When someone passes away, their assets often have to go through the costly, time-consuming, and public legal process known as probate before being distributed to heirs. However, using trusts as part of an estate plan can help avoid the probate nightmare.

There are two main types of trusts used in estate planning - revocable trusts and irrevocable trusts.

Revocable Trusts

With a revocable trust, you maintain control of the assets during your lifetime. You can modify or terminate the trust at any time. Typically, you name yourself as the trustee initially, with successor trustees lined up to take over after your death or incapacitation. You also name the beneficiaries who will ultimately receive the trust assets, often your children or other heirs.

Irrevocable Trusts 

An irrevocable trust, as the name implies, cannot be modified or terminated once established, except under very limited circumstances. You have to give up control of the trust assets by appointing a trustee other than yourself to manage them for the named beneficiaries. Irrevocable trusts have certain tax advantages but are more complex.

How Trusts Avoid Probate

For either type of trust to work for avoiding probate, you must transfer ownership of your assets into the name of the trust while you're alive. For example, re-titling bank accounts, investments, and real estate into the trust's name.

Once that's done, those assets can be distributed directly to the beneficiaries by the trustee after your death, bypassing the entire probate court process. This saves significant time, costs, and privacy compared to probate.

The Probate Nightmare

Without a trust in place, most of your assets have to go through probate court upon your death before legal ownership can transfer to your heirs. This is true even if you have a simple will. Probate can take over a year in many cases, rack up thousands in costs and fees, and open your family's private affairs up to public scrutiny. Squabbling among heirs can tie up the process for years while assets dwindle from fees.

There's also always the risk that the court could ultimately decide to distribute inheritances differently than you'd intended, either due to challenges from heirs or state intestacy laws applying if your will is deemed invalid.

Other Trust Benefits

Trusts can also be customized to protect assets from creditors or to ensure a beneficiary's eligibility for needs-based government benefits is not jeopardized by inheriting wealth. These provisions can sometimes be truly life-saving for vulnerable beneficiaries.

Essentially, a properly-structured trust gives you maximum control over how your estate is ultimately distributed while providing invaluable creditor protection and tax advantages.

The Downsides of Poor Planning

While setting up the right type of trust requires some initial effort and expense, it's well worth it compared to the alternative of poor estate planning. Too often, people try to use deeds or other workarounds as a perceived cheaper, easier option. For example, trying to avoid probate by simply adding a child's name to the deed of their home.

These types of "solutions" create far more problems than they solve. There can be unintended tax consequences, creditor and liability exposure for the child, challenges with distribution to other heirs after the parent's death, and more. A comprehensive trust is vastly superior.

When to Use a Revocable vs. Irrevocable Trust

For most people's basic estate planning needs, a revocable trust is ideal - it's straightforward, allows you to retain control of your assets during life, and can be modified as needed. Revocable trusts don't provide any special tax benefits, but probate avoidance alone is reason enough to have one. 

Irrevocable trusts have added complexity but provide tax advantages and asset protection benefits that make them worthwhile for certain higher net-worth estate planning situations. For example, removing assets from your taxable estate by putting them into an irrevocable trust.

For more information, schedule a consultation with one of our experienced estate planning attorneys. They can help you determine which type of trust setup makes the most sense for your unique financial situation and goals for passing on your legacy.