Will My Revocable Living Trust Avoid Probate? It Depends.

Suppose you have established a revocable living trust (which we will refer to simply as a trust). Congratulations! You are on the right track in creating a comprehensive estate plan. However, you are only halfway there. Many people believe that because they took the time to create a trust, their estate will automatically avoid probate, and they will not have to take any additional steps. Unfortunately, this assumption creates a false sense of security.

The key to probate avoidance is ensuring that, when you pass away, there are no accounts or property in your sole name without a current beneficiary designation. Taking this one step further, ensuring that the provisions of the trust you created will govern the management and ultimate distribution of your accounts and property after you pass away requires that you have either properly transferred ownership of your accounts and property to your trust or named your trust as the beneficiary.

What kinds of things go through probate?
Under what conditions will your loved ones have to go to probate court to administer and distribute your accounts and property after your death? Here are a few examples:

• Your accounts and real estate are titled in your sole, individual name (without a payable-on-death (POD) or transfer-on-death (TOD) designation)
• You own accounts and real estate jointly with someone else as a tenant in common
• Your retirement accounts have no named beneficiary
• Your life insurance policies have no named beneficiary

How can you ensure that your accounts and property avoid the probate process?
The following types of accounts and property will automatically avoid probate after you die and, therefore, do not need to be funded into your trust; however, you can choose to have some types funded into your trust at death:

• Accounts and real estate owned as joint tenants with rights of survivorship. Your interest in the accounts and real estate will automatically transfer to the surviving owner at your death by operation of law.
• Accounts and real estate owned by a married couple as tenants by the entirety. Your interest in the accounts and real estate will automatically transfer to the surviving spouse at the time of your death by operation of law, leaving them the sole owner of the property.
• Life insurance, if you have designated a beneficiary on the policy. In many instances, you may choose to name your trust, if you have created one, as the beneficiary of your life insurance policy. Naming your trust as the beneficiary will cause the life insurance proceeds to flow into the trust at your death.
• Retirement accounts, 401(k)s, and annuities. Suppose you have designated a beneficiary on the account or the plan has default rules requiring that the account be distributed to a specific person or group. In that case, if no named beneficiary exists, the account will go to that person or people. You might also consider naming your trust as the beneficiary of the retirement account so that the account will flow into your trust at the time of your death.
• POD and TOD accounts and, in some states, TOD or beneficiary deeds for real estate. Accounts or real estate with these designations will automatically transfer to the named beneficiary upon your death by operation of law.

What happens if you forget to fund your trust?

Life is ever-changing, and you could overlook an account or property when funding your trust. Or you could take all the steps necessary to ensure that all of your current assets are in the trust at the time of your death but then acquire new accounts or property and forget to fund the new items into your trust. If one of these situations arises, your loved ones may have to open a probate process at your death to handle any accounts or property in your sole name without a beneficiary designation.

Ideally, when you created your trust, you also created a pour-over will, which instructs the judge in a probate administration to transfer all of the accounts and property in probate to your trust during the probate process. So, even if your loved ones have to go through probate, the accounts or property will eventually be funded into your trust and managed according to the trust instructions. While this situation is not ideal and, in many states, may be very expensive and time-consuming, the ultimate outcome is that your trust remains the sole vehicle for managing and distributing all of your accounts and property.

What is the next step?

Book a Free Discovery Call to confirm whether your trust will avoid probate. Is it fully funded, and are all your accounts and property aligned with your estate plan? Creating a revocable living trust is the first step to probate avoidance, and proper ownership is the ultimate key.