Probate Avoidance & Revocable Trusts
While probate can be straightforward in states like Colorado, it may still be time-consuming and costly. This is why probate avoidance is essential in some states. A fully funded revocable trust bypasses probate and simplifies the transfer of assets. Such estate plans still include a pourover will in case assets are left outside the trust at death. Unlike wills, which become public when probated, trusts remain private. If privacy is a priority, particularly for public figures, a revocable trust may be preferable. For property in multiple states, a revocable trust can also prevent the need for multiple probate proceedings, reducing both time and expense.
Primary Reasons to Use a Trust
- Minor Children: Minors cannot hold assets outright, so a trust is often used for inheritances. This ensures that assets are managed responsibly until children are older. A revocable trust can allow for quicker access to funds for the benefit of minor children as well.
- Special Needs Beneficiaries: If you have a beneficiary with special needs who relies on public benefits, a Special Needs Trust can be essential. This type of trust allows you to provide for the beneficiary without jeopardizing their eligibility for benefits.
- Complex Assets: If you have a family business, rapidly appreciating assets, or other complex assets, trusts can protect these interests and facilitate efficient transfers.
- Life Insurance and Estate Tax Concerns: For clients whose estate, including life insurance, exceeds the estate tax threshold, trust planning can provide asset protection and help minimize taxes by keeping the insurance out of the taxable estate.
Advantages of Revocable Trusts
There are various advantages to using revocable trusts as the primary estate planning vehicle, accompanied by a simple pourover will:
- Assistance with Incapacity: Trusts, often in conjunction with financial powers of attorney, allow for a successor trustee to manage assets if you become incapacitated, offering continuity and a smoother transition without court involvement.
- Immediate Distribution: Assets in a trust may be distributed to beneficiaries pursuant to the trust provisions without waiting for probate. Whereas under a probate, assets often cannot be distributed for months, until the creditor claim period ends.
- Potential Barrier for Litigation: It may be less enticing to contest a trust versus a will, because all beneficiaries and heirs are entitled to notice of probate for a will, but typically only the beneficiaries of a trust must be notified of its existence.
- Creditor Protection: A creditor may need to initiate probate to make a claim on trust assets, adding a protective layer.
Disadvantages of Revocable Trusts
While beneficial, revocable trusts come with some downsides:
- Higher Initial Cost: Drafting a trust can be more costly than a will due to its complexity and are typically much more lenghty.
- Trust Funding Challenges: You must take care in keeping assets titled in the trust, as probate will be necessary if assets outside of the trust at death exceed the “small estate” amount (currently $82,000) and there are no joint owners or designated beneficiaries.
- Trustee Fees: Administrative fees may accumulate over time, particularly if it is necessary to appoint a third-party or professional trustee.
- Record-Keeping Requirements: Trustees must maintain detailed records.
- Creditors Have One Year to Make a Claim: Under probate, notice is published, which bars unknown creditors if a claim is not made after a certain period of time. Trusts may not publish such notice, and the decedent’s creditors instead have up to one year.
- Risks to Public Benefits: The trust may cause a loss of exempt assets like a residence and and then jeopardize public benefit eligibility.
Making the Right Choice
Ultimately, the decision to use a trust in estate planning is highly personal. By considering your specific situation—whether you have minor children, own complex property and assets, or wish to avoid probate—you can make informed decisions that meet your estate planning goals. Trusts are powerful tools that, when used strategically, can offer significant peace of mind for you and your beneficiaries.
