After you a list of what you own, you're ready to decide what items you want to hold in trust to avoid probate fees. Think about including:
You don't need to put everything you own into a living trust to save money on probate. For some assets, you may decide to use other probate-avoidance devices instead of a living trust. And at least some of the property left to a surviving spouse can probably be transferred without a full-blown probate court proceeding.
The most valuable thing most people own is real estate: their house, condominium or land. You can probably save your family substantial probate costs by transferring your real estate through a living trust.
In some situations, however, you may not want to hold your real estate in living trust. See the discussions below on:
If either of you owns real estate with someone else, you can transfer just your interest in it to your living trust. You won't need to specify that your share is one-half or some other fraction. For example, if you and your sister own a house together, you need only list "the house at 7989 Lafayette Court, Boston, MA." Your trust document will state that you have transferred all your interest in that property to the trust. The share of the property owned by your sister, obviously, is not included.
Co-op apartments. If you own shares in a co-op corporation that owns your apartment, you'll have to hold your shares in trust. Some corporations are reluctant to let a trustee own shares; check the co-op corporation's rules to see whether the transfer is allowed.
Small Business Interests
The delay, expense and court intrusion of probate can be especially detrimental to an ongoing small business. Using your living trust to transfer business interests to beneficiaries quickly after your death is almost essential if you want the beneficiaries to be able to keep the business running.
If you want to control the long-term management of your business, however, a revocable living trust is not the right vehicle. See an estate planning lawyer to draft a different kind of trust, with provisions tailored to your situation.
Different kinds of business organizations present different issues when you want to hold your interest in trust:
Sole proprietorships. If you operate your business as a sole proprietorship, with all business assets held in your own name, you can simply transfer your business property to yourself as trustee. You should also transfer the business's name itself; that transfers the customer goodwill associated with the name.
Partnership interests. If you operate your business as a partnership with other people, you can probably transfer your partnership share to yourself as trustee. If there is a partnership certificate, it must be changed.
Some partnership agreements require the people who inherit a deceased partner's share of the business to offer that share to the other partners before taking it. But that happens after death, so it shouldn't affect your ability to transfer the property through a living trust.
It's not common, but a partnership agreement may limit or forbid holding your interest in trust. If yours does, you and your partners may want to see a lawyer before you make any changes.
Solely owned corporations. If you own all the stock of a corporation, you should have no difficulty transferring it to yourself as trustee.
Closely held corporations. A closely held corporation is a corporation that doesn't sell shares to the public. All its shares are owned by a few people who are usually actively involved in running the business. Normally, you can use a living trust to transfer shares in a closely held corporation by listing the stock in the trust document and then having the stock certificates reissued in your name as trustee.
You'll want to check the corporation's bylaws and articles of incorporation to be sure that you will still have voting rights in your capacity as trustee of the living trust; usually, this is not a problem. If it is, you and the other shareholders should be able to amend the corporation's bylaws to allow it.
There may, however, be restrictions that affect the transfer of shares. Check the corporation's bylaws and articles of incorporation, as well as any separate shareholders' agreements. One fairly common rule is that surviving shareholders (or the corporation) have the right to buy the shares of a deceased shareholder. In that case, you can still use a living trust to transfer the shares, but the people who inherit them may have to sell them.
Limited liability companies. If your small business is an LLC, you'll need the consent of a majority or all of the other owners (check your operating agreement) before you can transfer your interest to yourself as trustee. This shouldn't be a problem; they'll just want to know that you, as trustee of your own trust, will have authority to vote on LLC decisions. Another way to address this concern would be to transfer your economic interest in the LLC, but not your right to vote.
It's not difficult to transfer bank accounts to your living trust. But you may well decide that you don't need to. That's because you can directly designate a beneficiary for the funds in a bank account. If you do, you don't need to transfer those accounts to a living trust just to avoid probate. Their contents won't go through probate in the first place.
This option can be especially useful for personal checking accounts, which you may not want to transfer to your living trust -- it can be difficult to cash checks on accounts owned in a trustee's name.
