1. I’ve heard of a living trust and heard that it avoids probate. What is probate and how does a living trust “avoid” it?

Probate is a court proceeding. In Florida, it can be time consuming and costly. Much of it is also public. Consider the case of Joe and Mary. They had run their own hardware store for many years. Joe owned half the stock in their family store and Mary owned the other half. They owned a home jointly. Mary had also inherited some money which she invested in rental property. Their savings was in a bank account, which they had decided to put in Joe’s name.

When Joe died, Mary learned that she didn’t yet own all the company. Joe’s stock had to be probated before it could be put in her name. Then she learned that she couldn’t get access to the savings. The court had to appoint her personal representative of Joe’s will before she could draw on any of those funds.

When the business creditors found out about Joe’s death, they waited until the will was filed for probate and read it. They saw that the will left everything to Mary, but they weren’t sure she was going to keep the store open, so they began calling her for answers. Joe had been prominent and, to Mary’s dismay, she learned that much of the probate proceeding was public record.

Over a year passed and Mary eventually settled the probate estate. She then heard of a living trust and heard that it avoids probate. She learned that during her lifetime, she would be in complete control of her living trust. She could buy and sell assets in the trust, even run the business, as easily as if she owned those assets herself. At her death, one of her children could succeed her as the trustee of the trust and its assets would pass then free from probate. Mary established a living trust, placed the company stock and her other major assets in the trust, and things ran smoothly for her after that.

 2. If everything I own is in joint names, won’t that avoid probate, too?

Yes, but there are some things to add here. First, if you own an asset with your spouse, it will go through probate at your spouse’s later death. Second, consider what may happen if you should put a child’s name on that asset. Mary did so after Joe’s death, and added their son, Sam, as a joint owner of the savings account. Sam had started his own hardware business in a neighboring town, but he didn’t have quite his parents’ talents or experience. When the business started to fail, his creditors were able to reach the savings account he held with his mother and nearly wiped it clean. So while joint ownership is a shortcut to avoid probate, it can create some very special problems of its own. For these reasons, a living trust is a preferable way to avoid probate.

3. My bank told me to just use a “Pay on Death” account to name my heirs. Does that avoid probate?

Yes, it can. But it can raise questions, too. After her husband’s death, Mary decided to set up a POD account so that her grandchildren, Sam’s kids, “would also get something.”  She set up another savings account and added her grandchildren, as a “Pay on Death” beneficiaries. At her death, she thought that the account would automatically pass to her grandchildren.  She also thought that this was enough to protect the account from any claim or control by Sam’s wife, Christine.  Mary had always mistrusted Christine and they had never gotten along.

When Mary passed away, the grandchildren were still very young.  Christine made claim to the account on behalf of her young children and was able to get control of the funds at that time. Mary’s desires were thwarted.

This result could have been avoided if Mary had used a living trust instead of the “Pay on Death” shortcut to avoid probate.  The living trust could have properly excluded Christine from control of the grandchildren’s funds at Mary’s death.

4. My life insurance agent told me not to worry about probate of my life insurance because insurance does not go through probate. How does this work?

That’s correct (provided it is not payable to your estate). Sometimes, though, you may not want your beneficiaries to receive such a large sum of cash right away. Many couples want their young children to be protected and set up trusts for them in their estate planning. The trusts postpone the children’s receipt of money until they are more financially mature and keep those funds safe for college expenses or emergencies. If a couple were to simply name their children as the beneficiaries then the children would get the proceeds right away with no strings attached. So further planning can be helpful in order to coordinate the beneficiary designations with the parents’ overall desires.

5. What about my home?

In Florida, there are very special considerations that apply to your home. First, it can be eligible for homestead tax exemptions. Second, it can be protected from your creditors. Third, Florida law restricts the ways that you can pass your home at your death. That law originally designed to protect widows and orphans, can lead to some unintended consequences, especially if you have remarried and have a minor child by your first marriage. Each one of these features needs to be taken into account when planning your estate.

6. How does a living trust avoid guardianship?

One of the most helpful features of a living trust is that it can serve as a way for your family to manage your assets if you should become disabled. Often, an adult child is named the successor trustee of a living trust. If you are disabled, that son or daughter, as successor trustee, can have access to the accounts in the trust and must use those accounts for your care. Bill paying and management of your assets is done through your trust and a costly guardianship proceeding can be avoided.

7. Won’t a durable power of attorney do the same thing?

A durable power of attorney is only a start. Because many financial institutions require their own form of power of attorney, it is often difficult to get a financial institution to honor a blanket durable power of attorney not pre-approved by them. This can cause delays when your power holder needs to get to your accounts to pay your bills. A living trust avoids this delay. It is an instrument which has been universally respected by such institutions for some time.

It should be noted here, too, that a fairly recent change to Florida law has required that many older Durable Powers of Attorney must be updated. If you have a Durable Power of Attorney, you should check its date.  If you had it drawn up before 2012, it would be a good idea to call your attorney to determine whether it should be updated to reflect current law requirements.

6. What’s the takeaway?

Use of a living trust is much more effective way to put in place your desires for your heirs.  A properly funded living trust avoids probate and avoids guardianship.  In the long run, it can save your heirs time and money.  That’s the good news in using a living trust as the foundation of your estate plan.