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In some states, Florida for example, a revocable living trust (“Rev Trust”) is often used as the primary estate planning document rather than a Will. This involves collecting bank accounts, investment accounts, and real estate and transferring them to a “trust” controlled by a “trustee.” The terms of the trust are in a legal document that establishes the trust, appoints a trustee, and determines the beneficiaries. Typically the person establishing the trust (the “Settlor”) is the trustee during his or her lifetime. A successor trustee serves after the death of the Settlor. Usually, the Settlor is the primary beneficiary of the trust during the Settlor’s lifetime. The trust is revocable, and the Settler can change the terms of the trust or terminate it at any time. After the Settlor’s death, the trust becomes irrevocable. The successor trustee distributes the trust assets under the trust terms without court involvement. In this way, the assets in the trust are already collected at the Settlor’s death and avoid probate. It is usual to have a “pour over” Will along with the Rev Trust. The Will gives to the trust any assets owned by the Settlor at the time of death which have not already been transferred to the Trust. If there are such assets, the pour over Will must be probated in the applicable probate court. To that extent, the Rev Trust may not totally avoid probate.
A Rev Trust simplifies the estate administration process by marshalling assets prior to the Settlor’s death and permits estate administration without involving the court system. The trust is not public and may provide for confidentiality. However, establishing a Rev Trust is usually more expensive than a Will, and it accelerates the estate administration process and expenses. There may be transfer costs as well as legal paperwork.
A Will is a legal document that establishes the beneficiaries of a decedent’s estate and nominates an Executor to collect and distribute assets after the death of the decedent (the “Testator”). A Will requires a court proceeding called probate. SCPA Article 14. In New York, the Surrogate’s Court deals with decedents’ estates. The probate requires the court to determine whether the Will is genuine and to appoint the Executor. In New York, this probate requires the court to obtain jurisdiction over the decedent’s “distributees,” those persons who would inherit s under the intestacy statute if there were no Will. EPTL 4-1.1; SCPA 1403. The Surrogate’s Court remains involved until the estate is finally settled, a minimum of seven months. In most cases the Executor may make distributions to beneficiaries so long as he or she retains sufficient assets to pay any bills.
Only those assets that are tilted in the decedent’s name alone and which must be retitled or sold pass through a Will. Jointly held assets, life insurance proceeds and retirement accounts, and other accounts with named beneficiaries (“POD” or “TOD” accounts) do not pass through the Will and are “nonprobate assets.” Often the majority of a person’s wealth is in the form of nonprobate assets. Thus, the probate estate may only involve a portion of a person’s actual wealth.
The term “estate” means different things for different purposes. There is the probate estate and the nonprobate estate. All of a person’s assets, including those in a Rev Trust and nonprobate assets, are included in the “taxable estate” for estate tax purposes.
In my experience in New York, Rev Trusts are less commonly used than Wills. The probate process in New York State is efficient, and in my opinion, avoidance of probate alone is not a sufficient reason to choose a Rev Trust. Some New York attorneys Rev Trusts for everyone, but I do not. In most cases, I believe New York residents are better served by a Will than by a Rev Trust. Despite my preference for Wills for most clients, there are circumstances under which I would definitely recommend a Rev Trust.
One of my clients has no idea who his distributees are, other than his wife. He has no children and was an only child himself. If his wife were to predecease him, probating his Will would involve the services of a private investigator and/or a genealogist. I have another client whose parents were divorced, and he has no knowledge of his relatives on his father’s side of the family. Since probate involves the Surrogate’s Court obtaining jurisdiction over a decedent’s distributees, it is clear that probate for some clients would be complicated. Such clients may well be better served by a Rev Trust than a Will.
Under New York law, distributees include the children of first cousins. EPTL 4-1.1(a)(7). I have had several clients who lived to an advanced without a spouse or children and were only children themselves. One such client had about forty distributees, all of whom were strangers. The beneficiaries of the client’s Will did not include any of these people. Probate required finding all these distributees and then asking them to sign a Waiver and Consent to the probate of the Will or serving them with a citation. I remember a telephone conversation with one distributee who indignantly told me that my request made no sense, there was nothing in it for her, and she was not going to do anything. Probate of the Will eventually happened, but the client would have been better served by a Rev Trust than a Will.
The reason why the Surrogate’s Court has to obtain jurisdiction over distributees as part of the probate process is to terminate the intestate rights of such persons. Since in many cases distributees would be better off under the intestacy statute than under the decedent’s Will, they have the right to argue that the Will is invalid and should not be probated. SCPA 1410. Although the legal grounds for successfully contesting a Will are few, a Will contest can drag on for years and can be very costly, financially and emotionally. It is often easy to spot potential Will contest situations when the client wishes to leave his or her estate to a “significant other,” friend, or caregiver, instead of blood relatives.
The Surrogate’s Court’s certificate appointing an Executor (“Letters Testamentary”) is only valid to convey real estate within New York State. If the client owns a condominium in Florida, or a vacation home in Canada, for example, the Letters Testamentary are not, by themselves, sufficient to sell or transfer the real estate in the other jurisdiction. Real estate is always subject to the laws of the jurisdiction in which it is situated. Posner v. Handelsman, 179 AD2d 723,723 (2d Dep’t 1992). The same principal is the case for real estate in New York owned by the resident of another state. SCPA Article 16. In such cases, what is required is called “ancillary probate.” This involves getting the New York Executor appointed Executor in the jurisdiction where the real property is located. This requires a separate legal proceeding in the other jurisdiction’s probate court. This is done by filing a petition in the other state’s probate court based on the court papers used in New York. It usually involves hiring a lawyer in the jurisdiction where the real estate is located. However, if the testator does not own the real estate personally, and the real estate is titled to a Rev Trust, ancillary probate can be avoided.
Probate papers contain much information about the value and nature of a decedent’s assets and the identity of the decedent’s beneficiaries. They are also public records which are accessible by many persons. For various reasons, a client might wish to keep such information private. To the extent that a person’s estate is held by a Rev Trust, the court is not involved and the decedent’s information remains confidential. In practice, this may not be entirely so because the Surrogate’s Court may require the filing of the Rev Trust document on the occasion of the probate of the decedent’s pour over Will. Nevertheless, a Rev Trust can sometimes insure privacy in a way that may not be possible in a probate proceeding.
To summarize, it is my opinion that not every New York client should have a Rev Trust. Most clients, especially those of moderate wealth with close families, are served perfectly well by Wills. However, there are certain situations in which foreseeable difficulties or complications may hinder or delay the normal probate process. In such instances, I have no hesitation in recommending a Rev Trust.
Jeffrey M. Johnstone, Esq. is a Partner in Tully Rinckey PLLC’s Rochester office, where his practice is concentrated in estate planning, trusts, estate administration, corporations and business, not-for-profit entities, and federal and New York tax.