More than five years ago, I set up a revocable trust for one of my clients who I will call “Carol” (because that’s her name). She transferred her condo to the trust. That was the only asset in her trust.
I recently received an email from Carol, saying that she had a ‘retirement review’ with her financial planner. To quote her “we decided that since the only consideration for my condo being in the revocable trust is to avoid probate, I should revoke my revocable trust.”
What’s wrong with this?
Legal Advice. Who is giving her legal advice? Her financial planner? She didn’t ask for my legal advice; she just let me know that she wanted to revoke her trust.
Named Beneficiaries. According to her email, all of her assets, except the condo, will be transferred to her children by beneficiary designations. That means, for example, her investment account at the brokerage firm has beneficiaries (we call that a “TOD or transfer on death” account); her bank accounts and CDs have beneficiaries (we call those “POD or payable on death” accounts). Her life insurance has named beneficiaries, and any annuities, IRAs and 401(k) have named beneficiaries. All of these assets will pass to her children without going through the probate process. As she stated, only the condo needs to be transferred using the probate process.
Probate on the Condo. Just for discussion, let’s assume that probate fees and court costs will be computed only on the condo, which is the only asset that has to be transferred by the probate process. If the condo is worth $150,000, the fees will be 2% for the attorney and 2% for the executor, $6,000, plus court costs of 0.5%, $750, for a total of $6,750. If the “only consideration for her condo being in the revocable trust was to avoid probate,” that is a pretty important consideration. It would save $6,750!
How are probate fees computed? What she doesn’t understand is that since her condo will have to go through the probate process, the probate fees and court costs will be based on the total of her assets, not just the condo. For example, if her condo is worth $150,000 and her assets total $800,000, the fees and court costs will be 4.5% percent of $800,000 and not of $150,000.
Not just fees. Fees are not the only issue. The probate process will take a minimum of a year; two to three years is not unusual.
Not just avoiding probate. We set up trusts for other reasons than avoiding probate. What if Carol becomes incompetent? With a trust, a successor trustee named in the trust can handle the assets in the trust. Privacy is another reason. Probate records are public records; if the assets pass under a trust or by beneficiary designations, those records are not open to the public.