Many people use a trust to keep assets in the family and prevent “outsiders” from taking the family wealth away from the children and grandchildren. Trusts can also provide some types of tax benefits, especially in helping to reduce a couple’s estate tax.
Many people want their beneficiaries to avoid the probate process after they die. One of the more common ways to avoid probate is to (1) create a trust, usually a revocable trust, which is sometimes referred to as a “Living Trust,” and (2) then transfer assets into the trust either upon death or before.
There are many other reasons to have a trust as part of an estate plan. Avoiding probate at death is not the only reason. If you’re looking to avoid probate without the use of a trust, there are alternative pathways to explore. In this article, we’ll look at how to avoid probate without a trust for married couples as well as single people, then delve into reasons why you might prefer to have a trust (for more than just avoiding probate).
Married Couples – First Death
For many couples, avoiding probate is easy. No probate is needed at the first death by the nature of how the assets are titled and directed. Some people think that, by state law, the survivor of the couple automatically receives everything from the deceased spouse. In most cases, that is the result. This is because a specific law makes it happen.
Many couples avoid probate at the first death because of the way their assets are titled and through beneficiary designations. When a married couple owns assets in both their names – a house, a bank account, etc. – then the survivor is seen as having a right of survivorship in the item.
For example, if a married couple owns a house and one of them dies, then the right of survivorship automatically transfers the deceased spouse’s portion to the survivor. If the house was only owned by one of the pair and not in both of their names, the survivor’s right of survivorship does not exist.
Some assets pass by beneficiary designation, like life insurance and retirement accounts. With most couples, they have named each other as the primary beneficiary. Unless a business is involved, most couples’ assets will either be jointly owned or have a beneficiary designation. Thus, the survivor automatically receives the assets at death, avoiding probate—but not because a specific law makes it happen.
Single People
Single people do not have an automatic right of survivorship in assets. Still, even without a trust, there are ways to avoid probate and pass assets to directed beneficiaries.
1. Transfer on Death (TOD)/Pay on Death (POD)
Many accounts are allowed to have a TOD or POD designation. This is like having a beneficiary designation, similar to a life insurance policy or a retirement account. This causes the asset to pass outside of probate. This also means that the Last Will and Testament have no direction on who receives the asset.
2. Real Property – Deed Designation
You cannot have a beneficiary designation attached to a deed, but you can have the deed itself direct who receives the property at your death. This is sort of a survivorship clause in the deed that directs the inheritance of the real property, avoiding probate.
3. Beneficiary Designations
As mentioned above, certain types of assets have beneficiary designations attached to them. You need to make sure that a primary beneficiary and alternate beneficiary are identified. The lack of listing a beneficiary could cause the insurance policy or retirement account to go through the probate process.
Challenges in Avoiding Probate for Business Assets
While there are several ways single individuals and married couples can avoid their assets passing through probate upon death, the question of avoiding probate is more complex when dealing with business assets.
Generally, business ownerships do not have a right of survivorship nor a beneficiary designation. Even if the business owners have a Buy-Sell Agreement directing who receives the ownership shares, the probate process still must be done to appoint a Personal Representative to implement the Agreement’s buy-sell provisions.
Also, closely held business interests do not have designated beneficiaries to receive the interest at death. To avoid probate with a closely-held business interest, you almost certainly need a trust to hold the ownership.
Reasons to Use a Trust (Other Than Family Wealth Preservation)
Even though the methods above can avoid probate, a trust is still probably the best way to avoid having your assets pass through the probate system. Two of the most important features of using a trust, in addition to avoiding probate, are:
- Direct where the asset goes after the primary beneficiary dies. If I pass assets to my sister through a TOD, I cannot direct that I want it to later go to her children when my sister dies and not to her husband. A trust can do that.
- Divide the assets proportionally. In a trust, you can identify a group of people and have the total assets proportionally directed among them. If you identify a certain person to receive the account through a TOD/POD, then that person gets the account, regardless of how much or how little may be in the account. On the other hand, the trust can direct that all assets be divided among people, regardless of what account holds a certain amount.
In addition, there are circumstances outside of family wealth preservation where a trust can be more desirable even than having a will as your main testamentary document, including:
2. Assisting When Incapacitated
A revocable trust can assist if the client becomes incapacitated. A well-prepared document will include language that (1) triggers the removal of an incapacitated trustee and (2) appoints a successor trustee. As the client’s property and assets are already titled in the trust, once the successor trustee assumes his/her position, he/she automatically has full authority to direct the management and use of the trust property.
Without the trust, the incapacitated client needs to have a Durable Power of Attorney (“DPOA”) or, without the DPOA, will need a judicial competency processing called conservatorship.
Even with a DPOA, some financial organizations will start to get fussy about honoring them. We had one organization tell us that it will only acknowledge the authority of a DPOA if it is the financial group’s own document specific to the account. When you use a trust to avoid probate, you can avoid this situation as well.
3. Privacy of Plan and Family Wealth
The probate process requires the client’s will to be filed with the local county court. Doing so makes the document a public record. This means that anyone can come and see what the will says, such as how and to whom the wealth is distributed. Sometimes an itemized list of the family wealth, with amounts and values, is filed with the court.
Having these documents in the public domain was not much of a problem twenty years ago. But with the internet, most clients do not want information about their testamentary decisions and a list of the family wealth to be available for public inspection.
Because a trust does not go through the probate process, nothing is filed with the court to become a public document. In avoiding probate with a trust, the document and inventory of trust assets all stay private as well.
Find Out How to Avoid Probate with MHPS
In summary, avoiding probate is still possible without using a trust, but before you set your assets up that way, make sure you understand the implications of what you might be missing out on, as a trust has many other beneficial qualities for situations outside of probate law.
At MHPS, our estate planning attorneys can help you figure out how to avoid probate with a will or trust and decide which options will work best for you and your unique circumstances. Contact us today to schedule a consultation and start planning your estate.
