Estate Planning – How Do Revokable Living Trusts Work to Avoid Probate

Karen: This week, I’m super excited to have Erin MacDonald here. Erin MacDonald is a partner in the Trusts and Estates Department at Karnopp Petersen. And she’s our go-to attorney when we have questions about taking title to property. Sometimes, we find a property that’s in probate or maybe sometimes even someone passes away and how can families deal with that.

So Erin, welcome to the program.

Erin MacDonald: Hi Karen.

Karen: Hey! Where would you like to start with? Maybe title?

Erin: Sure!

Karen: Ways of taking property title?

Erin: Sure, let’s talk about ways that people take title to real estate.

So, if you have an individual purchasing property, it’s fairly straightforward. They take title in their individual name. But if you have two people taking title to property. They may take it as tenants-in-common. And that designation means that each of them own a 50% interest in the property. And they can dispose of the property as they would like to do. So, on their death, their 50% interest  may be subject to their will and their estate planning.

Another way that people take title to property is as tenants by the entirety which is a type of tenancy where, if one person passes away—and this is particularly used where you have a married couple—if one of them passes away, the property automatically passes to the surviving spouse.

Non-spouses can also take property title in this kind of joint—it’s technically not a joint tenancy, but jointly by taking it not as tenants in common but with rights of survivorship. And that language “rights of survivorship” means the same thing as tenancy by the entirety. If something happens to one property owner, the property automatically passes to the survivor.

And so, as an estate planning attorney, this is really important when I’m working with families because I need to understand how the property is titled. And if something happens to one of the property owners, what happens with the property?

Karen: Yeah. And then, what happens also within the family if something happens?

So, when you are examining a house someone has chosen to take title, they can change the way they took title, can’t they?

Erin: Sure. So, when I’m working with someone, let’s say a couple comes in to work with me, we may record a deed and change how the property is titled, or we may start looking at more sophisticated estate planning strategies. And that may include using a revokable living trust.

So, when you have someone who passes away, and they own a piece of property individually, then that property is potentially subject to probate on their death.

Karen: Can you explain probate to our listeners? They might not know. I ran into probate as you know because we’ve had to—I’m just going to say this to our listeners really quickly. We’ve had to refer clients to Erin because they thought that their family had a property in a trust, and it wasn’t in the trust. And so then it was subject to probate through the state of Oregon, correct?

Erin: Sure. So yes, we’ll get the surprise call, “Oh, my goodness! We’re selling a piece of property. We’ve already accepted an offer. And when we got the title report prepared in the process of going through the transaction, we’ve discovered that the property was owned by mom who’s passed away. So it’s not owned exactly how we thought.”

And so, probate is the process where the court appoints the personal representative to step into the shoes of the decedent and actually process and transfer the assets from the deceased person to their next of kin.

So probate is the process where the court oversees the transfer of title on an asset. And it takes time.

Karen: A lot of time sometimes.

Erin: A lot of time sometimes.

So, we will take the will of the decedent entered into the court record. And then, we have to follow a series of steps. We have to provide an inventory to the court 60 days after the personal representative is appointed listing all the assets that the deceased person owns. We’re required to notify creditors. We have to publish notice in the newspaper.

So, there’s a whole series of steps that has to happen when someone passes away owning—whether it’s a piece of real estate or a bank account or an investment account. There’s a series of steps that we have to go through to transfer title from the deceased person to their next of kin.

Karen: So, if we go back to the beginning of our conversation, it’s really important for people to have guidance when they’re taking title on real estate. They can avoid all these probate.

Erin: Absolutely! So, one of the ways that we avoid probate is the joint titling of assets. So having an asset that’s held by two people where if something happens to one of them, the property automatically passes to the survivor.

There’s some cautionary tales there that maybe we’ll have time at the end of the program to talk about.

The other way that people avoid probate is using a revokable living trust.  And so with a revokable living trust, the person is taking the asset that’s in their individual name and transferring it into a trust that they control and that they can modify and adjust and amend during their lifetime.

But the benefit is that, on their death, instead of the asset being titled in their individual name, it’s titled in the name of the trust. And the trust continues to exist.

Karen: That makes so much sense, Erin.

Well, we’re going to take a break here. And we’re going to thank our sponsors because we wouldn’t be here without t hem. And then, we’ll be back on House Talk with Erin McDonald learning more about maybe the revokable living trust.

Thanks so much, Erin.

Erin: Thanks!

[voice over]: Stay with us! More House Talk is straight ahead on 104.5 FM, 1340 AM and KBNWTalk.com.

[voice over]: This is House Talk. Now, once again, here’s your host, Karen Malanga.

Karen: Welcome back to House Talk. If you just tuned in, we’re sitting here with Erin from Karnopp and Petersen. And she’s going to be telling us a little bit more about revokable living trusts when it comes to real estate.

So Erin, thanks again for being here.

Erin: Thanks Karen.

Karen: Take it away!

Erin: Okay! So, we were just talking about revokable living trusts as a way to avoid probate. And I was explaining that by creating a trust and transferring an asset real estate, for example, into the trust, when the deceased person dies, there is no asset in their individual name that needs to be subject to probate.

