A will is the primary estate planning document for probate, and probate court is a public court. Therefore, all wills become public record during the probate proceedings. If you want your estate to remain private—perhaps to protect the anonymity of your assets and beneficiaries—you’ll need to use a trust.
What is a trust?
A trust is an estate planning tool that can be used to supplement a will. Where your will offers instructions on how to transfer your assets, a trust agreement creates a legal entity that can actually own and distribute your assets. All trusts have three core parts:
- A trustee to manage the assets
- A beneficiary to receive principal and/or income
- A trust agreement that outlines the terms of the trust
There are many different kinds of trusts, but there are four universal distinctions. If you establish the trust during your lifetime, it’s known as a living trust. If you include instructions in your will to create a trust after you die, it’s called a testamentary trust. The trust is revocable if you (the grantor) retain the ability to amend or dissolve the trust agreement, and the trust is irrevocable if you surrender the assets without retaining control.
For the purpose of this discussion, testamentary trusts aren’t useful because they’d still require probating your assets. If you want to retain your privacy, you’ll want to use a living trust.
A revocable living trust
With most revocable living trusts, the grantor serves as the trustee and the beneficiary. This allows the grantor to retain full access to the assets held in trust, whether that means managing the assets, withdrawing investment income, or accessing the principal value. The trust agreement is usually broad, offering a wide mandate that makes it easy for the grantor to control and benefit from the assets. The agreement will usually have three additional features:
- A successor trustee to handle the trust when the grantor dies
- A successor beneficiary to receive the remaining assets
- Terms of the trust that dictate how and when the assets in trust should transfer to the beneficiary
All assets you transfer to a trust are exempt from probate, and do not need to be addressed in your will. It’s wise to have a pour-over will to pick up assets not carried by the trust, but ideally the majority of your assets are inside the trust, shielding them and your beneficiaries from becoming public record through probate.
Although they are a separate legal entity, the income from a revocable living trust is considered part of the grantor’s annual income, and must be reported with the grantor’s income tax return.
An irrevocable living trust
In contrast, the grantor to an irrevocable trust cannot serve as the trustee or beneficiary. Assets transferred to this type of trust are permanently removed from the grantor’s estate, and the terms of the trust cannot be amended or dissolved without the express permission of the beneficiary. Irrevocable trusts are usually issued their own social security number, and are taxed separately from the grantor’s income taxes according to trust income tax brackets.
Revocable living trusts are far more common than irrevocable living trusts, though they can each play a vital role in your estate plan.
Benefits of a revocable living trust
Revocable living trusts are a great vehicle to allow your assets to bypass probate. Considering how probate can be a long and costly process, a revocable trust can potentially save money in the long run by skipping the process altogether.
Revocable living trusts are also useful if you want to place stipulations on how and when trust assets can be used by the beneficiary. Many people simply transfer all of the assets in trust when they die, but some people include a vesting schedule, and withhold full access to the principal value until the beneficiary meets certain criteria.
For example, the grantor could stipulate that the beneficiary will receive $50,000 a year in income from the trust until they turn 18, at which point they’ll receive access to the full trust. This can be a particularly useful way to transfer assets to minor children, as minors cannot own property. If you tried to transfer assets to a minor without using a trust, it would require a court-supervised guardianship or conservatorship.
Benefits of an irrevocable living trust
For the select few Americans who make enough money to qualify for estate taxes, an irrevocable living trust is a fantastic way to minimize and avoid the estate tax. Individual estates that are valued at more than $5.49 million and joint estates worth more than $11 million are subject to the estate tax, which can be as high as 40%. Only about 0.2% of Americans qualify for the tax, but for those people it’s essential to minimize the value of their estate.
Transferring assets to an irrevocable trust is still subject to the lifetime gift tax exemption (synonymous with the estate tax threshold), but it comes back to the principle of taxing the seed versus the harvest. Reporting a gift tax return today is often much better than paying a massive estate tax on the growing principal value down the road.
Irrevocable trusts are also a great way to protect your assets from lawsuits and creditors. Because assets transferred to an irrevocable trust are transferred out of your estate, they are completely out of the reach of creditors and court judgements. Note, however, that you can’t transfer the assets after the fact—to protect your assets, you’d need to establish and fund the trust before the court judgment. This can be particularly valuable to business owners, property owners, and professionals susceptible to malpractice lawsuits, as all three of these can be at risk for personal lawsuits.
Are there any assets that can pass to beneficiaries outside of a will or a trust?
There are a handful of assets that can pass to your beneficiaries without going through probate, and without transferring ownership to a trust. These assets have contractual beneficiaries that are built into the ownership agreement, and will pass to the beneficiaries when the financial institution or custodian receives the account holder’s death certificate. These assets include:
- Bank or brokerage accounts with a transfer-on-death (TOD) or payable-on-death (POD) beneficiary designation
- Retirement accounts (IRA, 401k, etc.)
- Life insurance policies
- Real property held in joint tenancy or as tenancy by the entirety
Do You Need Help with Probate Matters?
As you can see, AZ probate laws can be complex. It requires a number of steps and without the right approach, it’s easy to get lost in the details.
At JacksonWhite, we can make probate a clear, easy-to-understand process. If you’d like help with probate matters, call the talented team at JacksonWhite Law today.
We can help explain your legal options and direct you to the probate solution that works for you and your loved ones.