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Revocable Trusts Avoid Probate and More

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Posted on Feb 29, 2016 | Share this post: Like Us on Facebook Join Us on Google Follow Us on Twitter

A Revocable Trust is frequently marketed as a tool to avoid probate, and indeed it certainly achieves that goal in many situations. However, the arrangement must be carefully tailored to a clients’ needs. Too many times, clients buy documents from Trust Mills to “avoid probate,” without really understanding what happens under the terms of the document. When drafted properly, in accordance with a client’s circumstances and wishes, a Revocable Trust can offer benefits much more important than avoiding an Arizona probate.

These benefits include the ability to protect shares for children with independent management, legal protection from creditors, and preservation of assets if a beneficiary divorces. Revocable Trusts also can be used to provide a lifetime benefit for a spouse but ensure assets to pass to the decedent’s children at the spouse’s death.

A Revocable Trust is essentially a set of instructions how to distribute property. When clients choose to use a trust as the cornerstone of their estate plan, it replaces the substantive provisions of a traditional Will. The Revocable Trust, instead of the Will, says who-gets-what at death.

The instructions affect only assets that have been titled to the trust or that are transferred to the trust at death. For this reason, a Revocable Trust should be accompanied by a Will, specifically a “pourover” Will. The Will should direct that all assets in the individual’s name at death shall be distributed from the probate estate to the trust, to ensure that everything the person owns will be distributed in accordance with their plan, which is set forth in the Revocable Trust terms.

Now, if a client intends to use the Revocable Trust to avoid probate, he or she will want to ensure assets are titled in the trust during their lifetime. However, a Will is always necessary, because no matter how complete you are in “funding” the trust, there is always a possibility a probate will still be required. An example is an individual who died as a result of an accident, giving rise to a lawsuit and a judgment or settlement in favor of his estate. In that case, if there was no “pourover” Will, the assets received from the lawsuit might not be distributed in accordance with the decedent’s wishes.

More commonly, some clients never get around to fully transferring all assets into the trust or an after acquired asset is mistakenly left out, and the pourover Will kicks in to transfer those assets to the Trust. A pourover Will also can be used for clients who want the more important benefits from a Revocable Trust, but may not wish to go through the additional work of retitling assets at that time. Those clients understand that a simple probate will be necessary to fund the Trust after death. The pourover Will ensures assets will be still end up in the Trust, where distribution plans can be carefully detailed.

I’ve heard professionals tell clients that if they haven’t funded their Revocable Trust, their entire plan is worthless, which is certainly not true. With improper funding, one of the benefits of having a trust (avoiding probate) is lost, but all the other benefits, which can be far more important, still apply.