Avoiding Probate

HOW A LIVING TRUST CAN HELP PRESERVE YOUR ESTATE

edited by Attorney Shae Irving

Because probate is time-consuming, expensive, and usually unnecessary, many people plan in advance to avoid it. There are a number of ways to pass property to your inheritors without probate. Some of these probate-avoidance methods are quite simple to set up; others take more time and effort.

FIVE WAYS TO AVOID PROBATE
1. Pay-on-death designations.
Designating a pay-on-death beneficiary is a simple way to avoid probate for bank accounts, government bonds, individual retirement accounts, and, in many states, stocks, and other securities. In a few states, you can even transfer your car through such an arrangement. All you need to do is name someone to inherit the property at your death. You retain complete control of your property when you are alive, and you can change the beneficiary if you choose. When you die, the property is transferred to the person you named, free of probate.

2. Joint tenancy.
Joint tenancy is a form of shared ownership where the surviving owner(s) automatically inherits the share of the owner who dies. Joint tenancy is often a good choice for couples who purchase property together and want the survivor to inherit. (Some states also have a very similar type of ownership, called "tenancy by the entirety," just for married couples.) Adding another owner to property you already own, however, can create problems. The new co-owner can sell or borrow against his or her share. Also, there are negative tax consequences of giving appreciated property to a joint tenant shortly before death.

3. A living trust.
A revocable living trust is a popular probate-avoidance device. You create the trust by preparing and signing a trust document. Once the trust is created, you can transfer property to it without giving up any control over the trust property. When you die, the trust property can be distributed directly to the beneficiaries you named in the trust document without the blessing of the probate court.

4. Insurance.
If you buy life insurance, you can designate a specific beneficiary in your policy. The proceeds of the policy won't go through probate unless you name your own estate as the beneficiary.

5. Gifts.
Anything you give away during your life doesn't have to go through probate. Making nontaxable gifts (up to $10,000 per recipient per year, or to a tax-exempt entity) can also reduce eventual federal estate taxes. So, if you can afford it, a gift-giving program can save on both probate costs and estate taxes.

LIVING TRUSTS
If you're considering setting up a living trust to avoid probate, there's no shortage of advice out there-much of it contradictory. Personal finance columnists, lawyers, your Uncle Harry-everybody's got an opinion.
Whether or not a living trust is right for you depends on exactly what you want to accomplish and how much paperwork you're willing to put up with. Living trusts work wonderfully for many people, but not everyone needs one.

What is a living trust?
A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A flesh-and-blood person, however, must actually be in charge of the property; that person is called the trustee. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.
There are many kinds of trusts. A "living trust" (also called an "inter vivos" trust by lawyers who can't give up Latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.
All living trusts are designed to avoid probate. Some also help you save on death taxes, and others let you set up long-term property management.

How does a living trust avoid probate?
Property you transfer into a living trust before your death doesn't go through probate. The successor trustee-the person you appointed to handle the trust after your death-simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all the property has been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust?
The expense of a living trust comes up front. Lawyers have figured out that they can charge high fees-much higher than for wills, documents usually of comparable complexity-for living trusts. They commonly charge upwards of $1,000 to draw up a simple trust. If you're going to hire a lawyer to draw up your living trust, you might pay as much now as your heirs would have to pay for probate after your death-which means the trust offers no net savings.
But you don't have to pay a lawyer to create a living trust. With a good self-help book or software program, you can create a valid Declaration of Trust (the document that creates a trust) yourself. If you run into questions that a self-help publication doesn't answer, you may need to consult a lawyer, but you probably won't need to turn the whole job over to an expensive expert.

DON'T FORGET YOUR WILL

Even if you make a living trust, you still need a will. Here's why:
A will is an essential back-up device for property that you don't transfer to your living trust. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust-which means that it won't pass under the terms of the trust document. But in your back-up will, you can include a clause that names someone to get any property that you don't leave to a particular person or entity.
If you don't have a will, any property that isn't transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.