A Situation Where Life Insurance DOES Go Through Probate

February 2, 2017

Example. Kirk and Lisa wanted to make their estate settlement simple for each other and for their three children. Knowing that assets in a revocable trust avoid probate, they created a trust and transferred their stock, home, LLCs into their trust. Kirk and Lisa “heard” that life insurance avoid probate because it’s paid to the beneficiary. Kirk died. The insurance company immediately tells Lisa that the insurance company needs a probate court order. Why?

Many years ago, insurance agents would sell life insurance to a married couple. Because the insurance agent believed there would be some estate tax savings, the insurance agent wrote the insurance applications in a way that the husband would “own” the life insurance policy on the life of the wife, and the wife would “own” the policy on the life of the husband.

So, when Kirk died, it was determined that Kirk “owned” the policy on Lisa’s life. When Lisa dies, the death benefit will be payable to Kirk (or Kirk’s estate). In either case, Kirk’s probate is necessary to collect the death benefit when Lisa dies. In addition, if the policy that Kirk owns has cash value, Lisa will not be able to access this cash value into the policy ownership gets transferred in a court proceeding.

Had they transferred their life insurance policy to their trust during Kirk’s lifetime, the probate would not have been necessary. After Kirk died, Lisa, as the sole trustee, would be able to access cash value or change the beneficiary. But since they “assumed” that life insurance avoided probate, they ended up being required to complete Kirk’s probate to “fix” the life insurance problem, even though all of their remaining assets avoided probate.

What is a Revocable Living Trust?

February 19, 2016

At its heart, a revocable living trust is an agreement. Revocable means that the agreement is able to be revoked or amended during the Grantor’s life. Living means that the agreement is made while the individual is alive, as opposed to a testamentary trust which is made through a deceased individual’s Will.

The trust agreement has at least 3 parties:

  1. The Grantor (aka Settlor, aka Trustor, aka Trust Maker): The Grantor is the person who creates the trust agreement. The Grantor is also typically the person who places assets (money, property, real estate) in the trust. In practice: When a husband and wife come in and ask for a trust, both husband and wife are typically Grantors.
  2. The Trustee: The trustee is the person who actually holds the trust property and manages it. In designing the trust agreement, the Grantor decides who the initial and successor trustees will be. The most important qualification for a trustee is… someone that you trust! In practice: In the trust described above, typically both husband and wife are initial Trustees. Then they would name a child, children, or other trusted individual as successor trustees.
  3. The Beneficiary: The beneficiary is the person, persons, or organizations that will receive the income and principal from the trust. In practice: In the trust described above, typically the surviving spouse is the first beneficiary, with the children named as beneficiaries upon the death of the surviving spouse. Distribution to the children can be tied to the child’s age, educational pursuits, or other criteria.

Creating the trust can be divided into 2 parts:

  • Part One consists of designing the trust agreement so it meets the Grantor’s goals. Some common goals include: avoiding probate, offering remarriage protection, offering creditor protection (spendthrift protection) to beneficiaries, providing for a child or grandchild’s education, making distributions at certain ages (rather than having a child receive a large lump sum at age 18, it is common to customize distributions to that children receive money periodically as they mature. For example: 1/3 at age 21, 1/3 at age 25, and 1/3 at age 30).
  • Part Two consists of ensuring that your property is transferred to your trust, a process we call funding the trust. Often you will want to transfer your real estate, vehicles, bank accounts, personal property, etc.. to your trust. Ensuring your trust is fully funded is the best way to ensure your loved ones can avoid the time and expenses of probate court.

The Missouri Bar advises clients that, “You should never sign a revocable living trust document without the advice of a Missouri attorney who practices in this field of law.” When choosing an attorney, ask them how much of their time they spend practicing estate planning. There are only a few of us in the Cape Girardeau area that practice primarily in estate planning.