Trusts

Did You Know?

Everyone knows that a revocable living trust does not require a public probate of the assets that are held in the name of the trust. But did you know that all revocable living trusts require a “Private Probate” when a trust creator dies? When a person who created a trust dies, it is very important for the decedent’s family to consult with both an attorney and a certified public accountant so that the instructions contained in the document are properly followed, and that all required tax returns are filed. This administrative process, usually without any court supervision or court filings, must take place. Sometimes it is very simple. Other times it is very complex.

I have a revocable trust that was drafted by my attorney, but I keep reading that the trust is only effective if it is “funded”. What does that mean and what do I have to do to make sure my trust works the way I intended?

A trust agreement only controls property that is owned by the trust. “Funding” means the transfer of property to your trust. You must transfer property from yourself as an individual to yourself as trustee of the trust. Generally, this is done by attaching a “schedule of trust assets” agreement that lists all the property to be included in the trust. You may also sign a document assigning ownership rights in your property to the trust. To transfer real property -- like your house or other real estate -- to a trust, you must sign and record a deed.

Although most estate planning attorneys will assist in the initial funding of the trust, it is up to you to ensure that newly acquired assets such as brokerage accounts and real property are titled in the name of your trust. Also, it is important to note that people are often required to take their property out of trust to refinance it. They must remember to transfer it back into trust once the refinance is complete.

I am trying to organize my estate to avoid probate so that I don’t have to pay federal estate taxes, is a trust the way to accomplish this goal?

Your question highlights a common misconception about estate planning. Avoiding probate does not save taxes. The probate system and probate avoidance have to do with state law and the manner in which property passes at death from a decedent to others. Federal estate taxes are determined by an entirely separate body of law which is contained in the Internal Revenue Code. Significant estate tax savings will not be realized by the avoidance of probate. This is because all of a decedent’s assets owned at the time of death are includable in the decedent’s taxable estate -- even property held jointly with others, IRAs and other retirement plans, and the payout amount of life insurance policies owned by the decedent at the time of death. Whether property passes to the beneficiaries through the terms of a contract, through a trust, or through the probate proceeding is irrelevant to the amount Uncle Sam claims as his share; however, proper estate planning can help you minimize taxes by implementing strategies that are accepted by the IRS.