Just what is probate?
Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:
- The appointment of an individual by the court to act as executor of the estate. Executors are sometimes referred to as "personal representatives". Most people name an executor as part of their will. If there is no will, the court appoints an executor, most often a spouse if the deceased is married.
- Proving that the will is valid.
- Informing creditors, heirs, and beneficiaries that the will is probated.
- Disposing of the estate by the executor in accordance with the will or state law.
The executor named in the will must file a petition with the court after the death. There is a fee for the probate process.
Depending on the size and complexity of the probable assets, probating a will may require legal assistance.
Assets that are jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.
What is a living trust?
A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Further, you can actually be the trustee of your own living trust, keeping full control over all property legally owned by the trust.
Property held in trust that is actually "owned" by the trustees of the trust, subject to the rights of the beneficiaries. The trust itself doesn't actually own anything.
There are many kinds of trusts. A living trust (also called an inter vivos trust) is simply a trust you create while you're alive, rather than one that is created upon your death under the terms of your will.
All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.
Do I need a living trust?
Property you transfer into a living trust before your death doesn't go through probate. The successor trustee, the person you appointed to handle the trust after your death, simply transfers ownership to the beneficiaries you named in the trust.
In many cases, the whole process takes only a few weeks and there are no attorney or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.
How does a living trust avoid probate?
Property you transfer into a living trust before your death doesn't go through probate. The successor trustee--the person you appointed to handle the trust after your death--simply transfers ownership to the beneficiaries you named in the trust.
In many cases, the whole process takes only a few weeks and there are no lawyer or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.
Is it expensive to create a living trust?
The cost of creating a living trust depends on what you want to achieve. The more complicated a living trust is, the more expensive it will be. Also important to note is that while the fees associated with creating a living will are paid upfront a living trust actually saves you money and time by avoiding probate court.
Is a trust document ever made public, like a will?
A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate - inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.
Does a trust protect property from creditors?
Holding assets in a revocable trust does not shelter those assets from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.
After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.
On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.
Do I need a trust if I'm young and healthy?
Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your premature death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance is sufficient.
Can a living trust save taxes?
A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.