Using a Trust to Avoid Probate
Trusts can be used to accomplish scores of different objectives. One very common reason many people create a trust is to simplify the administration process that occurs when people die by “avoiding probate.”
What is Probate?
Probate is the legal process that takes place when a person dies. The process typically includes submitting a will to the District Court in the county where the deceased person resided. Based on instructions in the will, the court will generally appoint a personal representative to administer the estate. This includes gathering and valuing assets and preparing an inventory of the assets. The personal representative also pays the debts, taxes, administrative expenses and ultimately distributes assets to those entitled to receive them.
If a person dies without a will, the deceased person’s spouse or nearest relative is typically appointed as the personal representative and has all the power and responsibility of a personal representative nominated in a will.
In Colorado, probate can occur under informal, unsupervised administration. As long as no matters are contested, neither the attorney nor personal representative will have to appear in Court. The Court is not required to approve actions taken in the course of the estate administration, as is the case in many other states. Informal, unsupervised administration can be completed in as little as six months. Because of Colorado’s simplified and efficient probate system, the need to “avoid probate” is not as great in Colorado as in many other states. However, the public perception of probate as a long, expensive process drives many individuals and couples to avoid it.
The Revocable Living Trust
The most commonly used tool to avoid probate is the Revocable Living Trust. A Revocable Living Trust is essentially a substitute for a Will. To create a Revocable Living Trust, a person typically transfers the person’s assets to himself or herself as trustee and signs a written trust document that contains instructions as to what the trustee is to do with those assets while the person is alive as well as upon death. The trust document also identifies who should take over as successor trustee when the person is no longer able to serve due to death or incapacity.
During life, the person’s assets in the trust may be used in any way the person, as trustee, directs, and the person may change the instructions in the trust document in a similar manner as one can change a Will. If the person becomes incapacitated, the successor trustee is instructed to use the trust assets for the person’s care.
At death, the successor trustee wraps up the person’s affairs by utilizing the trust assets to satisfy all of the person’s liabilities and distributes the remaining assets to the beneficiaries identified in the trust document. No court supervises the process, so no court fees are incurred. Moreover, advisors’ fees related to preparing court filings are avoided. Also, the administration of the trust is a private matter with nothing becoming public record. This process often results in a much better outcome for the person’s beneficiaries as compared to having the assets pass through the court supervised estate administration process.
The Joint Trust
Typically, when a married couple utilizes a Revocable Living Trust based estate plan, each spouse creates and funds his or her own separate Revocable Living Trust. This results in two trusts. However, in the right circumstances, a married couple may be better served by creating a single Joint Trust.
A Joint Trust tends to work best when a couple has the following characteristics:
The couple has a long, stable relationship;
Divorce is not a concern for either spouse;
The couple is willing to identify all assets as being owned one-half by each of them;
No creditors’ claims exist, whether current or contingent, for which the creditor could seek to collect from only one spouse and not the other;
Neither spouse has children from a prior relationship;
Each spouse is comfortable with the surviving spouse having full control over all of the assets after the death of one of the spouses; and,
The value of the couple’s assets is less than the federal estate tax exemption amount. For deaths occurring in 2017, this amount is $5.49 million (or $10.98 million per couple) reduced by any taxable gifts made during life.
A couple who meets these criteria could establish a Joint Trust by transferring their assets to themselves as co-trustees and signing a trust document to provide instructions as to what the co-trustees are to do with the assets. Typically, while both spouses are alive and competent, they retain full control over the trust assets and can change the trust document at any time. If one of the spouses becomes incapacitated, the other spouse continues to control the trust and can use the trust assets for the couple’s care.
After the death of one of the spouses, the Joint Trust will continue. The surviving spouse would continue serving as trustee and have full control over the trust assets. No transfers of assets are required at the first death because all assets are already in the Joint Trust.
Upon the death of the surviving spouse, the designated successor trustee wraps up the surviving spouse’s affairs by utilizing the Joint Trust assets to satisfy any liabilities and distributes the remaining assets as directed in the trust document.
Conclusion
In the right circumstances, utilizing an estate plan that involves a revocable trust or joint trust can simplify a married couple’s affairs and, as a result, make the administration process easier after death and ultimately lower costs.