dead. All you do is write down a statement in the trust that says that you want your wife or husband to be the sole trustee when you die and that you want Uncle Harry to be the successor trustee when both you and your spouse are dead. You will designate Uncle Harry as the successor trustee by simply writing his name into the trust as the “successor trustee.”
OK, let’s say you and your spouse both die in an automobile accident today. What happens at the bank? Uncle Harry walks into the bank tomorrow, and the conversation with the banker goes something like this:
Uncle Harry: Hi Mr. Banker. John and Mary were killed in an automobile accident last night.
Banker: Yeah, I read about it in the newspaper. Too bad!
Uncle Harry: I need to get into the bank account.
Banker: Drop dead, buddy. Go get me a probate order. I’ll see you in a year and a half.
Uncle Harry: No, this is a trust account.
Banker: Oh, yeah.
The banker goes into the back room to get the file. When you opened the account, the banker may have made a copy of all or part of the trust. Usually the banker doesn’t actually want a copy of all the pages in your trust. It’s best to supply the banker with a certification or summary of the trust from your attorney or argue that the banker only needs a copy of the first and last pages, just to reference the trust. (When you have an attorney draft your trust, ask if a certification of the trust document is part of the deal.) If Uncle Harry has a copy of the death certificate and the trust, or the banker has his own copy of the trust, the banker will know Uncle Harry is the new trustee. The banker will ask for Uncle Harry’s identification and simply say, “sign here.”
Uncle Harry is into the bank account. No court order. No lawyer. No two year wait. No probate! When you died, there was an instantaneous transfer of power to the new trustee.
Oh, the money isn’t Uncle Harry’s now. It still belongs to the trust and Uncle Harry is now under the sacred fiduciary duty to follow your instructions and manage or distribute the property exactly according to the instructions you left behind in the trust.
You just eliminated probate. It was a slam dunk, but most people who get a living revocable trust never understand what you now have learned. You have to know why the trust works. The trust has to own the property. Most people forget to open the new checking account in the name of their trust, or they never change their existing checking account into the name of the trust. They are under the false impression that just because they have a piece of paper called a trust, they will not go through probate. You have to use the trust.
Another Probate Story
In 1976, Kristy’s parents spent in today’s dollars about $8,500 for a living revocable trust, and they happened to get a good document. When I started to work with living revocable trusts in 1981, I looked at their trust. Although they had a good document, it would not have saved their family from probating everything when they died.
The lawyer had not taught them how to use the trust. Just having a trust and understanding it isn’t enough. You have to USE your trust. I had to go back and teach them how to put the bank accounts and real estate into the trust.
Actually, the lawyer who drafted their trust had made out a new deed transferring their house into the trust, and he had sent a letter to the bank notifying the bank that a trust had been created. These were steps in the right direction, but Kristy’s parents had bought more real estate and opened all new bank accounts. None of the new real estate or bank accounts were in the name of the trust. If they had died, everything would have gone through probate.
I want to help you understand these important legal strategies. The important thing is to get your estate planning done. Remember, understanding the trust is not enough. Once you have the trust in place, you have to maintain it correctly.
Your trust is a “living” dynamic document and concept. It isn’t something that you just put in a safe deposit box and forget about. Whether you write it or a lawyer writes the trust, it doesn’t matter. You have to know your trust inside and out and use it regularly.
I’m here to help you avoid these expensive legal traps.
(This is a small sub-chapter from my book Protecting Your Financial Future.)