A trust can seem like a confusing and mysterious idea, dreamed up by lawyers, wrapped in legal jargon, but in practice, a standard probate avoidance trust isn’t complicated. Here are the basics.
The kind of trust that avoids probate is called a revocable living trust. You can create one simply by preparing and signing a document called a Declaration (or Instrument) of Trust. If you and your spouse own valuable property together, you’ll probably want to create one trust, together. The trust document, much like a will, states who you want to inherit each item of trust property.
Once you’ve signed the trust document, you transfer your property—real estate, stocks, bank accounts, whatever—to the trustee, who becomes the legal owner. This step is crucial. If you don’t transfer ownership, in writing, to the trustee, the trust document has no effect on what happens to the property at your death. Holding property in trust has almost no daytoday effect while you’re alive. For all practical purposes, it’s as if you still owned it. The property is treated the same way it was before by the government when it assesses income or estate taxes, and by creditors when they are looking to collect on a debt you owe.
The trustee is in charge of trust property. You (or you and your spouse, if you create a trust together) are the trustee of your revocable living trust, which means that you keep complete control of all the trust property. As trustee, you can transfer property in and out of the trust, change the beneficiaries you’ve named or revoke the trust completely. Example: Ashley Zallon creates a living trust, the Ashley Zallon Revocable Living Trust, and transfers her valuable property—a house and some stocks— into the trust. She names herself as trustee of the trust. As trustee, she can sell, mortgage or give away the trust property, or take it out of the trust and put it back into her name. You can refinance a mortgage, even if your bank is grumpy about it. Living trusts are so common these days that banks shouldn’t raise an eyebrow if you want to refinance property that’s legally held in your name as a trustee instead of as an individual. If your bank or title company does ask questions, it should be reassured if you present a copy of your trust document, which should specifically give you, as trustee, the power to borrow against trust property. In the unlikely event you can’t convince a lender to deal with you in your capacity as trustee, find another lender (which shouldn’t be hard) or transfer the property out of the trust and back into your name. Later, after you refinance, you can transfer it back into the living trust.
After you die, the person you named in your trust document to be the “successor trustee” takes over as trustee. He or she is in charge of transferring the trust property to the family, friends or charities you named as the trust beneficiaries. In most cases, the whole transfer process can be handled within a few weeks at little or no cost. No probate is necessary for property that was held in trust. For example, if you left real estate in your trust to your son Paul, the successor trustee can simply sign a deed transferring the property from the trust to Paul. With property like bank accounts or securities, the successor trustee will need to show the institution that he or she has the legal right to take possession of the property. Banks and brokers, which have long experience with living trusts, generally accept the authority of the successor trustee without a fuss after examining a copy of the trust document, with its notarized signature. Occasionally, however, an institution balks at the idea of releasing a deceased client’s money without further proof of authority. It might, for example, demand more proof that the trust is valid or that it hasn’t been revoked. In a few instances, institutions have threatened to withhold trust funds until they were shown a “certification” of validity by the lawyer or bank involved in drawing up the trust—even if that was impossible because no lawyer or bank had been involved. No law requires that a lawyer, broker or bank be involved with a living trust in any capacity. Requiring the signature of a lawyer or bank is simply a bureaucratic rule, imposed by financial institutions afraid of liability for turning over money to the wrong person. So shaking the money loose will not be an insurmountable problem, even if no lawyer drafted the trust. The successor trustee must simply be persistent. The bank should relent if the successor trustee produces the original, signed and notarized trust document, and offers his or her own notarized statement, stating that the trust is in full force and effect.
When all the trust property has been transferred to the beneficiaries, the living trust ceases to exist. If you leave property to youngsters, you may want a living trust to continue after your death. You can arrange for your living trust to stay in existence for a while—even years—after your death.