Avoidance of Probate
The probate process was originally designed as a method of ensuring that assets are transferred from the estates of deceased individuals to their beneficiaries with the minimum of difficulty. It is also intended to ensure that outstanding debts are paid as efficiently as possible. In reality, however, probate can sometimes be a long and drawn out process, as well as one which can be expensive and time-consuming. As a result, many people are keen on finding ways in which they can avoid the probate process to as great a degree as possible.
Living trusts are a potentially effective method of avoiding probate. They offer an opportunity for the individual establishing the trust to separate portions of their assets from the rest of their estate. These assets will then be passed directly to the intended beneficiaries without the need to go through the process of probate.
When a living trust is established, the individual who has established it (more correctly known as the settlor) transfers assets into the ownership of the trust itself. This individual gives up their legal title to those assets, and they become the property of the trust. On the death of the settlor, therefore, the assets that have been placed in trust will be treated separately from the rest of the deceased’s estate.
Death of the SettlorThe terms of a living trust will almost always include a clause outlining what should happen to the trust assets when the settlor dies. In many cases, the settlor will also have been the trustee and beneficiary, meaning that they would have been able to derived benefit from the assets placed in trust during their lifetime. An ultimate beneficiary, however, should have been named in the trust instrument (that is, the document used to establish the trust); it is to this individual that the assets in trust will pass, without going through the process of probate, upon the death of the settlor.
There are a number of other aspects that should be considered in these circumstances. In the first instance, the probate process does not apply to all assets anyway. Some personal items are exempt from probate when there is a clear natural dependant – for example, if the deceased individual is survived by a spouse. On the other hand, however, it is likely that the probate process will only be totally avoided if the settlor transfers all of their assets into the trust before their death.
Many individuals are uncomfortable doing this, as they are essentially required to give up the legal ownership of all of their property. It should be remembered, however, that there is no reason why the settlor cannot continue to enjoy the benefits of the asset; in practice, they will continue to exercise ownership in all but title. This will, however, have tax implications, as is outlined in the article regarding revocable and irrevocable trusts.
As with any such financial decisions, individual circumstances will determine the most effective course of action. As such, you should always seek private, independent legal advice before attempting to avoid probate through the use of a living trust.