In most cases, no, a trust does not need to pass through probate. Most trusts are specifically created so that you can pass along your assets to your beneficiaries without probate delays.
Estate planning is necessary for anyone who wants to consider how they will distribute what they own after their death. In most cases, a trust is decided to be a non-probate financial tool.
What does that mean? Let us simplify this complexity in this article by discussing probates, trusts and how they overlap with each other. We’ll also look at the consequences and effects that these strategies have on your beneficiaries.
Defining Probate: An Overview
Probate happens after you've passed away and your estate is managed by a will. This process includes confirming the will of the deceased, locating and valuing their property, paying outstanding debts, and providing any remaining assets to beneficiaries. Probate is typically overseen by a probate court and can take many different forms depending on how the law in your state reads.
Essentially, the probate process fulfills several critical objectives. It ensures that the deceased’s wishes are respected. It provides a structure for resolving conflicts. And it offers an apparatus to distribute assets efficiently.
But this can be an arduous and time-consuming process, with some states taking several months or even years to complete the probate process. This can be emotionally draining for families who are mourning, while also trying to understand how the estate process will work.
The Probate Function in Estate Planning
Probate is very important in the area of estate planning. It serves to ensure that the estate assets are distributed according to the documents made by the deceased. This is a key concept that estate planners often share with clients - probate can impact what, and how much of it, actually gets to the people who are supposed to inherit your estate.
An estate plan is not free and could be subject to costs when it goes through probate, such as court fees, attorney fees, executor fees and more. These costs can reduce the value of the estate, which may leave less for your beneficiaries.
Therefore, many people want to reduce or avoid probate with various estate planning methods like the creation of a trust. A trust may make the distribution of assets more simple, and allow beneficiaries to access their inheritances sooner and with fewer taxes.
In addition, trusts can be very private because they do not go through the public probate process and this is where families can have a huge benefit of keeping all their financial issues quiet and their privacy intact.
Misconceptions About Probate
Probate is surrounded by tons of myths. Many people think that every estate has to go through probate. However, this is not the case for all estates. For example, jointly-held assets, life insurance policies, and retirement accounts can circumvent probate.
A common misconception is that probate is always time-consuming, complicated, and costly. It definitely can be for more complicated estates.
But a simple estate can be resolved quickly without a mountain of expenses and time delays. In inheritance matters, a good will can also speed up the probate process because the decedent provides instructions as to how he or she wants his or her assets distributed.
On the other hand, a poorly drafted or unclear will can breed conflict and lead to long-drawn legal battles which only makes life tougher for bereaved families.
Defining Trusts
A trust is a fiduciary relationship in which a trustee holds the title to specific assets for the benefit of one or more beneficiaries. A trust is a very powerful estate planning tool and provides many benefits including privacy, asset protection, and the ability to determine how and when assets can be distributed.
There are different kinds of trusts designed for different circumstances where they can be useful. That can be revocable living or irrevocable trusts; special needs and charitable trusts, are a few. Deciding on the right trust really comes down to what you are trying to accomplish with your estate planning goals.
Different Types of Trusts
Revocable Trust:
The grantor (the person who creates the trust) maintains ownership of all assets and can amend or cancel the trust at any time. This option means it is more popular for planning how to distribute your assets once you’re gone.
Irrevocable Trust:
Once completed, the grantor has no right to amend or revoke it. This type of trust is generally for tax benefits and cannot be touched in a lawsuit. The grantor essentially removes those assets from his or her taxable estate by transferring them to the irrevocable trust, which can translate to large tax savings — especially popular for high-net-worth individuals.
Special Needs Trust:
A trust which is created to assist individuals with disabilities without interfering with their ability to collect government benefits. This trust can help by holding assets separate from the beneficiary’s name and going over asset caps for things like program benefits such as Medicaid or Supplemental Security Income (SSI).
Charitable Trust:
This trust allows a grantor to make tax-free contributions to a good cause. Depending on how a charitable trust is structured, it might operate as a charitable remainder trust that ultimately donates remaining assets to charity. It’s fairly effective at minimizing taxes on a personal estate as well.
How Trusts Play Into Estate Planning
Trusts can be a very useful tool in estate planning and have several advantages over probate. Once the grantor dies, any assets held in trust are not part of the grantor's estate and usually do not have to pass through probate. It will allow for faster distribution of assets to beneficiaries and preserve privacy.
What’s more, is that trusts can provide more control over the distribution of assets to beneficiaries and when/how they receive them. For example, a grantor can define that the distribution only takes place when a beneficiary has reached a certain age or met particular milestones.
The trust serves as a method of protecting beneficiaries from themselves when they have not gained the emotional maturity required to manage an influx of money. Trusts can also provide for the management of assets if a beneficiary is incapacitated so that financial needs are being met while not interrupting long-term economic security.
