lee's angelMany people have heard that a living revocable trust avoids probate.  Though this is possible, be warned that if that trust is not properly funded, your property will still go through probate.

Probate is a legal process whereby the court transfers title of a deceased person’s assets to their heirs. A revocable living trust is a written legal document used both to manage property during the lifetime of the person who signs it and to distribute that same property upon their death.  If the trust is properly drafted and funded, the heirs of the trust will avoid probate on the property owned by the trust.

Avoiding probate saves money, time, and frustration.  While it is true that in some cases probate can be used to good advantage to protect an estate, most folks are better served by avoiding probate altogether. It cannot be done with a simple will. It can be accomplished through using a living revocable trust, but only if written and used correctly.

Most Living Revocable Trusts Fail

Unfortunately, many folks who set up a living revocable trust do not avoid probate with their trust.  Their families go through probate just like those without a trust.  Their lawyers get the big fees for writing trusts, and then they get the probate fees too.

How does this happen? Most failures are due to one of three problems:

  1. The living revocable trust is not written properly. A number of years ago, Fortune Magazine reported that only one percent of American lawyers could draft a good living revocable trust.  There are many details and provisions that should be carefully spelled out in order for the trust to be effective both before and after your death.
  2. An attorney mistakenly drafts a Testamentary Trust. A testamentary trust is created as part of and by a will probated as part of that will.  Because it is formed by the will, and the will has no force until after it has been probated, no property is moved into a testamentary trust until after you have died and probate is finished. Folks who sign a testamentary trust thinking they are avoiding probate like they would with a living revocable trust will be disappointed.
  3. The trust was never funded. When the trust is unfunded there will be a probate when property passes through the estate.

Funding a Living Revocable Trust

To fund a living revocable trust and avoid probate, your assets must be transferred into the trust’s ownership.  You should transfer any assets that require your signature to move ownership.  . This includes bank accounts, brokerage accounts, safe deposit boxes, and real property.  Each asset needs to be transferred into the trust. For instance, to transfer real property you can use a warranty deed or its equivalent.   To transfer bank accounts or safe deposit boxes you will need to sign new signature cards at the bank as trustee of the trust. For more details, see https://www.legalees.com/how-to-put-property-in-a-trust/ Make sure you do so properly, with the full name of the trust.

Don’t worry–this does not mean you lose control of those assets. You still have control because with a living revocable trust, as long as you live, you remain the manager or “trustee” of the trust.  As manager of the trust you still have full control over all of the assets, just like you did when they were held in your name instead of the trust’s name.  But because the living revocable trust owns the assets, when you die the owner didn’t die.  That means that there does not need to be a probate, because the trust will still have a manager.  An appropriately drafted trust document names the new trustee who will take over at your death.

This new “successor trustee” of your trust will have full authority over the assets and can manage them without any court, aka probate, interference.  This is a neat legal trick.  It will not cost your heirs the extra money or time like going to court for probate would.  A living revocable trust works really well, provided you use the trust during your lifetime and follow all of the rules that allow the trust to avoid probate.

  1. Your blog on Revocable Trust funding mentions putting one’s brokerage account in the name of the Trust. At Fidelity, they have a beneficiary form that permits them to distribute my account assets (stocks, bonds, cash, REIT) to the named beneficiaries. I put my Trust as secondary beneficiary in case the person named dies before me. That should be sufficient for stock & REIT holdings, correct? Also, you did not mention IRAs in your article. My understanding is that a person needs to be named a beneficiary in order to stretch the IRA into the future. Is that your advice as well?
    For primary residence, others advise moving the home into the Trust but wording the Trust & new deed filing so that owner keeps homestead & age related exemption rights intact. It took me awhile to find the proper wording. You might give suggestions in future blogs. As always, I enjoy reading your articles.

    • Alan,
      For a brokerage account:
      Having a beneficiary designation on a brokerage account is similar to a payable on death (POD) account. You don’t have to put it into a trust because it will already avoid probate. However, you may want to note that Texas and Louisiana are exceptions to this rule. If you live in one of those states, you may want to talk directly to your broker.
      For an IRA:
      You do need to have a named beneficiary rather than a trust in order to stretch out the benefits.
      For a primary residence:
      Usually it is best to talk to your county recorder about what specific wording they would prefer you use on the deed and in the trust. Different counties have different preferences.

  2. I have almost finish reading your book “Protecting Your Financial Future” and am finding it so informative and so easy to read,thank you so much. Could you comment on the complexity of changing or amending an AB Trust to an AB Disclaimer Trust. Last year our estate planning Lawyer gave us an AB Trust even though our assets are well below the current estate exemption. We now feel this was “overkill” and think we should ask for a change to an AB Disclaimer Trust or something else that would more suitable for us. We both are in our middle 70’s.

  3. Y.M. Villarreal,
    If you are making large changes to the Trust you will want to do a total restatement of the Trust. With a restatement you are going to say that you completely rewriting the trust but keeping the name and date of the old trust. You will then have the entire trust rewritten to fit what you want. Because the Trust was restated, everything a future trustee needs to know will be in the restated trust. Also if you have already transferred assets into the old Trust you don’t have to re-transfer them into the restated Trust because you will keep the old name and date.

  4. Thank you so much for your prompt reply. We are mostly interested in making things easier for the surviving spouse by having the option but not be required to set up a B Trust. We don’t want to be forced into having multiple trusts along with added legal fees, CPA fees, and the bookkeeping that is required. We will not be able to tolerate a high level of complexity.
    We are grateful and do appreciate being able to avail ourselves of your great service. I like the info you impart on U-tube. For awhile I was receiving E-mails from you but lately they have stopped coming. (???)

