Estate & Business Law
The general idea is that all of your assets should be in your trust. However, there are a few assets you may not want in your trust, or that cannot be put into your trust. Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests, and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan.
Assets You Probably Want in Your Living Trust
Assets You Probably Do Not Want in Your Living Trust
If you’ve set up a Revocable Living Trust, congratulations! You’re definitely on the right track. But you are only half way there. Many believe because they took the time to create a Trust, their estate will automatically avoid probate. Unfortunately, this is false. The key to probate avoidance is proper asset ownership, including the full funding of your Revocable Living Trust.
What Assets Require Probate?
What Assets Avoid Probate?
What’s the Next Step?
Ask a qualified estate planning attorney to confirm that your Revocable Living Trust is fully funded and that all assets are aligned with your estate planning. Proper asset ownership is key to probate avoidance.
These days many people choose a revocable living trust instead of relying on a will or joint ownership in their estate plan. They like the cost and time savings, plus the added control over assets that a living trust can provide.
When properly prepared, a living trust can avoid the public, costly and time-consuming court processes at death (probate) and incapacity (conservatorship or guardianship). It can let you provide for your spouse without disinheriting your children, which can be important in second marriages. It can save estate taxes. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending. Still, many people make a big mistake that sends their assets right into the court system: they don’t fund their trusts.
What is “funding” my trust?
Funding your trust is the process of transferring your assets from you to your trust. To do this, you physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. You will also change most beneficiary designations to your trust.
Who controls the assets in my trust?
The trustee you name will control the assets in your trust. Most likely, you have named yourself as trustee, so you will still have complete control. One of the key benefits of a revocable living trust is that you can continue to buy and sell assets just as you do now. You can also remove assets from your living trust should you ever decide to do so.
Why is funding my trust so important?
If you have signed your living trust document but haven’t changed titles and beneficiary designations, you will not avoid probate. Your living trust can only control the assets you put into it. You may have a great trust, but until you fund it (transfer your assets to it by changing titles), it doesn’t control anything. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.
What happens if I forget to transfer an asset?
Along with your trust, your attorney will prepare a “pour over will” that acts like a safety net. When you die, the will “catches” any forgotten asset and sends it to your trust. The asset will probably go through probate first, but then it can be distributed according to the instructions in your trust.
Who is responsible for funding my trust?
You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust.
Most people think of probate as a legal process for changing titles on assets from the name of a deceased person to the name of the deceased person’s beneficiaries or heirs. But there is another probate court process, a “living probate.”
Living probate is what happens when someone is alleged to be incompetent to manage their own affairs. Someone literally sues them in a probate court, asking the judge to take away their right to make their own health care and/or business decisions and give that right to someone else. It is an expensive process in which the alleged incompetent person pays the lawyers on both sides. If the person is found to be incompetent to manage their business affairs and there are business affairs to be managed, the court will appoint a guardian or conservator to do so. Sometimes the responsibility for the physical care of a disabled person and the responsibility for the management of assets that are titled in the disabled person’s name are given to two different people: a guardian of the person (for physical care) and a conservator of the person’s assets (for financial care).
If there are no assets titled in the incapacitated person’s name, such as when the person’s assets have been placed in a trust, the court has no need to appoint a conservator of the incapacitated person’s assets.
Because the courts jealously guard everyone’s rights to manage their own personal affairs and property, living probate provides a form of protection that is anything but free. Living probate, especially when there are assets to be managed, is costly, time consuming, and cumbersome. There are annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All those costs are paid from the disabled person’s assets, and living probate proceedings are a public record. Once a guardianship/conservatorship is established, it will go on until the incapacitated person dies or the court determines that he or she is no longer incapacitated. That can be many years.
Another possible problem is that a court cannot allow an incapacitated person’s resources to be used to provide care for anyone who is not the incapacitated person’s legal responsibility. That means that adult children, parents, grandchildren and others for whom the disabled person was providing support will be on their own.
Living probate can be avoided with proper estate planning for disability. If your estate plan does not address disability, you should make an appointment with your estate planning attorney to discuss it.
With people living longer due to advances in medicine and changes in lifestyle, odds are that most of us will become disabled for some time before we die and may need long-term care. Unfortunately, too few plan for an event that is more likely to be a probability than a possibility—and the consequences of not planning can be disastrous for all involved.
When someone owns assets in his/her name and becomes unable to manage financial affairs due to mental or physical incapacity, only a court appointee can sign for the disabled person. This is true even if the person has a will, because a will can only go into effect after death. With some assets, especially real estate, all owners must sign to sell or refinance. So, for example, if a married couple owns their assets jointly, one of them becomes disabled and an asset needs to be sold or refinanced, the well spouse will have to go through the probate court in order for that to happen.
This is called a “living probate” because it is similar to the probate process at death but the person is still alive. It can be costly, time consuming and cumbersome with annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All costs are paid from the disabled person’s assets, and all assets and proceedings become part of the public probate record. A living probate usually lasts until the person recovers or dies which, depending on his/her age when the disability begins, can be years.
A fully funded revocable living trust avoids a living probate. When a living trust is established, the titles of assets are changed from the individual’s name to the name of the trustee. This is called “funding” the trust. If the trust has been fully funded (all titles changed) and the person becomes unable to conduct business, there is no reason for a living probate because the disabled person does not own any assets in his/her name. The successor trustee, hand-picked when the trust is created, can automatically step in without court interference and manage the disabled person’s financial affairs—selling or refinancing assets to help pay for his/her care and the care of loved ones, or keeping the owner’s business going—for as long as needed.
Other necessary documents include:
* Durable Limited Power of Attorney, which allows the successor trustee to transfer to the trust assets that may have been overlooked, and to manage assets (like IRAs) that cannot be put into a living trust;
* Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.
* HIPPA Affidavits, which give written consent for doctors to discuss your medical situation with others, including family members, loved ones and your successor trustee(s).
Planning for disability may also include disability income insurance (to help replace lost income), and long term care insurance (to help cover the costs of care that are not covered by medical insurance). Business owners may want to consider business or professional overhead insurance that will pay monthly operating expenses until they recover or the business can be sold or transferred, and buy-sell agreements in the event a co-owner becomes permanently disabled.
Disability before death is not always expected and it does not always happen, but it must be planned for.