720-730-7274The short answer to this question is: YES. If I could just leave the answer at that, this would be the shortest blog post ever, but unfortunately, things aren’t quite that simple. I do wish it were that simple, but alas, it is not.
One of the main reasons people establish trusts is to avoid probate. Trusts are private documents and if property is owned by a trust, then the property does not need to be subject to the probate process. However, a trust only avoids probate for property owned by the trust. If you own something personally, and not inside of the trust, then the property may be subject to probate. When you set up a trust, you need to pay special attention to getting assets into the name of the trust. Not all assets can, or should, be put into the name of the trust, but you want to set things up to transfer assets into the trust at the correct time. So therefore, a trust can avoid probate, but only insofar as it properly controls and owns assets.
How Does a Trust Avoid Probate?
When you set up a trust, you are generally the person in charge of the trust while you are alive. This may not be true of irrevocable asset protection trusts, but most revocable living trusts set you up as the person in charge of the trust – the trustee. You will likely also be the primary beneficiary of a trust while you are alive, so you can give money to yourself and pretty much do whatever you want with assets inside of the trust while you are alive and in charge.
When you pass away, you are no longer in charge of the trust, because Colorado law does not allow dead people to be in charge of money or assets in a trust, or really in charge of anything! However, your trust does not die with you, but rather the trust continues to exist. Because the trust continues to exist, the assets inside of the trust do not need to go through the probate process. Probate only applies to assets you owned personally at the time of your death, not to assets owned by the trust. Because the trust continues to exist, someone other than you can take over the trust at the time of your death. This new person or entity, called a successor trustee, can then distribute your assets to the named beneficiaries of your trust. These final beneficiaries are the people you pick to receive assets after you have passed away.
How Do You Get Your Assets into the Trust?
In order for your trust to control what happens with the assets, the trust needs to own the assets, or have the assets controlled by the trust. Making the trust the owner of an asset requires different processes for different types of assets. Real estate can be transferred to the trust using a deed, like a warranty deed, or a quitclaim deed in Colorado. Other states may have different deeds that can be used to transfer ownership of real estate from you into the trust. Things like bank accounts or other investment assets can have pay on death, or transfer on death designations associated with the account. A pay on death or transfer on death designation means that the money in a bank account or investment account can be transferred into the trust at the time of your death. The pay on death or transfer on death designation is set up with the bank or other financial institution prior to your death and tells those institutions what to do when you die – transfer funds into the trust.
When To Talk To Your Investment Advisor
Investment accounts can often be retitled into the trust immediately after a trust is formed. Doing so means the trust is the owner of the investment account, not the individual. Transferring an investment account into the name of the trust, or deciding to use a transfer on death designation are both excellent ways to get investment assets into the trust. Choosing which method to use is best done after consulting with the investment company / your investment advisor – you should choose which is the easiest way for the investment company to handle the transfer on death or retitling of the account into the name of the trust. No one way is really superior to the other with post-tax investment accounts.
Some Assets Should Not Be Put Into the Trust Immediately
Pre-tax investment accounts, like IRAs or 401(k)s, or annuities, or life insurance accounts should not be transferred into the name of a trust immediately. If you try to put an IRA or a 401(k) into the trust immediately after the trust is formed, the IRS will treat the transfer into the trust as a taxable distribution. You will need to pay income tax on the full amount in the IRA or 401(k) at the time of the transfer into the trust. This could be up to approximately 50% of the amount in your IRA or 401(k), so if you don’t want to lose half of your money in retirement accounts to the IRS, don’t put it in the trust right away.
Instead, you can use beneficiary designations on IRAs or 401(k)s, or annuities, or life insurance accounts to transfer these assets into the trust when you die. Such transfers are set up prior to your death with the company administering the IRA or 401(k), or with the insurance company that issues the annuities or life insurance policy. When you pass away, your survivors need to go through whatever process the retirement account administering company or insurance company has to pay out the money / assets to the trust at the time of your death. Of course, you can have these types of assets go directly to the beneficiaries, but sometimes you want everything to be consolidated in one spot. You may want the money to be subject to restrictions on giving money to the beneficiaries, so they don’t get too much money all at once. If that is the case, you can have the assets pay out to the trust.
Get Your Assets into the Trust, or Point the Asset in the Right Direction!
Some assets have a low enough value that you don’t need to title them in the name of the trust, or have a pay on death designation, transfer on death designation, or a beneficiary designation. Things like household items or furniture are like this. Most often you want to have a house and all of its contents be part of the trust, and you want your other assets to be owned by the trust, or set the trust up to receive money and assets from different types of financial or retirement accounts. You want everything to end up in the trust in the correct way and at the correct time, so that your assets go where you want and your survivors don’t need to go through probate.
An experienced estate planning attorney can give you the proper guidance and direction to get your assets into the trust. Your trust then avoids probate and gets assets to the beneficiaries as quickly as possible. You can make an appointment to talk to an experienced estate planning attorney by clicking the button below.
