Is a Revocable Living Trust Right for Avoiding Probate?

If you’ve taken the step of creating a revocable living trust, you’re already ahead of many people when it comes to estate planning. A trust provides an excellent foundation for distributing your assets after you pass away, but it’s important to understand that creating a trust is only one part of the process. Many individuals believe that simply establishing a trust means their estate will automatically avoid probate. Unfortunately, this belief is a misconception. Without the proper steps to fund the trust and ensure all your assets are aligned with it, probate may still become a part of your estate’s process.

In this article, we’ll take a deeper look into what needs to be done to maximize the benefits of your revocable living trust and how to avoid probate altogether. We’ll also explore what happens when trust assets are not properly funded and the actions you can take to prevent this situation.

What is Probate, and Why Should You Avoid It?

Probate is the legal process that occurs after a person dies to authenticate their will, pay debts, and distribute remaining assets to the beneficiaries. While probate isn’t inherently bad, it can be time-consuming, costly, and often public, which many people prefer to avoid. For those interested in learning more, you can explore the topic further through our blog.

By having a revocable living trust in place, you can bypass probate for assets that are correctly titled within the trust. This process can simplify matters for your heirs, allowing them to receive assets faster and with less legal intervention. However, if assets are not titled properly or named within the trust, probate may still be necessary for those assets.

What Needs to Be Done for a Trust to Avoid Probate?

To fully avoid probate, you must ensure that all of your assets are appropriately transferred into the trust or that your trust is named as the beneficiary. This includes everything from your bank accounts to real estate, life insurance policies, and retirement accounts. If any of your assets are still in your name alone and lack a beneficiary designation, they may be subject to probate. Here’s how to ensure your estate avoids this process: trust based plan

1. Titling Accounts and Property to Your Trust

The first step is to transfer ownership of all appropriate accounts and properties into your revocable living trust. This includes assets such as bank accounts, brokerage accounts, real estate, and even certain business interests. The ownership of these assets needs to be explicitly transferred from your personal name to the name of your trust. If these assets remain in your name and do not have designated beneficiaries, they will go through probate when you pass.

2. Beneficiary Designations on Life Insurance and Retirement Accounts

Certain accounts, such as life insurance policies and retirement accounts (e.g., 401(k)s and IRAs), do not need to be titled in the name of your trust for them to avoid probate. Instead, you simply need to name a beneficiary who will inherit the proceeds of these accounts upon your death.

However, if you want the revocable living trust to receive these assets directly, you can name your trust as the beneficiary. This ensures that the proceeds are transferred into the trust and handled according to your estate plan without the need for probate.

3. Payable-on-Death (POD) and Transfer-on-Death (TOD) Designations

Another way to ensure that your assets avoid probate is by setting up payable-on-death (POD) and transfer-on-death (TOD) designations for certain accounts. These types of accounts, when appropriately set up, will automatically pass to the designated beneficiary upon your death, bypassing probate entirely. You can use these designations for checking and savings accounts, investment accounts, and even real estate, depending on your state’s laws.

4. Jointly Held Property

Property that is owned jointly with rights of survivorship or as tenants by the entirety typically does not go through probate. When one of the joint owners passes away, the surviving owner automatically inherits the decedent's interest in the property. This type of ownership can apply to real estate, bank accounts, and other assets. It’s important, however, to ensure that the title reflects joint ownership with rights of survivorship or tenancy by the entirety, so the transfer is automatic.

What Happens if You Forget to Fund Your Trust?

Despite your best efforts, life changes can lead to assets being left out of the trust. If you forget to transfer new assets into the trust or fail to update the trust after acquiring new property, those assets will not be governed by your trust and may be subject to probate.

For example, if you buy a new home or open a new bank account and forget to title those assets into the trust, your heirs will likely need to go through probate to have those assets transferred.

The solution? When creating a revocable living trust, it's essential to work with an experienced estate planning attorney to ensure that everything, including any new property or accounts, is properly funded into the trust. Additionally, consider drafting a pour-over will, which ensures that any assets not funded into the trust will automatically be "poured over" into the trust during the probate process. While this isn’t ideal and may result in additional time and legal fees, it does ensure that your assets are ultimately distributed according to your wishes.

What Kinds of Assets Avoid Probate Automatically?

While most assets should be titled into your trust to avoid probate, certain types of property are automatically excluded from probate as long as they have the proper designations:

1. Joint Tenancy with Rights of Survivorship

Assets held as joint tenants with rights of survivorship automatically pass to the surviving owner upon death, without the need for probate. This can apply to real estate, bank accounts, and other shared property.

2. Life Insurance Policies with Named Beneficiaries

If you’ve named a beneficiary on your life insurance policy, the proceeds will go directly to the named beneficiary upon your death. You can also name your revocable living trust as the beneficiary to ensure the proceeds are distributed according to your trust’s terms.

3. Retirement Accounts with Beneficiary Designations

Retirement accounts like 401(k)s, IRAs, and pensions automatically pass to the named beneficiaries without going through probate. Again, you can name your trust as the beneficiary of these accounts to ensure they are distributed as part of your overall estate plan.

4. Transfer-on-Death and Payable-on-Death Accounts

As mentioned earlier, accounts with transfer-on-death (TOD) or payable-on-death (POD) designations will avoid probate if the beneficiary is named. This can apply to checking and savings accounts, CDs, and investment accounts.

5. Real Estate with Transfer-on-Death Deeds

Some states allow you to use transfer-on-death deeds for real estate, which allows the property to automatically transfer to a designated beneficiary without the need for probate.

Steps You Can Take to Ensure Your Trust Avoids Probate

Avoiding probate requires more than just setting up a revocable living trust. It’s essential to regularly review your estate plan and make updates as necessary. Here are some steps you can take to ensure your trust avoids probate:

1. Review Your Beneficiary Designations

Ensure that all beneficiary designations are up-to-date on your life insurance, retirement accounts, bank accounts, and any other assets that allow for such designations. If you’ve created a revocable living trust, name it as the beneficiary for relevant assets.

2. Transfer Ownership of Assets to Your Trust

Ensure that all assets, including real estate, bank accounts, and investment accounts, are properly transferred to your trust. It’s important that you title assets correctly to avoid probate.

3. Create a Pour-Over Will

Even if some assets are accidentally left out of the trust, a pour-over will will ensure that those assets are transferred into the trust during the probate process.

4. Consult with an Estate Planning Attorney

To ensure that everything is in order and that your estate plan effectively avoids probate, consult with a qualified estate planning attorney. They can review your plan, make necessary adjustments, and help you navigate any complexities.

Avoid Probate with a Revocable Living Trust

A revocable living trust can be an excellent way to avoid probate, simplify the estate administration process, and ensure your assets are distributed according to your wishes. However, to fully benefit from a trust, you must ensure that all assets are properly funded into it and that beneficiary designations are up-to-date.

By taking the necessary steps to fund your trust, review beneficiary designations, and seek guidance from an experienced estate planning attorney, you can help ensure a smooth transition of your assets without the delays and costs associated with probate.