Living trusts, or revocable trusts, are often established to prevent the probate process over a loved one’s assets after they die. Colloquially, it is known as a “will substitute.” A will dictates the terms that go into effect right after you die. While a trust does the same, finances are prepared and stored away beforehand, so that it can go into effect immediately. Real estate property and bank accounts are transferred into a separate account for an individual to inherit once the grantor dies. The grantor retains the right to revoke and/or amend the trust at any point before passing away.
Under New York law, the grantor is the trustee. Accordingly, until the trustee passes away, they have complete control over the assets they put away into the separate account. They can withdraw assets from the account and use them for transactions as needed. When the grantor dies, the assets in the trust are not subject to probate in court. Nonetheless, a living trust still requires a will known as a “pourover will.” The will guarantees that any assets the grantor fails to transfer before passing, “pours over” into the trust.
Regardless of whether all assets have been transferred into the living trust before death, probate costs are largely avoided if most assets were correctly transferred into the account during the grantor’s lifetime. Court involvement is also unnecessary if the Grantor failed to transfer assets into the other trusts the living trust created during their lifetime. As a result, the process rarely involves any delays in transfers to the beneficiaries.
A Living Trust Avoids a Probate, but what is it?
The probate process uses a Surrogate’s Court to recognize a document as an individual’s Last Will and Testament. The Executor of this will is given letters testamentary. This document allows them to take control of a deceased individual’s estate. The Executor gathers assets without a named beneficiary such as life insurance and retirement accounts, pays their debts and taxes, and lastly, distributes assets as directed by the will. When the will is submitted for probate, unless a conflict arises in which a judicial accounting is then called into action to approve the Executor’s actions, the Executor is discharged from any other duties.
Difference between Administration of Living Trust vs. Probate
Most notably, the living trust does not have to proceed through the probate process in the Surrogate’s Court. Therefore, the Grantor does not have to pay a filing fee, which often totals over $1000. In some instances, a probate is needed for the pourover will, but the fee is quite low if most assets are already in the trust. Still, the probate does not cause a delay in administering the trust. The living trust names a successor trustee to take over the account’s assets upon the Grantor’s death and distribute them accordingly.
Taxes on a Living Trust
A living trust does not save on taxes more than a properly drafted will does. Similar to a will, a living trust can reduce or eliminate Federal or State taxes when appropriate. However, it does not save on taxes on its own. The assets may be used towards the Grantor’s income taxes and the Grantor will be taxed on the account’s interest, dividends, and capital gains. All living trusts assets are recognized as the Grantor’s for Federal and State estate tax purposes.
Establishing a Living Trust
Recent changes have allowed living trusts to become more accessible to a wider audience. In one scenario, it is best to transfer assets into a living trust if they are spread across multiple states. For example, if an individual owns real estate in New York and Texas, it is a good idea to transfer both properties into one trust. Doing so will allow the grantor to avoid probate fees over two wills in different states. In another case, a living trust is the best option if surviving family members are distant relatives that an individual has lost touch with. With a will, the Executor will have to demonstrate due diligence to locate all family members. If the Executor cannot find one or more family members, they will have to obtain an Order of Publication. An order of Publication allows a defendant to circulate a legal ad in a newspaper searching for anyone that may have information on the whereabouts of those named in the estate. This often costs hundreds of dollars from the estate and they are rarely successful because they are often overlooked. Lastly, the Surrogate’s Court will have to appoint a lawyer as Guardian ad Litem to protect the interests of the defendant and determine the will’s validity. Not only are the costs high, but the process for the assets to be transferred sees a significant delay.
If a living trust is the right approach for you, please contact the Law Office of Inna Fershteyn at (718) 333-2394 for all of your estate planning needs.