    • Y.M. Villarreal,
      If you are going to make it optional to have a split trust you need to be careful about who gets to decide if the trust will split at the first death. The person that makes that choice cannot be someone who has an interest in the trust such as beneficiaries. This would mean you would need an independent trustee, such as a family friend, who can make the choice of splitting the trust or not, and if it is split, what assets go into which trust. With the ability to elect portability the necessity of using a split trust has been greatly reduced.

      We have noticed some issues with email subscribers not getting our emails because their systems have put them over into junkmail. You can “whitelist” them to come straight into your inbox (a good explanation of how to do that can be found here), or simply resubscribe at http://forms.aweber.com/form/33/492245633.htm.

  5. I’m reading that one of the reasons that most folks that sat up a Living Revocable Trust do not avoid probate is because they fail to fund it. Does that mean “zero” funded or does that statement includes partly funded –or is one just a bad as the other. I’m puzzled by the fact that brokerage accts, money mkt accts, savings,and credit unions accts with JTWROS or POD or TOD designations can automatically be passed on to the named beneficiaries at death without the need for probate. If that is so, why can’t they be left out of the trust? Is there something terribly wrong or lost in doing so?

    • Y.M. Villarreal,

      Not funding or partially funding a trust will end in probate, which can be costly and time consuming. The goal of the Living Revocable Trust is to completely avoid having to go through the probate process. Funding the trust does not take much time and has very little cost.

      The idea is that when you do a little work now, you save your heirs a lot of work later on. An account that is held as Joint Tenants with Rights of Survivorship or has Pay on Death (POD)/Transfer on Death (TOD) beneficiaries does not have to be held in a trust, because it will avoid probate. The Survivor or designated beneficiary of the account will automatically have control of the account at the previous owner’s death.

      This may seem like an easy and good way to pass on wealth, but it does have its pitfalls. If you name all of your children on the bank account as a joint tenant, then that account becomes subject to any creditors that your children may have. You may then decide to just have your children as beneficiaries on a POD account, but as soon as you die, each of your children has rights to the whole account, and the first kid to the bank can just drain the account, because the account is not subject to any distribution provisions in your will or trust.

      If you just name one child on the account and ask that child to distribute the account after you die, you will fall into another trap. If that child is willing to distribute the money from the account (the child is not bound by your will or trust to share the money), they will be considered to be making a gift in their own name as opposed to having the money distributed as an inheritance from the deceased individual. Having the distribution characterized as a gift has very different and may have worse tax consequences than a distribution as an inheritance.

  6. I Have your old book and used it to structure things. I will be purchasing your new book with the CD does it have “forms” in the CD? I also got the book “Lawyers Are Liars” and when checking over my mothers documents, all came in a cool leather binder with lots of useless pages. I noticed the lawyer had created a A.. Real LLC and titled the property supposedly held in the LLC as A.. Rental LLC. Kind of a big screw up. As all the papers seemed to come out of a “program” I hate to admit I think it was done purposely to send me at her demise back to him to get things fixed. Curiously the program generated quit claims for her properties not warranty deeds? I thought you said to not use those? I also think I screwed up. Titling our properties I did not use the entire trust name I did not include A&B etc ist there a way to “fix” it without having to retitle the properties? Such as amending the trust to include properties titled as _______ . If I have to retitle things does that undo the seasoning on our trusts? They were set up in 2008.

    • Delia,

      The forms are included in the CDs.

      When transferring property into a trust quit claim deeds is what you would use. Transferring into a revocable trust does not cause you to loose your title insurance so you do not need a warranty deed.

      If you did not put the correct trust name on the deed you are going to need to create a new deed. Just amending the trust to say it includes that deed would be the same as just listing the property on schedule A. The trust has a specific name that requires all three parts, and that name must be exactly on the deed.

      As for seasoning, a transfer into a revocable trust does not change the seasoning since it is a transfer from you, to you.

  7. We have a closely held Subchapter S company, ACME, of which all 5 family members (2 parents , 3 kids) own different percentages.
    We are reviewing estate plans.
    2 questions-
    Our parents, who each own 1/3 of the voting shares of ACME each have revocable trusts. The ACME stock certificates are titled: 100 shares of capitol stock of ACME issued to Jane Doe , Trustee of the Jane Doe Revocable Trust.
    Each parent also has a document with their estates that names a present co-trustee (one of the kids) for their revocable trusts.

    Even though the certificates are not titled that way- Can the Co- trustee vote any of the voting shares of the company held as above? If the co- trustee wanted to challenge a parents vote is there a property right of those shares to the co- trustee merely by being named as co-trustee?

    And 2- Also noticed in our Articles of Incorporation that state under voting rights- The trustee of a trust holding voting shares may not vote the shares unless the shares are transferred into their name.

    Q2- If parents are the Trustees of their revocable trusts is it necessary to transfer the shares into their personal names (not as Trustees as their stock certificates say) in order that they may vote their voting shares? I think personal name and name as Trustee are different but not sure in this context.


    • Mabel,
      It all depends on what is written in the trust and what powers the co-trustee has. Even though they are not on the stock certificate they are still a trustee and have control over that stock depending on what is written in the actual trust document. You may want to have a new stock certificate created showing both trustee’s names on the certificate.

      You do not need to transfer the stock certificates out of the trust. A trustee is the legal owner of the stock and has the power to vote.

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