A living trust, however, offers one advantage that most pay-on-death arrangements do not: You can name an alternate beneficiary to receive the account if your first choice isn't alive at your death. Pay-on-death accounts are discussed in About Living Trusts.
Jointly owned accounts. If you want to hold a joint account in your living trust, things are more complicated, and you may just want to name a payable-on-death beneficiary for the account instead. The reason is that almost all joint accounts have what's called the "right of survivorship," which means that when one owner dies, the survivor automatically owns all the money in the account. A provision in a will or living trust can't override that. So no matter what your living trust says, the share of the first grantor to die will go to the survivor; the money in the account will go to a trust beneficiary only when the second grantor dies.
EXAMPLE: Joan and Alex have a joint savings account. They go to the bank and change the registration card on the account to read "Joan and Alex Crookshank, trustees of the Joan and Alex Crookshank Revocable Living Trust dated August 23, 2007." In the trust document, Alex leaves his half of the account to his friend Max. Joan leaves hers to her daughter Linda. Alex dies first. The account is now owned by Joan, and when she dies, all the funds will go to Linda. Max won't inherit anything.
Vehicles and Property That Is Often Sold
Some kinds of property are cumbersome to keep in a living trust. It's not a legal problem, just a practical one. Two common examples are:
If you own a life insurance policy at your death, the insurance company will give the proceeds to the named beneficiary, without probate. (The proceeds are, however, considered part of your estate for federal estate tax purposes.)
If you have named a minor or young adult as the beneficiary, you may want to name your living trust instead. Then, in the trust document, you name the child as beneficiary of any insurance proceeds paid to the trust and arrange for an adult to manage the policy proceeds if the beneficiary is still young when you die. If you don't arrange for management of the money, and the beneficiary is still a minor (under 18) when you die, a court will have to appoint a financial guardian after your death. (Young beneficiaries are discussed in Part 6: Property Management for Young Beneficiaries.)
Passing the proceeds of a life insurance policy through your living trust is a bit more complicated than leaving other property this way. You must take two steps:
If you buy and sell stocks regularly, you may not want to go to the trouble of acquiring and selling them using your authority as trustee of the trust.
Fortunately, there's an easier way to do it: Hold your stocks in a brokerage account that is owned in your name as trustee. All securities in the account are then held in trust, which means that you can use your living trust to leave all the contents of the account to a specific beneficiary. If you want to leave stock to different beneficiaries, you can either establish more than one brokerage account or leave one account to more than one beneficiary to own together.
Stock in closely held corporations. See Small Business Interests, above.
It's common for people to want to leave cash gifts to beneficiaries -- for example, to leave $5,000 to a relative, friend or charity. Don't, however, just type in "$5,000 cash" when you list the property you want to hold in trust. There's no way to own cash as a trustee, unless that cash is specifically identified.
The way to identify the cash is to transfer ownership of a cash account -- a savings or money market account, for example -- to yourself as trustee. You can then name a beneficiary to receive the contents of the account. So if you want to leave $5,000 to cousin Fred, all you have to do is put the money in a bank or money market account, transfer it to yourself as trustee and name Fred, in the trust document, as the beneficiary of the account.
If you don't want to set up a separate account to leave a modest amount of cash to a beneficiary, think about buying a savings bond and leaving it to the beneficiary or leaving one larger account to several beneficiaries.
EXAMPLE: Michael would like to leave some modest cash gifts to his two grown nephews, Warren and Brian, whom he's always been fond of. He puts $5,000 into a money market account and then transfers the account to himself as trustee. In his trust document, he names Warren and Brian as beneficiaries of the account. After Michael's death, the two nephews will inherit the account together, and each will be entitled to half of the funds.
Property Held in Joint Tenancy
Property owned in joint tenancy does not go through probate until the last surviving owner dies. When one co-owner (joint tenant) dies, his or her share goes directly to the surviving co-owners, without probate. So if avoiding probate is your only concern, you and the other grantor don't need to transfer your joint tenancy property to your living trust.