Finally, trusts offer a way to safely control assets from one generation to the next. A dynasty trust, for one, is designed as a way to keep family wealth intact for future generations and avoid subjecting each generation's inheritance to estate tax. These types of trusts can create generational wealth.
Where Trust Meets Probate
In order to understand how trusts and probate work together, we have to understand the relationship between the two. While trusts can go a long way in making the probate process quicker and cheaper, even some unlucky trusts may wind up on the docket in probate court.
Trusts Vs. Probate
One of the biggest advantages of setting up a trust is that it allows you to avoid probate. Said another way, the assets of the trust are funded during the grantor's life. When the grantor of a trust dies, the assets now belong to the trust and can be distributed directly to beneficiaries without having to go through probate.
Because revocable living trusts are not public records like wills, the beneficiaries can be given what you left them without having all the details of your estate exposed to the public.
In addition, trusts can provide some measure of control over when and how an inheritance is paid out to beneficiaries. For example, a grantor could determine that the funds cannot be transferred to the beneficiary until they have reached the right age or achieved specified goals (for instance, having earned a college degree).
When Trusts May Be Probated
However, even with these benefits, some situations may require that a trust must still be probated. The trust may not be fully funded at the grantor's death. This just means that all the grantor’s assets weren't transferred into the trust and thus are still in the name of the grantor.
For example, trusts like testamentary trusts are embedded in a will and only take effect after the person dies. These are probate assets, subject to the probate process.
Disputes between beneficiaries or challenges to its validity can quickly push a trust into probate as well. If a beneficiary of an inheritance decides that the trust was signed under undue influence or did not have capacity at the time, the trust might be thrust into probate for a resolution.
The Probate Process of Trusts: A Step-by-Step Guide
Again, the probate process for trusts will differ based on individual circumstances; but it typically consists of a sequence of steps to ensure everything is performed accurately. Here’s an overview:
Starting The Probate Process With Trusts
The first step in probating trusts is to find the trust document and initiate the probate process for your trust. That's important because it shows how the assets would be administered and given out.
If the trust is a revocable living trust, this is when the successor trustee becomes in charge of managing the trust's assets. That person has a duty to inform all beneficiaries and potential creditors of the deceased’s wishes.
When a testamentary trust is used, the process begins with the will being probated. The probate court will supervise the creation of a trust, guaranteeing that it is done in compliance with the decedent's intentions and relevant regulations.
Executor or Trustee Role
The executor is a key figure in the probate process, helping to settle the estate according to directions in a last will. If there is only a trust, the trustee manages the trust’s assets. Once a trust has been set up, the ongoing duties of the trustee include retaining and managing assets in the trust, keeping accurate records, and making distributions according to the terms of the trust.
Sometimes the executor and trustee are the same person; other times they are not. Their job consists of being honest, and accurate with their legal obligations for the estate. The executor has to deal with any debt of the estate or taxes owed, which may require making complicated financial judgments and negotiating with creditors.
How Probate Affects Beneficiaries
Anyone who is involved with an estate must understand the ramifications of probate on beneficiaries. Probate can also take an emotional toll, but the process is costly enough for those waiting to receive their distributions.
Timeframes for Trust Beneficiaries
When used properly to avoid probate, a trust can distribute assets to beneficiaries in far less time. On the other hand, if probate is necessary then beneficiaries could be waiting several months or years to get their assets.
The exact time will vary on a number of things including the size and complexity of the estate, any disputes that may arise, and how efficient probate court is in your jurisdiction. If the estate is very large, and there are many items to be appraised, it could take longer. financial implications for beneficiaries.
Probate can be costly from a financial perspective. This is because the process can incur legal fees, accounting fees, tax planning services, and more, all expenses that are taken off of the total value of the estate. This reduces the amount that will be paid out to the beneficiaries — causing friction and potential problems between heirs.
For heirs who need to use inheritance money as soon as possible, an extended probate process can be troublesome. One solution is to have insurance policies to cover major expenses like funeral costs and legal fees. That way, while the probate is underway, the remaining family members have the funds they need for immediate expenses.
Does a Trust Always Go Through Probate?
No, it does not. But that’s exactly why people choose them as their preferred estate planning tool.
But it’s not the only reason. The right trust can do more than speed through court procedures. You can find better asset protection, stronger investment plans, income sources, tax minimization, and even offshore structures to eliminate taxes altogether.
The right trust can be hard to find though. That’s why we’re here to help. Fill in the form below and we’ll reach out to talk through your options. We’ll get to know your goals and desires, and we’ll guide you to create the trust you need, avoiding probate, gaining security and looking after the ones you love.
Start today and fill in the form to secure your financial future.
