By: Lisa Millich
It is well-known that wills go through “probate.” However, there are many misconceptions about what probate is and is not. Simply put, in the context of a will, probate is a court proceeding to transfer the assets of the “testator,” or decedent who executed the will, to the testator’s beneficiaries. Clients often say that they want to avoid probate because it will be expensive to their beneficiaries and time consuming for the personal representative. However, in New Mexico, we have a simplified “informal probate” proceeding, which is not ordinarily as costly or complicated as probating an estate in larger states like California or New York. Our “formal probate” procedure is more complex, but still generally not as onerous as probate in some of the bigger states.
In a probate, the personal representative of the estate is responsible for bringing the will to court, marshalling the deceased testator’s assets, creating an inventory, paying (or contesting) the decedent’s debts, and distributing the assets to the proper beneficiaries (which may be to a trust) and accounting for the personal representative’s actions to the court and to the beneficiaries. However, because it is a court proceeding, it is also a public proceeding. Individuals wishing to keep their finances private at their death should consider executing and funding a revocable trust.
A revocable trust serves as a receptacle of a person’s assets during his or her lifetime. As their name suggests, revocable trusts are revocable and amendable by the person who created the trust (a/k/a settlor, grantor, or trustor) until the settlor’s death. Generally, the settlor of a revocable trust also serves as its trustee during the settlor’s lifetime. This allows the settlor to maintain control over his or her assets during his or her lifetime. Owning assets as trustee of a revocable trust of which the trustee is also the settlor is not much different than owning the assets outright, except that those assets in a trust will avoid going through probate upon the settlor’s death.
Revocable trust agreements are extremely flexible. Generally speaking, a trust may be created for any lawful purpose. Additionally, revocable trusts agreements are more easily amended than those of a will. Wills require a “codicil” to be amended, and codicils must be executed with the formalities of a will. Revocable trust amendments, on the other hand, do not have to be executed with such formalities. Because of their flexibility, revocable trusts are often recommended when complicated family dynamics exist. When an individual has a large and varied estate, a revocable trust may be recommended as they are good vehicles for managing diverse assets in large estates.
Some common misconceptions about revocable trusts is that they provide tax benefits or creditor protection, they do not (irrevocable trust usually do). However, when a person’s estate is over the estate tax exemption limit (currently $11,400,000 per person), revocable trusts can provide tax planning benefits that take effect on the death of a settlor. However, many of these tax planning benefits that take effect on the death of the settlor can also be achieved with a probated will.
Upon the death of the settlor of a revocable trust, depending on the terms of the trust, the trustee has many of the same fiduciary duties as a personal representative. Ultimately, the trustee will either distribute trust assets outright to the beneficiaries, will keep the assets in trust (usually in an irrevocable trust), or do some combination of both.
Funding a trust, i.e., transferring assets into the trust during the settlor’s lifetime, is all-important if that individual wants to avoid probate. With a revocable trust and a “pour-over will,” any asset not titled in the name of the trust at the settlor’s death (not including assets with a payable on death beneficiary designation) will go through probate to be distributed to the revocable trust. A person with a revocable trust and a pour-over will can title the assets in the name of a revocable trust now and avoid probate later, or not fund the revocable trust and have a personal representative distribute the estate to the trustee of the trust upon the death of the settlor/testator.