Revocable Trusts and Probate

Revocable Trusts and Probate

A revocable intervivos trust (also known as a living trust) is sometimes chosen by people who want an alternative of having a last will and testament.

In this kind of arrangement, the written trust agreement usually provides that the grantor of the trust (also known as the "creator" or "settlor") has the right to receive all of the income for life, to remove whatever other assets he so desires from the trust, and the power to revoke the entire trust and reclaim all of the assets at any time.

Upon the death of the grantor, the assets are distributed to the beneficiaries, or the assets may be held in further trust in accordance with the terms of the trust agreement.

Advantages of using a living trust instead of a will are:

1. To avoid probate. If all of the deceased person’s assets were titled in the name of the trust, then there is no need to probate a will with the Surrogate, or the equivalent office in another state.

2. Privacy. A probated will usually become available to the public, although the size of the estate and its exact assets are not usually described in the will. This contrasts sharply with a trust, which is not a public document.

3. Management during disability. Should the grantor become unable to manage his finances, then the succeeding trustee can act as trustee, and use the funds for the grantor. This is preferable to an agent under a power of attorney.

Disadvantages of using a living trust are:

1. Retitling of assets. In order to fully avoid the probate process, it is necessary for the individual to transfer all of his assets so that they are not held in his name, but instead is held in the name of the trust. This makes things cumbersome to manage, especially with banks, brokerage houses or other institutions.

2. The necessity of Last Will and Testament and Probate. Unless every asset owned by the decedent was titled in the name of the trust prior to his death, a will must still be probated so that the other assets are directed into the trust after death. For example, if there is a last paycheck or other asset that is still in the name of the decedent, it is only the executor who is able to transfer the assets. Usually a person using a revocable trust in lieu of a will also has a short "cleanup" will, which directs that assets remaining in the grantor’s name will flow over into the trust.

3. No tax savings. Using a living trust does not save on taxes. Federal estate tax laws (and inheritance or estate tax laws of the majority of States), provide that assets over which a person has the right to revoke and claim as their own (such as in an irrevocable trust) can be included in the gross taxable estate even if no will is ever probated.

The word "probate" has several different meanings, which has caused much confusion.

The basic definition of the word "probate" is the process of legally determining that a certain document is, in fact, the last will and testament of the decedent. Once a last will and testament has been "probated" it means that there have been a signed and legally binding determination that it is the last will and testament of the decedent, which will then be used to administer the estate and distribute the assets. In the state of New Jersey, this is the least difficult part of estate administration process, while in other states, such as New York, Florida, California and Texas, this procedure can be burdensome and expensive.

The second meaning of the word "probate" is used to describe assets which are passed according to a will or by intestacy. The term "probate estate" usually means those assets of the decedent which were passed according to the terms of the last will and testament, or would pass according to the intestacy statute in the event that there is no last will and testament. The term "non-probate estate" is then used to describe assets passed according to a beneficiary designation, rather than by a will, such as life insurance policies, retirement benefits and jointly-held accounts.

The broadest meaning of "probate" is the entire process of administering the estate, including the accumulation of assets, paying debts, selling assets (as needed), filing tax returns and distributing the proceeds.

In summary, while using a living trust as a will substitute does avoid the process of having the will admitted into probate, it does not avoid the need for these other processes.