When it comes to estate planning, many individuals seek strategies to ensure their assets are efficiently distributed to their intended beneficiaries after their passing. Probate is often associated with delays, expenses, and potential disputes that can arise during the distribution process. One common tool used to bypass probate is a lifetime trust.
Understanding Probate
Before delving into the potential benefits of a lifetime trust, it’s crucial to grasp the concept of probate. Probate is the legal process that occurs after an individual passes away, during which their assets are distributed according to their will or the intestacy laws of the state if no will exists. Probate involves various steps, including validating the will, identifying assets, settling outstanding debts and taxes, and eventually distributing the remaining assets to the rightful heirs. This process is supervised by the court and can be time-consuming, costly, and subject to public scrutiny.
What is a Lifetime Trust?
A lifetime trust, also known as a living trust or revocable trust, is a legal arrangement in which an individual (the grantor or settlor) transfers their assets into a trust during their lifetime. The grantor retains control over the trust and can amend or revoke it as desired. Typically, the grantor also serves as the initial trustee, managing the trust’s assets for their benefit. However, the trust agreement designates successor trustees to manage the trust in the event of the grantor’s incapacity or death.
One of the primary advantages of a lifetime trust is its ability to bypass probate. When assets are properly transferred to a trust during the grantor’s lifetime, they no longer form part of the grantor’s probate estate. Instead, they are owned by the trust, and upon the grantor’s death, the assets are distributed according to the trust’s terms. As a result, these assets can be distributed to the beneficiaries without the need for probate court involvement. This can help expedite the distribution process, maintain privacy, and potentially reduce costs.
Probate Avoidance
Probate avoidance is the process of employing various legal strategies and tools to ensure that assets are distributed to intended beneficiaries outside of the probate process. Probate is the legal procedure through which a deceased person’s assets are managed, debts are settled, and the remaining assets are distributed to heirs or beneficiaries. While probate serves an important purpose, it can be time-consuming, costly, and subject to public scrutiny. Here are some common methods of probate avoidance:
Lifetime Trusts: By transferring assets into a trust during their lifetime, individuals can ensure that those assets are owned by the trust and managed by a trustee. Upon the grantor’s death, the trust assets can be distributed to beneficiaries named in the trust document, bypassing probate.
Joint Ownership with Rights of Survivorship: Holding assets jointly with rights of survivorship is a common probate avoidance technique. When one joint owner dies, the ownership automatically transfers to the surviving joint owner(s) without the need for probate. This method is often used for bank accounts, real estate, and vehicles.
Beneficiary Designations: Certain assets, such as life insurance policies, retirement accounts (e.g., 401(k), IRA), and payable-on-death (POD) or transfer-on-death (TOD) accounts, allow individuals to designate beneficiaries. Upon the account holder’s death, the assets are directly transferred to the designated beneficiaries without going through probate.
Gifting: Another way to avoid probate is by gifting assets during one’s lifetime. By transferring ownership of assets to intended beneficiaries before death, those assets no longer form part of the individual’s probate estate. However, it’s important to consider the potential tax implications and limitations on the amount of tax-free gifts that can be made in a year.
Assets Typically Transferred to a Lifetime Trust
A lifetime trust can hold various types of assets, such as real estate, financial accounts, investments, business interests, and personal property. To ensure probate avoidance, it is essential to properly retitle assets into the name of the trust or designate the trust as a beneficiary for certain assets like life insurance policies or retirement accounts.
Assets that can be transferred to a lifetime trust include:
Real Estate: This includes residential properties, commercial properties, land, vacation homes, and rental properties. The trust holds legal ownership of the real estate, and the grantor can continue to live in or use the property during their lifetime.
Financial Accounts: Bank accounts, savings accounts, certificates of deposit (CDs), and money market accounts can be transferred to a lifetime trust. The trust becomes the owner of these accounts, and the grantor can continue to manage and use the funds as the trustee.
Investments: Stocks, bonds, mutual funds, brokerage accounts, and other investment assets can be placed in a lifetime trust. The trust becomes the legal owner of these investments, and the grantor can retain control as the trustee, making investment decisions and receiving income generated by the assets.
Business Interests: Ownership interests in businesses, such as shares in a corporation, partnership interests, or membership interests in a limited liability company (LLC), can be transferred to a lifetime trust. The trust becomes the owner of these interests, and the grantor can continue to manage and operate the business as the trustee.
Personal Property: Valuable items like jewelry, artwork, antiques, collectibles, and vehicles can be transferred to a lifetime trust. The trust holds legal ownership of these assets, and the grantor can continue to use and enjoy them during their lifetime.
Intellectual Property: Intellectual property assets, including patents, trademarks, copyrights, and royalties, can be transferred to a lifetime trust. The trust becomes the owner of these assets, and the grantor can continue to manage and benefit from them.
It’s important to note that not all assets are suitable for transfer to a lifetime trust. Some assets, such as retirement accounts (e.g., 401(k), IRA) and life insurance policies, have specific beneficiary designations, and those designations should be coordinated with the trust to ensure proper integration into the estate plan.
Exceptions to Probate Avoidance
While a lifetime trust is an effective tool for avoiding probate in many cases, it’s important to note that certain assets may still be subject to probate even if they are held within a trust. Assets inadvertently left outside the trust, such as newly acquired property or assets not properly retitled, may still require probate proceedings. Additionally, certain types of assets, such as jointly owned property with rights of survivorship or assets with designated beneficiaries, may pass directly to the surviving owner or beneficiary, bypassing probate altogether.
Schedule a Consultation with a Professional Estate Planning Attorney
It is crucial to work with an experienced estate planning attorney to properly set up and fund the trust, ensuring all assets are appropriately titled and included. At Galanti & Copenhaver, we prioritize personalized services tailored to meet the unique needs of each client. Our dedicated team is readily available to address any questions or concerns you may have. Schedule a consultation today to speak with our experts at Galanti & Copenhaver.