Living trusts dominate the legal protection world, when they are well written and properly used. However, do you know if you should use them? Numerous high priced lawyers advise their clients to disregard living revocable trusts. Nonetheless other expensive lawyers teach the public about living trusts saying if you don’t have one, your hair will thin, your teeth will come out, and your kids will detest you. Insurance salesmen proclaim that you don’t have to pay a lot for a trust, because he has got a special price on the documents when you buy insurance. The majority of the conflicts which occur in the living trust battles are over two chief concerns; the need for a living trust and probate. The fight over living revocable trusts persists as lawyers, trust promoters, insurance agents, and senior advocacy groups all hurl stones at each other. A living trust works very effectively and will avoid probate in all 50 states; the trust promoters are correct. Unfortunately, most of the people who bite on the hard sales pitch from the living trust salesmen, seminar attorneys, or insurance agents don’t actually avoid probate with their living trust. Because those people who get a living trust don’t avoid probate, many high priced attorneys scream that the public is being duped, and they are right. Hence here are the battles in the living trust war. First, does the living trust avoid probate? Next, should you avoid probate?
Probate isn’t a troubling disorder. It can serve as a useful legal device. However, the awful accounts you have heard about probate, unscrupulous attorneys, and pushy promoters are almost all correct. It is a good idea to avoid probate, unless there is a legal reason for you to use it. You need to understand your legal options, so that you can sort out all the information that is thrown at you and make informed decisions. There is an important caveat that you must consider if you want to pass as much as possible to your family without any estate taxes.
Having a trust isn’t the only thing you need. You must be trained how to use the trust throughout your life and why it avoids probate. Someone needs take the effort to teach you, but it isn’t hard to understand and use the trust. Because your lawyer, insurance agent, and or other promoters usually don’t make the effort to teach you once they have your initial payment, problems arise. The attorneys are right that you are wasting your money to get a trust unless you know what probate is for and how to use trusts.
The family needs to have the legal authority to sign dad’s name when he is dead so they must go to court and go through the probate process. Dad has to sign before stocks and bonds or the house can be sold, before savings can be withdrawn, or to get into the safe deposit box, etc. He can’t sign, he is dead, and so who has authority to sign in lieu of him? The court transfers that signature authority to the personal representative (executor or executrix) through the probate process. All of the debts must be satisfied, the heirs must be protected as dictated by the will, if there is one, before the court grants this authority to sign.
Whenever an asset is held by a departed individual and a signature is required to transfer that asset, a probate proceeding is required.
By giving the family a “legal loophole,” the living trust avoids probate. Your trust, when correctly formed and operated becomes a legal entity that can own property such as stocks, bank accounts, houses, etc.
The trust document directs how the manager or “trustee” of the trust should take care of the property the trust owns, and the document requires the trustee to use the property and all of the generated income for the “beneficiaries” benefit. Naturally, you and your heirs are generally the trustees and beneficiaries named by your trust. Technically you don’t own your property however; you manage the trust property and get all of the property benefits. The trust owns the property. So, the owner of the property doesn’t die when you die. Simply the manager has died. Whoever you choose will be the new trustee and you will name them in your trust document i.e. your spouse, one or more of your children, your parents, or your banker, whoever you wish. The manager will sell your property and split the proceeds up between your heirs, or use it to benefit your family depending on what you have directed them to do.
Because a dead person doesn’t own your assets, none of them will have to be probated. The new trustee has full control over the trust’s assets and can sell them or manage them without any further authority. A trust performs without difficulty. Nix the probate! At your death if you have not funded the trust there will be a probate because your name is on the bottom line of your assets. Your family will have to get the court’s authority to sign your name. Sure, your name is actually on the trust’s assets, but only as the trustee, and the laws governing trusts automatically give the new trustee power to sign as trustee after you die or resign.
Forming a trust is very different from forming a company, but as an analogy, pretend that you are creating a company when you sign your trust. If the head of IBM dies, all of IBM’s assets don’t go to probate. When the head of a company dies, the laws say that a new president can be appointed with complete control over all of the assets of the company. A similar procedure occurs in a trust. No probate is required and another trustee is appointed.
Many people who form a trust don’t avoid probate because they don’t follow through and make sure all of their assets are “owned” by their trust. Despite having a trust, they don’t avoid probate. Therefore, the lawyers scream that the trust is no good and a sham. Living trusts are not bogus, except when they aren’t drawn or managed properly, and then they can’t give the promised benefits. Trusts drafted by lawyers may fail to provide the benefits as often as trusts supplied by the promoters and insurance agents. Many attorneys just “overlook” educating their clients about how a trust must be used so probate can be avoided. Unfortunately, a lot of the insurance agents, promoters, and even attorneys just don’t understand well enough to instruct you.
You need to both have the education to use the trust, and be certain you have a properly drawn trust that observes all the tax rules. Groups such as AARP and others have stated that less than five percent of lawyers can draft a living trust properly. Of course, the trust avoids being probated – IF it is correctly construct and you utilize it properly.
Should probate be avoided is a harder question to respond to. Somebody can use probate to their benefit in quite a few ways. The probate estate can act as a receptacle for payments from insurance or government assistance which cannot be received by a trust. A probate proceeding can also cut off the estate’s liabilities, settle property disputes, and give some tax advantages in rare cases. Probate doesn’t have to be the monster it is often made out to be, especially in states that have updated their probate laws.
Many states have passed some form of the Uniform Probate Code which is intended to standardize the probate process across the United States and streamline the process. Unfortunately, even in the states where the Code has been adopted, probate is often still a nightmare, time consuming, and very expensive for many families. After dad dies, mom and the family are very vulnerable, and the lawyers, among others, sometimes take advantage of the situation. It is easy for the heirs to be cheated in the probate process at the death of a family member.
The majority of people can and should avoid the probate process. Without a doubt, when the family can probate an estate and it will help them, then they should use the probate advantage. While most of the estate passes through the trust that is in place and avoids probate, a proceeding can still be conducted for part of the estate. Probate can be an appropriate alternative, even if a trust is in place. If you want to know more about when you should use probate, get my book Protecting Your Financial Future .
When all is said and done, the living trust is a powerful estate planning tool. It can give most families big benefits when a family member dies, and if it is drafted properly and used properly, it can have a huge positive impact when mom or dad becomes incompetent and can’t handle their business affairs. The strategy to benefit from a living trust is to educate yourself about how to set up and use living trusts and don’t blindly trust your insurance agent, attorney, or any promoter to follow though and guard your estate. The best way to benefit from your living trust is to learn about how to use living trusts.