The Family Trust: Top 3 Reasons Probate Wasn’t Avoided
While it is true that a properly funded and properly drafted revocable living trust will avoid the probate process, there are several reasons why probate isn’t always avoided. Here are some of the most common reasons assets still go through the probate process, even though the decedent had a trust.
The Trust Is Not Properly Funded
You first have to understand which assets need to pass through the probate process. Probate is the legal, or court, process that handles the transferring of assets from the decedent’s name to the names of the beneficiaries, whether those beneficiaries are intestate heirs or those named in the Last Will and Testament.
Certain assets have beneficiaries named on them. Such assets normally don’t pass through probate. Common examples include life insurance policies, retirement accounts, and transfer-on-death or pay-on-death bank accounts. Such items pass directly to the named beneficiary with no probate. If you are the named beneficiary, then you often just provide the life insurance company or financial institution with a death certificate and fill out some paper work, and the funds will be sent to you.
When talking about funding a trust, we are talking about transferring title of the assets to the trust that has been created. For assets with actual titles, this means preparing and executing the proper transfer document. For real estate, we would prepare a new deed to transfer ownership of the property. Banks will have paperwork to fill out and sign to change the ownership of the bank accounts to the trust. Ownership of an LLC may require an assignment.
As you can see the process is a little different depending upon what the asset is. Nevertheless, it is important to make a checklist of your assets and check down through the list as they are transferred to the trust. Typically, items of tangible personal property are transferred to the trust by signing a simple assignment of such items, which covers things such as household furnishings, personal effects, collections, art, etc.
Many, many times, people forget to retitle a few assets in the name of the trust. Or some time after they establish the trust, they acquire a new asset and forget to title it in the trust’s name. When they die, such items need to pass through probate in order for the title to be transferred.
Failure of a Beneficiary Designation
As previously mentioned, certain assets such as life insurance policies and retirement accounts list beneficiaries. Both primary beneficiaries and secondary, or contingent, beneficiaries should be named.
What if the named beneficiary or beneficiaries predecease the insured in the case of life insurance? If no beneficiary survives the insured, the insured’s estate is often the default beneficiary. “Estate”, as in probate estate. So the life insurance proceeds must pass through probate to get to the proper beneficiaries. Assuming the insured has a living trust and pour-over will, the probated insurance proceeds would end up in the trust and pass to or be held for the benefit of the trust beneficiaries.
Depending upon the situation, the trust may be named as a beneficiary of the policy or account, either as the primary or secondary beneficiary. Then you don’t have to worry about the beneficiary dying first.
Poorly Drafted Trust
While not common, I’ve seen a trust drafted so poorly, that the trust assets ended up in probate under Nevada law. One case involved a trust that simply failed to name a beneficiary at all. Another case involved a trust that list a couple of specific bequests, but then failed to distribute the remainder of the trust estate to a beneficiary. In each case, the trust assets had to be probated and passed to the intestate heirs of the decedent.
A trust that fails to fully devise all of its trust property is usually one that someone drafts themselves from a do-it-yourself kit.
The bottom line is that having a trust does not guarantee that your entire estate will avoid probate. To work properly, the living trust must be properly drafted and fully funded.
To learn more about the probate process, read this article.