In 1966, Norman Dacey wrote How to Avoid Probate. Because of Dacey, even today, most people think (1) that the probate process is the scariest thing since The Shining and (2) that trusts are the fail-safe solution to every estate-planning problem. Almost fifty years later, I routinely encounter estate planning clients who with great passion inform me “Do not draft a will—I WANT A TRUST!” Trusts are no doubt useful and flexible legal instruments. I use them for all sorts of things, including estate planning. But trusts neither eliminate all risk nor assure your surviving family members of avoiding probate.
First, let me explain what a trust is. A trust is a legal agreement in which another person, called a “trustee”, owns property for the benefit of another. Inherent in this definition is a sobering thought for many people—when you put property in trust, you technically no longer own the property, and what happens to the property is governed by the trust document. However, this risk is mitigated by the fact that, unless you specify that your trust is irrevocable, you can always revoke your trust. Further, in Arkansas the person or persons who create the trust (called the “settlor”) can also be the trustees. Therefore, I could own my property as “Trustee of the McNeal Revocable Trust” and the day-to-day realities of owning my property would be no different than owning my property in my individual capacity.
However, what many people don’t realize is that drafting a trust is just step one in avoiding probate. In fact, even with a trust, it is really hard to avoid probate. This is because you must transfer ALL of your property to trust. All your real estate, automobiles, boats, planes, trains, and wagons have to be deeded to your trust. Fail to transfer even one property—whether a bank account, a dog, or rental income—and someone will have to probate your estate.
Unfortunately, many people cannot transfer property into trust. Under virtually all modern-day mortgage agreements, putting your house in trust would constitute an act of default, and your lender would have the right to set in motion foreclosure proceedings. I shouldn’t have to tell you that foreclosure is worse that probate.
Also tricky are business assets. Few financial firms will invest in a closely-held company whose assets or stock are held in trust. Further, holding your stock in trust will frequently have adverse tax consequences. Shares of S-Corporations, which usually are taxed more favorably than C-Corporations and LLCs, must be held by natural persons. Therefore, putting your shares in a trust will expose your business either to additional corporate taxes or to additional payroll taxes.
However, if you follow three steps, probate is hardly the scary process that Dacey described. First, hire an attorney. Well-drafted estate documents answer questions that neither you nor Legalzoom likely would ever think to ask, and usually resolve the most common issues that survivors fight about. The common “I give my children all my property” is NOT clear. Not even close. My experience is that you will spend a lot less to have an attorney draft clear estate documents than your children will spend on attorneys because either you or Legalzoom drafted poor estate documents.
Second, even if you have a trust, you should also have a will. In the event that you cannot put certain property in trust, you will need a will to control that property’s disposition in probate. Otherwise, whether you like it or not, your property will be disposed according to the Arkansas Intestate Code. Further, you can draft your will so as give your survivors more control over the probate process. Doing so often speeds up the probate process.
Third, if possible, utilize one of several means of making money immediately available upon your death. For example, most banks offer POD (“payable on death”) bank accounts. A POD account, upon your death, immediately transfers the money in the account to the named beneficiary. The beneficiary has no access to the account during your lifetime, but you have complete access. I usually advise clients to set up a POD account with about two to four thousand dollars. In the vast majority of cases, this amount is sufficient for one of your children to hire an attorney to complete the probate process.
At Johnson & Vines, PLLC, we can help most individuals with their estate planning goals. If you are in need of estate planning, don’t hesitate to call us today for a free consultation.