And so what happens in that scenario is you have a successor trustee who’s appointed in the revokable trust who can step in and follow the outline of what’s been put into the trust, the directions that the person who created the trust has left for the successor trustee. And what that means is that it’s a very easy transition for the asset to the next of kin.

So, in an example where I received a call from Karen, and she’s in a transaction, and the property is owned by a deceased person, then we have to typically slow down the process a little bit to get the person appointed as a personal representative.

In a situation where the property is held in a trust, the successor trustee steps in and is able to close on the transaction and sell the property with very little effort or worry. It all can happen very seamlessly during that process.

And then, what the successor trustee may be instructed to do in the trust is distribute the sale proceeds across the beneficiaries. And again, all that happens without having to have the court involved.

Karen: We just went through that with my own family and sold my mother’s home. And then, her instructions allowed us to divide the proceeds equally between the children and set aside an amount for her memory care because she’s in memory care. It was incredibly simple. But I can understand how by not having that sort of trust set up, how something could become incredibly difficult and challenging.

Erin: Yes. And probate can be expensive. So, by going through the process of creating a revokable trust and avoiding that court process, you end up saving money in the long run.

Karen: Sure!

Erin: So, even on a very simple probate, you’re looking at thousands of dollars to go through the process because it’s so specific from a statutory perspective. You’re an executor. We call them a personal representative in Oregon. Your personal representative has to go through a number of specific steps. And there’s just no way around it. It’s expensive.

Karen: I also think, Erin, for so many people, it comes as a surprise. Okay, their mom owns this house say out in Sisters. This is a situation that you and I were involved in. So I’m definitely not going to say any names. When I got an offer on the property, then all of a sudden, the children realized when we entered escrow that the home was not in a trust, and it was going to have to be going through probate.

I do think it would be really a smart thing to do for everyone to sit down, people that own property, and just look at how you’re holding title to it. And then, also, if you have a parent, maybe see is this really in a trust or was the trust done in 1984 and maybe there are some amendments that need to be made?

I mean do these lasts forever? Or if you set up a revokable living trust 20 years ago, is everything in it going to be valid today?

Erin: There’s actually two important points that you raised. One is can the trust be changed. And typically, the typical document that we’re talking about, a revokable living trust, is amendable and revokable as long as the person who created it has capacity. So that’s important.

Karen: There’s another if.

Erin: Yes, yes. And then, the second point there is is the trust funded.

So, as an attorney, I can draft beautiful documents for my clients. But if the assets never end up in the trust, then the trust is really not serving its purpose. So trust funding is crucial.

Trust funding for real estate means recording a deed and transferring it from mom, let’s say, into mom’s trust. So that’s funding the trust. And that’s critical.

And so, when I meet with clients, we might create a trust and fund the trust; and then in five years, revisit the trust. Are the provisions still consistent with what we think they say? And are they reflective of what the client wants to accomplish?

And then, we look at trust funding because, you’re right, they may buy and sell property frequently. They may change investment advisers and accounts. And so using every five years as an opportunity to sit down and make sure that the assets are in the trust is critical because the trust can’t work unless the assets are actually titled in the trust.

There is, when we create a revokable living trust, that person, that client will also have a will. And the will is called a pour-over will. And it’s very abbreviated. And the will says, “If this decedent dies and owns assets individually, put those assets into their trust.” That’s the pour-over mechanism.

Karen: So, that kind of covers anything that might be a loose end.

Erin: Exactly, exactly. Now, ideally, as an attorney and as a realtor, we do not want loose ends.

Karen: No, we never want loose ends.

Erin: But when a client comes in, we do both a trust and then this pour-over will just to be a catchall in case the client goes off to Hawaii and buys a time share or in case they inherit a piece of property and take the piece of property in their individual name, and then something happens to them. We have this pour-over mechanism to make sure that everything ends up in the trust, and then the trust provisions are followed.

But the pour-over will for the property to get into the trust, there would have to be a probate.

So, again, that’s why it all comes down to trust funding. It’s crucial that not only you create the trust but that you fund the trust.

Karen: You put everything in it in the proper way. So you’re re-recording the property.

Erin: Exactly!

Karen: I know. And not to discuss my personal life, but I know my mom’s will was done in 1984, it had so much in it that just wasn’t around anymore. And that wasn’t a problem though because if it’s not there, even if it’s in the trust, if it’s gone, you don’t really have to worry about it that much.

Erin: Right. Right!

So, I mentioned also that looking at how assets are titled, in Oregon, we now have a transfer on death beneficiary deed, a TOD deed.

Karen: I didn’t know about that. Why don’t I know about that?

Erin: Because we’ve been working the trust. But there is this alternative mechanism where an individual who wants their real property to pass directly to a beneficiary and doesn’t have a trust. So maybe this is really their only asset, there is a mechanism in Oregon—it’s only been around for a few years—where they can designate a beneficiary on a deed.

So they continue to own the property in their individual name. But they can designate a beneficiary so that, on their death, a death certificate is recorded and the property transfers to the beneficiary that’s designated.

And there are some rules around these deeds that make them a little more complicated than others. But it’s something to be aware of because it’s another tool in our kit to avoid probate.