Joint tenancy doesn't avoid probate, however, if the joint owners die simultaneously -- there is no survivor to inherit the other's share. If you die at the same time, each owner's half interest in the joint tenancy property is passed to the beneficiaries named in the residuary clauses of each person's wills. If you didn't make a will, the property passes to the closest relatives under state "intestate succession" law.
If you're concerned about what would happen to the property in the (statistically very unlikely) event that you and your spouse or partner died simultaneously, you have two choices:
There's another reason to use a living trust for joint tenancy property: if you want to leave your share of the property to someone besides the other joint tenant(s). Joint tenancy property automatically goes to the surviving co-owners when one co-owner dies. But if you transfer joint tenancy property to a living trust, the joint tenancy is destroyed, and you can leave your share to anyone you please.
Property Held in Tenancy by the Entirety
You and your spouse or registered domestic partner may hold title to property in "tenancy by the entirety" -- basically, a kind of joint tenancy that's only for married couples (and same-sex couples that have registered within the state). Not all states have this form of ownership; see About Living Trusts for a list.
Like joint tenancy, tenancy by the entirety property does not go through probate when one owner dies; it automatically goes to the survivor. So if avoiding probate is your only concern, you and your spouse or partner don't need to transfer your tenancy by the entirety property to your living trust. Also like joint tenancy property, tenancy by the entirety property doesn't avoid probate if you both die simultaneously. If you're concerned about that possibility, you have two choices: Name a beneficiary in your backup will, or hold the property in trust. These options are discussed in Property Held in Joint Tenancy.
Community Property States
* If spouses sign a community property agreement
If you and your spouse or registered partner own significant community property, and you want to leave it to each other, you may not want to transfer it to your living trust. Your options depend on what state you live in.
Alaska, Arizona, California, Nevada or Wisconsin. In these states, you may want to take advantage of an option that lets you avoid probate completely for community property. You can add the right of survivorship to your community property so that when one spouse dies, the other automatically owns it.
California also allows community property that isn't held with an express right of survivorship to pass outside of probate, via two different procedures. For real estate, the surviving spouse or partner simply files a one-page affidavit (sworn statement) with the county recorder's office. The affidavit states that the person is entitled to full ownership of the property. For other property, the survivor requests a Spousal Property Order from the probate court, which then authorizes the transfer into the survivor's name.
Idaho offers a simple probate procedure when the surviving spouse is the only beneficiary. The survivor files a petition with the probate court, and the court issues an order stating that he or she now owns everything.
Washington offers no probate shortcuts for community property. It goes through probate just like everything else.
New Mexico allows a surviving spouse to take title to a home held in community property without probate. But there are several limitations: It's allowed only after a six-month waiting period, only if probate isn't necessary for any other assets and only if all debts and taxes have been paid.
In any state, community property does not avoid probate when the second spouse dies. To avoid probate then, the property must be left via a living trust or other probate-avoidance device.
Community property also doesn't avoid probate if both spouses die simultaneously. If you're concerned about that possibility, you can hold the property in trust, and each spouse can name the other as primary beneficiary and name an alternate beneficiary to receive his or her share of the property in case of simultaneous death. It's a bit more paperwork, but you're assured that probate will be avoided even in the event of simultaneous death.
Individual retirement accounts cannot be held in trust. Instead, avoid probate by naming a beneficiary to inherit whatever's left in your retirement account at your death. The plan administrator or account holder can provide forms on which to designate your beneficiary.
Because retirement account funds don't go through probate (as long as you name a beneficiary other than your estate), there is usually no reason to name your trust as the beneficiary. If you do name a revocable living trust as the beneficiary of your retirement account, then (under current IRS rules) after your death required minimum distributions will be based on the life expectancy of the trust beneficiary.
Resource. IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out, by Twila Slesnick and John C. Suttle (Nolo), explains the options of those who inherit money in a retirement account.
Other Valuable Property
Other valuable items -- everything from jewelry and antiques to boats and airplanes -- can also be placed in trust.