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Trusts, Wills, and Probate…. Oh My!

First of all, I need to reiterate that we are not lawyers, we are CPA's.  The purpose of this article is to give you a general overview of these topics from a CPA's perspective, not to give legal advice.  If you have questions about how these concepts could affect you, please consult your lawyer and tax advisor.

Probate

Probate is a court proceeding to validate a will and transfer ownership of property from the decedent to others.  In most places, probate is required when certain assets exceed an applicable threshold.  In Minnesota, probate is required when probate assets exceed $50,000 or when real estate is involved. Probate assets include:

  1. Assets owned individually by the decedent
  2. Assets owned in tenancy
  3. Life insurance, annuities, and retirement accounts with no beneficiary designation, if the estate is named beneficiary, or if the beneficiary has deceased or disclaimed their interests

Probate may still be required even if a will is made if the probate assets exceed the applicable thresholds.

Wills

A will is a legal document that allows the decedent to name a representative of their estate, determine the division of property, and nominate a guardian for minor children.  Should a will not be made, the determination of these factors will fall to intestacy laws. Most intestacy laws rank the heirs in the following:

  1. Spouse, children, and other descendants
  2. Parents
  3. Siblings and children of deceased siblings
  4. Other kin
  5. The State

Wills have no effect on non probate assets.  They cannot override beneficiary designations or determine ownership by joint tenants.  In most cases a will cannot be used to disinherit a surviving spouse but can be quite effective in disinheriting adult children.

Trusts

A trust is a legal entity that holds title of property by one person for the benefit of the other. The terms and conditions of a trust are determined by a legal document such as a will or trust agreement. Trusts can be used to postpone a gift or receipt of inheritance or provides asset management for those unable to perform the management function.

There are three parties to a trust:

  1. A Grantor- creates the trust, determines the terms, and transfers the assets to the trust.
  2. The Trustee – holds the title to the assets and is responsible for their management and distribution
  3. Beneficiaries – persons selected by the grantor to benefit from the trust

A revocable living trust is a common way to avoid probate and provide for your beneficiaries.  Typically in a revocable trust the taxpayer is all three parties.  The assets should be titled in the trusts name, but as the trustee and beneficiary you control and benefit from the assets the same as you did before creating the trust. It is called revocable because you have the power to change or revoke assets or conditions at any time. The trust agreement in a revocable living trust provides for the management and distribution of assets after a grantor's death.  Upon death, the revocable trust becomes irrevocable.

In the case of a revocable trust as with all trusts, it is absolutely essential that the trust is funded per the will or trust agreement.  This generally means that the assets that are meant to belong in the trust need to be retitled to the trusts name and identification number.  Failure to retitle the assets will result in a failure to avoid probate and control of the assets potentially outside of the taxpayers intended action.

The choice of assets to fund your trust should be decided by your estate plan.

Your advisors will be essential in considering how these concepts will affect you.  A complete estate plan will create the greatest assurance that your values and wishes will be respected and acted upon in the case of your death.  Like the old proverb says, “Make hay while the sun shines;” take the time now while you can and feel comforted in knowing that you have provided well for your loved ones.

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