Trusts and the Probate Process: What You Should Know

If you’re confused, or unfamiliar with trusts as part of an estate plan, you’re not alone! Some people need to have a trust, others do not.

Then there’s the probate process. Does having a trust impact the probate process? Should you have a trust to avoid the probate process?

To answer your questions about trusts and probate, read on!

What is a trust?

There are many types of trusts that accomplish various estate planning objectives, from reducing estate tax exposure to avoiding probate administration.

A trust, in general, is a written document that explains how you want any money in the trust to be spent during your lifetime and how you want any money in the trust distributed after you die.

A trust is an arrangement among three basic parties:

(1) the grantor who creates and funds the trust (typically also the trustee of the trust while alive)

(2) the trustee who manages the trust

(3) the beneficiaries who are or will be entitled to funds from the trust

The living trust should also name a successor trustee to take over managing the trust should the original trustee no longer be able to carry out the duties.

A living trust is revocable, meaning that the grantor can amend or revoke the trust at any time.

Let’s say you are the grantor, meaning that you created the trust. Since you retain the power to change or revoke the trust, you still retain as much control over the assets in the trust as if you still owned them outright.

A living trust is, in essence, your personal checkbook — you can do with the assets whatever you wish. Although the trust is the legal owner, the I.R.S. treats you as the owner because you really have not parted with control, you can take the assets out of the trust for your personal use at anytime and for any reason. You suffer no loss of control or of income.

In addition, because the I.R.S. treats you as the owner of any money in the trust, any income earned will be reported on your personal 1040 Income Tax Return. No separate income tax return is necessary so long as you are the trustee or co-trustee.

On the other hand, since a living trust is revocable and you retain control over the assets, any assets in the living trust at your death are includable in your gross estate for estate tax purposes. This is an important point –– a living trust does not of itself save any estate taxes. For this reason, there is no minimum net worth or wealth that is necessary to consider creating a living trust.

So why create a living trust?

AVOID PROBATE…
Any assets that you have transferred to the trust during your lifetime will avoid probate administration after you die. Generally, when a person dies owning any assets in his sole name, the probate court will oversee the proper distribution of those assets.

Probate administration involves filing various forms, reporting on assets and expenditures, attending hearings, providing notice to interested parties, and allowing creditors a forum to bring claims. Assets properly transferred into a living trust will not require probate administration and will thus avoid the paperwork, hearings and other steps. The trustee or successor trustee will simply distribute the assets according to the terms of the living trust.

Note: Although assets in a living trust do not need to go through probate administration, those assets must still be reported on the Connecticut estate tax return, regardless if estate tax is actually due.

If no estate tax is due, the Connecticut estate tax return is filed with the local probate court and the court assesses a fee based on the total amount reported on the return – including the value of the living trust. Using a living trust does not avoid probate fees.

KEEP IT PRIVATE…
If you have a Will and go through probate administration, your Will becomes a public document that anyone can read. The terms of a living trust, however, are not public. You may have particular reasons for desiring privacy – from leaving unequal distributions to children or making donations to certain charities. In our practice, we have found that this privacy element is seldom the motivating factor for using a living trust.

HAVING SOMEONE MANAGE YOUR AFFAIRS WHEN YOU CAN’T…
A living trust ensures proper management of your assets in the event you are physically or mentally unable to manage the assets on your own. If you have transferred assets into a living trust and at some later point become incapacitated, the successor trustee you have appointed will be able to take over the management of your assets according to the terms you set up.

Funding the trust – A MUST!

A living trust only benefits you if you actually fund it! Some people will create a terrific living trust and not fund it, either intentionally or by accident.

If it is intentional, the person likely has a “pour-over” Will, an estate planning document which serves to automatically transfer any assets that the person holds in their name to the trust at the time of their death.

However, any assets you may own in your own name at the time of your death will be subject to probate at your death, even though they will ultimately be added to the assets held in the living trust.

You should carefully and continually review those assets held in your own name (whether now owned or acquired later) to be sure that such ownership is appropriate in light of your desire to avoid probate at death.

Some people choose not to fund the living trust initially because they want to wait until they are unable to manage their affairs and will fund it (or to have someone holding their power of attorney fund it) at that point.
A delay to fund a trust could also be the desire to avoid one time administrative steps (dealing with various financial institutions, doing new deeds, etc.) that have to be taken in order to fund it. This is understandable, but NOT wise!

For a list of assets that belong in a trust, click here.

The two strongest arguments for using and funding a living trust:
if you have out of state real property or a family that argues.

For out of state real property, a living trust that holds such property will avoid the need to go through that state’s probate procedures and paying a probate lawyer from that state to handle the probate, usually at considerable cost for just the one asset.