Karen: Sure! Alright. Well, thanks. We’re going to take another quick break, thank our sponsors again. And we’ll be back with Erin on House Talk.

[voice over]: Stay with us! More House Talk is straight ahead on 104.5 FM, 1340 AM and KBNWTalk.com.

[voice over]: This is House Talk. Now, once again, here’s your host, Karen Malanga.

Karen: Hi, this is Karen. And you’re back on House Talk today. Thank you again for Erin for stopping in to visit with us. And we’ve been talking about the transfer on death deed.

So Erin, I have a question for you. I was pondering this during our break. How is that so different than just somebody simply putting one of their children on the deed?

Erin: Yeah, that’s a great question, Karen. So we were talking about transfer on death deed as a way to avoid probate, so an individual can maintain ownership of the property unless the beneficiary and the property automatically transfers to the beneficiary designated.

Karen: Sure.

Erin: And at the beginning of our conversation, we were talking about jointly titled property—so tenants by the entirety or rights of survivorship—where if one of the joint property owners passes away, the property automatically passes to the survivor.

So, you would think that the outcome is the same, but there’s actually a significant difference. If I have a client who comes in and they say, “I want to put my son on this piece of property, so that, when I die, the property automatically goes to my son. My concern is that with the son being on title, the son’s creditors now have an asset to pursue.” So, it’s not just owned by mom in my example, but it’s also owned by son. And it’s not just creditors, but they could be considered as an asset subject to a divorce decree.

So, all of a sudden, mom’s security in her real estate is now subject to the creditors and claimants of the son. That is not ideal… obviously.

If we’re doing this merely to avoid probate, then why not list the child as a beneficiary. And mom is the sole owner of the property while she’s living. It’s far less risky, and it really is more reflective of her intent.

There’s also potentially gift tax consequences when you put property into another person’s name. There’s potentially a gift of an interest in the property. And that’s just something to be considered when you’re looking at retitling assets.

Karen:  I never really thought about it that way.

Erin: Yeah, you got to be careful. You got to be careful or at least give it thought. Make sure that what you’re doing is really reflective of your intention.

I know that we’re kind of getting close on time, and I wanted to also mention—because I’ve seen a couple of real estate transactions recently that have come across my desk where powers of attorney have been important. So, if someone becomes incapacitated—so this is a family situation where they need to sell a piece of property, it’s not in a trust, and they have a power of attorney for mom—

Karen: …because she may have dementia, Alzheimer’s…

Erin:  Yes! So while she had capacity, she did some estate planning, she got a power of attorney.

A power of attorney appoints someone to make financial decisions for you.

Karen: Sure!

Erin: And in Oregon, we typically do a durable power of attorney which means it’s effective upon execution, but it’s to be used if the person becomes incapacitated or if the person is traveling.

So, the power of attorney appoints them to make a number of financial decisions, one of which may be selling real estate. And so what will typically happen is the child will come in and say, “Mom is incapacitated and we need to be able to sell her house to generate funds to put her into assisted living.”

Karen: Mm-hmmm… that happens a lot.

Erin: It does happen a lot. And so, typically, what we’ll do is we’ll take the original power of attorney and record it with the county or provide it to the title company as a demonstration that the child signing the deed selling the house is going to be sufficient.

And so, anyway, I just wanted to mention that powers of attorney can be critical, particularly when someone is living but has become incapacitated as a way for the family to be able to transact business on behalf of the individual.

Karen: We just went through that in my family. And so with the power of attorney and going through escrow down in California, we had to provide three doctors’ letters too to prove to title and escrow that, yes, our mom was mentally incapacitated. They wanted documentation on top of that power of attorney.

Erin: I haven’t reviewed your mom’s estate planning documents, but may be because, in California, they have what’s called a springing power of attorney which means it does not become effective until someone is incapacitated. And I would distinguish it from a durable power of attorney which we use for our clients here in Oregon. A durable power of attorney is effective upon execution so that you don’t have to demonstrate incapacity. You don’t have to get all those doctors’ letters.

It’s an important distinction. And we have durable powers of attorneys and springing powers of attorney in Oregon. But we frequently use durable just to avoid having to go through the hassle of getting those doctors’ letters.

Karen: Yeah, yeah. I mean even though your relative or your parent can be living in a memory care center, that still wasn’t proof in California.

Erin: Yes. Oh, yeah.

Karen: It was really interesting.

So, I think we’re getting ready to wind down the program today. And there’s so much more to talk about. But is there any one nugget you would like to leave the listeners with?

Erin: I guess my one nugget would be you can do estate planning with an attorney, but you can also, unbeknownst to you, have done some estate planning yourself. And it’s really important to make sure that those are married together. And what I’m talking about is joint titling of assets, beneficiary designations. You want to make sure that that’s all consistent and that you haven’t overlooked anything.

Karen: Oh, thank you so much, Erin for being on our program today. And again, it’s Erin. You can find her at Karnopp and Peterson. And she is a partner in the Trust & Estates Department. I so appreciate you being here.

Don’t forget to join us next week for another edition of House Talk. Thanks for listening.

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