Many individuals go through the estate planning process and set up a revocable trust to avoid probate court. The probate process can be lengthy and costly; by forming a revocable trust, you can entirely avoid the probate process. Unfortunately, for many who have gone through the process of creating a revocable trust, their estates may still end up in probate court as if the trust were never created.
There are many critical steps along the way that, if missed, will invalidate the trust, including:
- Having a poorly written trust. Few people can draft a legal revocable trust. Many details and provisions must be included for the trust to be effective both before and after your death.
- Creating the wrong kind of trust. In some instances, a testamentary trust is created rather than a revocable trust. A testamentary trust is formed by the will and will have no legal force until after it has been probated. Further, no property is moved into a testamentary trust until after the probate process has been finished.
- Not updating the trust to include current assets and beneficiaries.
And finally, one of the most common mistakes to make is not funding the trust. A revocable trust can be amended anytime and must be amended when you would like to add or remove assets. Once the trust is created, the individual should title all applicable assets to the trust. These assets – whether property, vehicles, financial accounts, or safe deposit boxes – should no longer be held in the individual’s name. Ownership must be transferred to the trust for the remaining duration of their life. If you are uncertain whether ownership must be transferred or not, a good rule-of-thumb is that if it requires a signature to change ownership, it should be moved to the trust.
Changing your assets’ ownership while you are still alive does not mean that you lose control of these assets. With a revocable trust, you retain control as long as you retain the right to make changes in the trust document.
Your role as trustee generally continues until you die or no longer have the capacity to make decisions for your estate. When the trust owns assets, and you die, the owner of the assets didn’t die from a legal perspective. Instead, management of the trust is just passed from the initial trustee to the one that you named to take over upon your death.
After forming the trust, it’s crucial to discuss funding the revocable trust with your estate planning attorney. You must understand which assets need to be retitled and which do not. For example, retirement accounts and life insurance policies should remain outside of the trust and pass directly to the beneficiary without probate.
You must also be sure to update asset ownership with any new asset that is added to your estate or sold from it. If some of your assets remain outside of the trust, it is considered partially funded. In California, if the total value of the unfunded assets without a named beneficiary exceeds a certain amount ($166,250 in 2020), the estate will go to probate court. Accounts with a named beneficiary – even if it is not the trust – do not count toward this total.
Leaving a revocable trust unfunded or only partially funded can lead to many negative consequences for your estate and beneficiaries, including but not limited to:
- The estate may need to go through probate court. This process can be expensive and lengthy. Probate also often takes an emotional toll on an estate’s beneficiaries – especially if the family has disagreements on the planned asset distribution.
- Assets may be distributed directly to creditors, rather than going to beneficiaries who can settle the accounts with creditors.
When developing an estate plan that includes a revocable trust, it is crucial that you follow-through with every requirement in order for it to be deemed valid and legal. But completing all of these requirements is the best way to ensure that your assets are distributed in the way that you intended. Since the process is so complex, it’s always a great idea to consult with an expert estate planning lawyer to understand how a revocable trust may be beneficial under your unique circumstances.