If there is a second marriage or children who do not get along, then a living trust may be best (if your trustee is faithful to your wishes). It will be harder for one of the other potential beneficiaries to cause trouble for trouble’s sake if they do not know what the trust contains or says; remember, that it is a private document.

A living trust is a very flexible planning tool that has very practical applications, but this does not mean that everyone needs one.

The decision to use a living trust cannot, however, be made in a vacuum–it must be viewed in light of your assets, wealth, and family relationships.

Give us a call if you need a hand deciding if a trust is right for you.

The probate process and trusts

One of the benefits of a properly drafted and funded living trust is that it enables a person to avoid probate upon their death. And we’re not saying that probate is bad – it’s actually a super-helpful process to ensure people’s wishes are met. But let’s define exactly what probate is and then to overlay the process on your financial and family situation to determine whether probate avoidance is in your best interests.

In general, when a person dies the function of the probate court is to ensure the following:

If there was a Will, it is the decedent’s true last Will, and not a forged or revoked version
The decedent’s assets are safeguarded and protected from waste, theft, or neglect
Valid bills and debts are paid, including death taxes, if any
What remains is paid to the intended beneficiaries in accordance with the decedent’s valid Last Will and Testament.

For a walk-through of the probate process, click here.

Is probate lengthy?

The executor may make distributions to estate beneficiaries prior to concluding the probate court process. (For distributions made before the executor files the state death tax return, you may need to obtain consent from the Connecticut Department of Revenue Services.)

You must always be careful to retain sufficient assets to pay all creditors and any taxes (estate, income or otherwise) that are due. The executor is personally liable if there is a shortfall. Our practice is to make a cash need projection early in the process, add a cushion to it to be safe, and to then assist the executor in immediately distributing those assets that are not going to be needed for bills or other purposes.

The process is not a long one. A formal probate estate process will take a minimum of 5 months start to finish, but a full year is more typical. During most of that time period, little work is being done–usually the executor is waiting for the 150 day claims period to end or is waiting until the last moment to file the death tax returns (why pay the government sooner than you have to!).

As mentioned earlier, the final account cannot be filed until there is evidence that all taxes have been paid. This often delays estates because it may take several months after filing the death tax returns to receive confirmation from the taxing authorities that the return is correct or to settle any disputes raised by the taxing authorities (such as over the value of real estate or the value of an interest in a family business).

Is the probate process expensive?

Probate is also not an inherently expensive process. In our practice we have found that probate becomes expensive for three reasons.

(1) The family was dysfunctional to begin with and now that mom and dad have both died, the beneficiaries’ (usually children) true nature is revealed. They argue over who gets what and how mom or dad always favored so and so.

Items of relatively insignificant value, all of a sudden, take on added significance. In such disputes people tend to act in a manner not economically justified and end up hiring lawyers to resolve these matters, although the lawyers are often reluctant to get involved. Counseling is needed more than lawyering.

(2) The named executor is neither particularly trustworthy nor knowledgeable. The executor drags his feet the entire time, tries to live in the decedent’s house rent-free for as long as he can, co-mingles his personal funds with those of the estate, fails to meet tax filing deadlines (thereby incurring interest and penalties), does not communicate with family members or beneficiaries (who then hire lawyers to find out what is going on which then forces the executor to hire a lawyer), and for similar reasons. All of this delays the process and results in additional costs to everyone.

(3) Ambiguous or inconsistent scheme(s) that the decedent left behind to dispose of his property. This can be due to a poorly drafted Will (which is rare). Or, because the decedent had assets titled jointly with some children and not with others, but made promises to those other children that certain assets would pass to them under their Will, but which don’t end up passing to them.

This is the classic “I have titled my $100,000 bank account jointly with my daughter, but she knows that when I die she is to share it with my other two children.” Right! This is a formula for trouble if ever there was one, unless there is solid trust among the entire family.

In any event, the fee that cannot be avoided is the probate court’s fee. Probate courts in Connecticut are funded in part based on fees that they levy on a decedent’s taxable estate. People who use living trusts have taxable estates as well and will have to pay a probate fee even though their assets pass outside of probate!

In addition, most of the costs incurred in probate, for accountants, lawyers, and appraisers, for example, result from tax issues that arise regardless of whether your assets avoid probate. These professional fees will result even if you use a living trust.

Assuming a harmonious family and a properly and thought out estate plan, there is no reason to fear probate. Probate may even be a beneficial process in that there is an independent and skilled entity, the probate court, overseeing the process to make sure that everything happens as you would like it to.

The probate process and probate avoidance through living trusts each have their pros and cons. There is no right or wrong solution. What matters most is that someone takes the time to discuss with you how each method would work in your situation–what advantages of each might you gain from and what disadvantages of each might you suffer.

This is where a probate attorney well-versed in Connecticut estate administration can play a valuable role. Contact us, this is what we do all day long. We’d be happy to help.