Having spoken and written about revocable living trusts for years, and having prepared hundreds of them, I often assume people know why they are used and how they work. I was reminded recently that my assumption is incorrect.
A revocable living trust has the primary goal of avoiding the probate process. To understand why a revocable living trust is used, you have to understand probate.
When you die, if you hold property in your sole name, whether it is real estate, bank accounts or brokerage accounts, the only way that property can be given to your loved ones is through the probate process. Probate is an administrative function supervised by the Register of Wills in the county and, in the event of litigation, by the Orphan’s Court for the county. If you own real estate in Maryland and in Florida in your sole name, two probate proceedings in two states are necessary to transfer the property to loved ones.
The probate rules require that in a standard estate proceeding, any creditors are given six months to claim against an estate. This means that probates ordinarily take between eight to 12 months to complete. Often, the probate process is much longer, usually due to family disputes over property. Unfortunately, such disputes are all too common. The probate process is public. This means that all of the filings made in the probate of an estate, such as the inventory of estate assets and records of liabilities, are available to the public, including any relatives of the deceased who may want to challenge the will or any filings.
Ordinarily, the Personal Representative (PR) named in a person’s will to handle the probate process seeks the advice of an attorney to make the proper filings. The maximum commissions that a Personal Representative (or Attorney hired by the PR) can charge the estate for services is approximately 3.6% of the estate assets. Usually, the PR pays that fee to the attorney to prepare the filings that the PR signs. So, if the probate assets amount to $1 million, the legal fee can be estimated at $36,000. That money comes out of the estate and the pockets of the beneficiaries. Court approval of legal fees is required.
To sum up, the probate process is long, lasting up to a year, it is public and it can be expensive.
The alternative to probate is the revocable living trust. Why? Because when a living trust is created and funded, all the assets of a person are re-titled into the name of the trust so that there are no assets held in sole name when the person dies. Therefore, there’s no probate.
The person creating the trust becomes the Grantor of the trust, meaning they contribute their property to the trust. Ordinarily that same person is also the Trustee of the trust, meaning they have the power to use all the assets of the trust. In the trust, the Grantors designate a Successor Trustee to act if the Trustee cannot do so. Most often, the Successor Trustee is also the beneficiary of the trust. The trust that is created uses the same social security number as the Grantor of the trust. In a real sense, the living trust becomes the alter ego of the Grantor. The Grantor still uses his or her property in any way he or she chooses. The Grantor can buy or sell real estate held in the name of his or her trust in the same way he or she can if the real estate were not in the name of the trust.
Because the assets of the person are placed into the name of the trust, they are no longer held in sole name and therefore, on death, there is no need for probate. Upon the death of the Grantor/Trustee, the assets in the trust immediately pass to the care of the Successor Trustee whose job it is to follow the terms of the trust and distribute them to the beneficiaries.
With no probate process, assets pass immediately to beneficiaries on death and there are no legal or other fees involved. In addition, living trusts are private, not public.
Why doesn’t everyone use a living trust? Primarily because people do not understand what a living trust is. I call it the “last act of love and affection you can give to your loved ones.” Why? Because it makes it easy on the beneficiaries when you die. With a living trust, there is virtually nothing the beneficiaries need to do after a death. No probate, no filings, no legal fees, no public scrutiny, no court supervision. At a time when you hope your loved ones are mourning your death, they will not be faced with the added burden of going through the probate process.
Additionally, the legal costs involved in creating and, most importantly, funding the living trust are more expensive than the legal costs involved in creating a will and for that reason, some people opt to use a will.
Why is it more expensive to create a living trust than a will? More about that in the next issue of the Chesapeake Current…
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.