Trusts and Probate

*Photo by Phil Roeder is licensed under CC 2.0. *

As I have discussed in previous posts, trust property is non-probate property and therefore not subject to probate proceeding. Consequently, the terms of the settlor’s will have no affect on the disposition of property held in trust—except, of course, where the will leaves non-trust property to the trust. For irrevocable trusts, the property has often long been removed from the settlor’s estate and ownership.

For living trusts, however, the settlor—or creator—of the trust generally retains complete control over the property, and the property is included in the settlor’s estate for estate tax purposes. Despite remaining in the settlor’s estate at death, however, property held by a living trust is not subject to the probate process. For this reason, the living trust has become a popular estate-planning tool to avoid probate. In this post, I will briefly discuss what happens to a living trust at the settlor’s death and the relationship between living trusts and probate.

Living Trusts and Probate

Once the settlor of the trust dies, the revocable living trust—or simply living trust—becomes an irrevocable trust. At that point, the trust is a completely independent entity and will need its own tax identification number, or TIN. This allows the trustee to set up bank accounts in the name of the trust as a new taxable entity.

As a side note, obtaining a TIN for the trust may be unnecessary if the trust property will be fully distributed quickly following the death of the settlor. A probate lawyer should be able to assist with navigating through these various requirements.

In this sense, therefore, the relationship between living trusts and probate is a distant but related one. The probate process itself has little influence over the transformation of the living trust after the settlor’s death, but the two processes run simultaneously with one another. Therefore, they each exist outside of the other’s sphere of influence, but are influenced by the same events, most notably the settlor’s death.

Splitting the Trust

If the trust is going to be split up among more than one beneficiary, all assets held within the trust will be assigned an appropriate value. This is necessary to determine how the assets should be distributed—as trusts often are set up to distribute their property in percentage amounts, such as 33% to each of three children—and to calculate any estate taxes due, as the property within the trust is still considered to be held within the settlor’s taxable gross estate.

The division process can be time-consuming. Setting up QTIPs and bypass trusts can be particularly time intensive, and the entire process must be done carefully to ensure the requirements of the trust and federal law are met.

Because of the difficulty and complexity that can sometimes result from setting up trusts after death, particularly where the trust property is not immediately distributed, the trustee should have broad powers under the trust documents, so that the trustee can more easily administer the trust and navigate through the various legal requirements.

Final Assessment

The relationship between living trusts and probate is hazy at best. The two do not really affect one another, as probate addresses probate property, while trust procedures affect trust property.

It could be said, however, that the process described herein is a living trust’s version of probate, in the sense that it governs the trust following the death of the settlor. The process, however, is generally much less expensive and time-consuming—though that is not always the case.

Nevertheless, as indicated above, while both living trusts and probate are affected by the death of the settlor, the two operate independently and do not generally affect one another.

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See Also:

The Living Trust

Irrevocable Living Trusts