Living Trusts and Probate Avoidance

Naturally, most people who anticipate that they will die while owning any sort of assets want as much of those assets as possible to pass to their children or other loved ones. This means that whether they know it or not, people want to avoid having a substantial chunk of their estates eaten up in attorney’s fees and court fees after their death, which very well may occur if the assets are subject to the probate process. That is where a living trust comes in, as it can help to avoid probate fees and other undesirable consequences of the probate court’s involvement in the distribution of a person’s estate. Our expert New Mexico estate planning lawyers can assist you in creating a living trust, as well as inform you about the other benefits of living trusts.

The probate process itself consists of a court’s involvement and oversight in the distribution of certain portions of a deceased person’s estate, including appraising the estate property, paying any outstanding debts or estate taxes, and distributing what is left in accordance with the person’s will (or intestacy in the event the decedent passes away without a will). When a living trust is created, however, any assets placed in the trust can avoid this process, and get to your intended beneficiaries quicker and without judicial involvement. Also, more of the property in the trust will be left for your survivors than it would be if it were subject to probate. Additionally, married couples can create one living trust for the purpose of handling both their jointly owned property, and each individual spouse’s separately owned property.

How Do I Make a Living Trust?

In order to create a basic form of a living trust, you will be required to execute a document called a “declaration of trust” or a “trust agreement”. This document is somewhat similar to a will. In the document, you will generally name yourself as trustee (meaning you are in charge of the property in the trust). If you are married and you create a living trust with your spouse, you will generally name yourselves as co-trustees. After executing a trust agreement, you must then transfer whatever assets you choose to yourself as trustee of the living trust. This will not cause you to give up any sort of control over the property which you place in the trust, as after all, you are the trustee. Please note that other types of trusts may limit access to assets from the creator of the trust and offer other advantages, whereas this article discusses what is commonly referred to as a revocable living trust.

As part of the trust agreement, you will name the individuals or organizations to whom you want the trust property to pass to upon your death. Because you are executing the trust document during life, you can later go back and change the beneficiaries if you choose, or you can revoke the trust entirely (some trusts however are not revocable). If you do not already have a will at the time you create a living trust, it is best to create at least a simple will to accompany the trust, as any property not placed in the trust is obviously not covered by the trust terms and will instead need to be addressed in your will. If you do not have a will, any property you own outside of a trust upon your death will be distributed according to the default laws of your state, and as such, may not end up where you would have liked it to. Be sure to see our article for answers to frequently asked questions about trusts.

Tax Implications and Recordkeeping

Once you have created a revocable living trust, there is very little need for regular record keeping or updates. What you will need to do, however, is simply execute the required paper work at the time you transfer property into the trust. Though this process can be somewhat tedious, it is generally not very difficult. For example, imagine that Mary and Andy Green create a living trust in which they put their home, in an effort to avoid probate. However, Mary and Andy later decide the sell the home. When they transfer the deed of ownership to the new owners, Mary and Andy will sign the deed and real estate contract as “trustees of the Mary and Andy Green Revocable Living Trust.”

With regard to taxes, no separate tax forms or returns are required for the trust, provided that you are both the grantor (the person who created and funded the trust) and the trustee. Any income from the property held in the trust must be reported on your income tax return, but you do not need to file any sort of separate tax documents because of the trust itself.

What Happens After Your Death?

After your death, the person you selected to take over for you as trustee, called the “successive trustee,” will distribute the trust property according to the trust terms specified. For example, if you name your sister as successive trustee and specify that one half of the trust assets are to be distributed to each of your two children, your sister will transfer ownership of the trust property accordingly after you are deceased. None of the trust property will pass through probate when it is transferred, and there will be no involvement by a court unless some dispute regarding the trust terms or distribution arises.

If you need assistance in creating a living trust as a probate avoidance device, or if you simply have questions regarding living trusts and how they may be able to benefit you, you should consult with an experienced estate planning attorney.