Setting Up Living Trusts to Avoid Probate

Setting Up Living Trusts to Avoid Probate

The probate process can be intimidating to the average person and can take two forms. 

The most common form of probate is where the probate court processes the estate of someone who dies or "decedent" and transfers the assets and properties to the decedent's heirs and beneficiaries.  In most states, the will of the deceased has to be filed with the probate court,  notice of the death must be publicly posted so that creditors and other can make claims against the estate, and an inventory of assets must be given to the court.  For a time period designated by the court, anyone who wishes may challenge the validity of the will and creditors have a certain amount of time to file any claims against the estate.

While the estate goes through this sometimes lengthy process, no assets or property can be transfered to the heirs and beneficiaries, and the court has control over and approval of any expenses coming from the estate.  Toward the end of the process, a detailed list of all expenditures must be prepared, reviewed and approved by the court.  At the very end of the probate process, the remaining assets and property will be distributed among the heirs and beneficiaries according to the will, or in the case of no will, by the inheritance laws of the state.

The second form of the probate process is called "living probate."  This type of probate was specifically designed to take over should someone become incompetent or unable to handle their own financial affairs.  Most states will require a hearing of some sort to appoint a guardian to oversee the finances of the incompetent person.  The guardian is required annually to file reports with the probate court about any income collected or debts spent from the estate.  Often, there are additional hearings in  probate court to approve any expenditures that are other than routine maintenance on the estate, or if any part of the estate needs to be sold.

Two ways that the probate process can be avoided is through "living trusts" or "durable power of attorneys." 

A living trust is a document that allows you to transfer ownership of your property into a separate trust.  You can even set yourself up to be trustee, beneficiary and can make all decisions about the trust.  Nothing changes while you are still alive.  However, when you die, the trust would automatically transfer to the beneficiary or your heirs without going through the probate process.  There are some fees associated with setting up this kind of trust.  However, these fees are usually substantially lower that those associated with the probate process.  If you were to become incapacitated in some way, your successor trustee would have to manage your assets.  There is no probate court hearing to appoint this successor, which allows you to have more control over who potentially will manage your money. 

Another, more simpler way to avoid probate costs is the durable power of attorney.  If for some reason you were to become incompetent, then the durable power of attorney would take over and handle your financial affair, much like the successor trustee.  Again, there is no probate court involvement whatsoever, so your privacy is maintained and costs are reduced.  However, the durable power of attorney has no power after you die and does not avoid probate at that time.