Instead of a will, some clients choose a revocable living trust to avoid probate. Probate is the process where the Clerk of Court oversees that the will’s executor has paid debts from the deceased person’s assets and has distributed the remaining assets as the will directs. (Remember that probate in North Carolina is not nearly as long or as expensive as in some other states. Don’t feel like you must have a living trust if you prefer the simplicity of a will.)
With a revocable living trust (or simply “living trust”), you are the trust and the trust is you during your lifetime. You are the trustee and the beneficiary. You can do whatever you want with the trust assets. If you become incapacitated or once you pass, the successor trustee named in the trust takes over managing and distributing the trust assets as the trust directs. Just like with a will, after you are gone, the successor trustee pays your last debts and distributes the remaining trust assets as the trust document directs. Because it is revocable, you can change the trust or terminate it during your lifetime.
When some clients come to see me with a living trust prepared in the past, I notice a problem that keeps the trust from doing its job of avoiding probate. It is easily fixed during the client’s lifetime, but not afterward.
The problem arises when the trust has been set up, but no assets have been transferred into it. My client still owns all or most assets in their individual name, which means they must go through probate even though a living trust document exists. The client has paid good money to have the trust set up, but their estate will still have the cost of probate after they are gone. That is surely not what they intended.
It is standard to have a “pourover will” that sends all the assets to the trust after death, but these assets will have to go through probate to reach the trust. Th goal is never to have to use the pourover will. It is intended as insurance in case you’ve forgotten to put an asset into the trust while alive.
All your assets that have titles – real estate, bank and investment accounts, stocks, vehicles, etc. – need to be retitled in the name of the living trust. As an exception, federal law requires that IRAs, 401(k)s, and 403(b)s remain individually titled. If you have named either adult people or charities as beneficiaries on your qualified retirement accounts, these accounts won’t trigger probate. (To leave qualified retirement accounts to minor children, you need to address this in your living trust and then name the trust as the beneficiary.) Life insurance policies and annuities do not need to have ownership transferred to the trust, and transferring ownership of them can be complicated. Treat these like you would your qualified retirement accounts.
Are the deeds to all your real estate in the name of the trust? Do your bank and investment account statements show they are owned by your trust? Do your stock certificates show the name of the trust? Do your vehicle titles list the trust as the owner? If any of these are still in your individual name, take action to transfer them to the living trust. In the future, if you acquire new real estate, financial accounts, or vehicles, be sure you take title in the name of the trust (not individually) from the beginning.
When you set up your living trust, you wanted to avoid probate, but it can only do this job for assets titled in the trust. Now is a good time to review how your assets are titled. This problem is easily solved during your lifetime, but only if you notice it and act timely.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919)732-7300 or at kim.steffan@steffanlaw.com.