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Avoiding Probate by Use of Trusts and Beneficiary Designations

A significant mental block in estate planning can be the belief that you need to create an all-in-one document — ominously known as a last will and testament — that directs how all your property will be distributed upon your death. But the truth is that there are simpler arrangements you can make to give properties to specific people or organizations. These methods offer the added advantage of avoiding the court process known as estate probate, which can be lengthy and expensive.

Two popular and effective means of transferring property outside of probate are (1) establishing living trusts and (2) designating beneficiary on bank and financial accounts.

A living trust is a legal entity that you create for the purpose of holding certain designated assets for purposes that you define. It takes effect while you are alive, as opposed to a testamentary trust, which takes effect after you have passed away. The main purpose of the living trust is to name beneficiaries who will receive the trust property after you are gone. In the trust instrument, you appoint a trustee who takes over the trust upon your death and carries out the directed distributions. You can also specify that the trust will continue in effect for the benefit of certain beneficiaries, such as those who have not yet reached majority age. The administration of the trust is done entirely in private, without court assistance or intervention.

A living trust can be made revocable or irrevocable. A revocable trust can be changed or revoked at any time. You can appoint yourself as the trustee, which gives you full control of the trust assets while you are alive. You can add or remove assets as you wish. The downside of a revocable living trust is that it does not provide asset protection, whereas an irrevocable living trust can do so. Both types of living trust can avoid probate of the assets included.

The other major tool for transferring assets directly, without the need of estate probate, is designating beneficiaries on bank accounts, investment accounts, retirement accounts and other financial assets. You give the institution holding one of these accounts the instruction that upon your death, the funds are to be paid directly to the designated beneficiary. This makes it a payable-on-death (POD) account. The beneficiary needs only to provide proof of your death and of their own identity to claim the assets.

While living trusts and beneficiary designations have distinct advantages, there are a few cautions to keep in mind. A living trust controls only the property that you have transferred to it. Other property you own at death may still have to go through probate. As for a POD account, if a beneficiary dies before you do, the transfer fails and that account will be subject to probate. Also, the assets of a POD account will be distributed outright to the beneficiaries. If you want to protect those assets from the beneficiaries’ poor judgment or from the beneficiaries’ creditors, it may be preferable to place those assets in a trust. An experienced trusts and estate attorney can advise you on how to deal with these contingencies.

The Paton Law Firm LLC in Fair Lawn represents clients in Bergen County and throughout northern New Jersey in trust and estate matters. Please call 201-470-4801 or contact me online to schedule a free initial consultation.


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