The probate process can be long and costly, but is there a way it can be avoided? Revocable living trusts are often touted as a convenient way to avoid probate. The following are some basics about what they are and how they work:
What is a revocable trust?
A trust is a legal entity through which one person holds property on behalf of another. The grantor (also known as a settlor) is the person who creates the trust. The trustee is the person responsible for administering the trust and can be an individual, a bank or a trust company. The beneficiaries are the persons who benefit from the trust.
With a revocable trust, you can nominate someone else to be a trustee, but you can also be both a trustee and a beneficiary of the trust yourself. You can change or end the trust at any time. You retain complete control of any property transferred to the trust and can continue to fully enjoy the use of your property during your lifetime.
How is probate avoided?
Once property is transferred to the trust, the trust owns it and continues to do so after you die. You will most likely be the original trustee, and provisions can be made in the trust document for a successor trustee. Provisions are also made for the trust property to be distributed to beneficiaries in much the same way as a will.
Property not transferred to the trust may still need to go through probate. However, certain property, such as money in a joint bank account or in an account with a pay-on-death beneficiary, jointly owned real estate, life insurance policies and pension plans with named beneficiaries, bypass the probate process altogether.
Under the Internal Revenue Code, trust property is treated as your property for tax purposes. Federal estate taxes, if applicable to your estate, would therefore still need to be paid. Adverse tax consequences may also arise from transferring property to the trust and you should seek professional advice before doing so.
Some pros and cons
Aside from avoiding probate, there are other advantages to setting up a revocable trust:
- Incapacity — should you become incapacitated, the trustee can manage the property on your behalf and possibly avoid the need for the court to appoint a guardian
- Privacy — a trust document is private, whereas a will becomes a matter of public record once it is probated
- Out-of-state property — if you own property in other states, it may be advantageous for you to set up a revocable trust and thus avoid probate in those states
On the other hand, the set-up and operating costs of a trust can be high. Avoiding probate may not be all that advantageous. The probate process in Pennsylvania is relatively straightforward, and has the advantage of being overseen by the court.
Ultimately, whether or not a revocable trust is an appropriate estate planning mechanism for you depends on your individual circumstances. An experienced Pittsburgh estate planning attorney can explain all the options available to you. At Fingeret Law we can help you prepare an overall estate plan tailor made for your individual needs.