What Has Priority: Living Trust vs Last Will and Testament?
As an estate planning law firm, the comment we most hear after explaining the basics of estate planning to our clients is something to the effect of, "Wow! I didn't know any of this. This is great information. Not enough people know about this stuff." We find, on top of a lot of general information just not being easily accessible, that there is often a lot of confusion around what different documents mean and how they work in conjunction with each other. Frankly, we don't blame people for the confusion. We've talked at length about titling assets, why you need a will with a trust and how to go about funding your trust. However, all that raises the question of what to when those things are in conflict with each other. Which takes priority, the living trust, a last will or perhaps the title of the account or asset itself?
Generally speaking, the first thing we are going to look at is the title of the account or asset, keeping in mind the type of asset and its value. Assets that have titles are going to usually be governed by how that account is held. Some examples are bank accounts, cars and, the big one, real estate. If an asset is titled in the name of your trust, that is the trust name appears on the title documents, then that asset is considered "in trust" and the trust controls the administration of that asset. If you're alive and the trustee, then you control the management of that asset. After you pass and a successor trustee steps in, they have to follow what the trust says, which is usually pay bills and distribute the assets as you laid out in the trust. If, however, the assets are not titled into the name of your trust, but your name as an individual, then it will be treated the same as what's called an "Untitled Asset."
In our prior post, we talked about "Untitled Assets." Those are assets that don't have a title to them - furniture, tools in the garage, personal items, etc. As they don't have a formal title, we need to consider their value first. So long as all of your assets together that are not titled into your living trust are worth a value below the probate threshold - $184,500.00 here in CA as of April 1, 2022 - then your family can avoid the probate court but have to follow what your documents say. As discussed, these are untitled assets, meaning they are not titled into the name of your trust, thus we need to see if some other documentation speaks on the matter. Hopefully your last will and testament has a pour-over provision in it meaning your assets not titled into your trust and not subject to probate court are then poured over into your trust. This pour-over provision would also apply to assets in your name as an individual as well. Watch our video going over the pour-over will in depth for some more details.
However, what happens to untitled assets or those just in your name if your will doesn't have a pour-over provision in it or you don't even have a will? Well, firstly, if you have a will, then there should be some distribution plan laid out in it, meaning all assets you have, not titled into the name of your trust, are to be distributed according to the terms you wrote in your will. If, after adding the value of everything together, the total value is below the probate threshold, then the family can take care of the distribution, with the executor, meaning manager, in charge of overseeing that process. No need to get a court involved and all the fees, time delay and headache that comes with going to court. If, however, the value exceeds the probate threshold, then everything gets lumped together and thrown into probate court, and your executor cannot act until they get court permission and authority to do so.
Now all that is if you had a will. Let's say you didn't have a will in place when you died. Your estate will now pass intestate, which simply means without direction from a will. If your estate is going down the intestacy route, then your state's intestate succession laws will determine who your heirs are. Your estate goes to your children and beyond by right of representation. If you had no living children, grandchildren or beyond, then back up to your parents, before then going to your siblings and their lines and so on until all shares of your estate have a corresponding heir. Again, if the total value of your estate is over the probate threshold, then a probate court will need to oversee all of this.
So far, we've seen that the first aspect to look at when determining priority among estate planning documents is the title of the asset. If the asset is titled into the name of a living trust, then that trust takes priority over administering that particular asset. If the asset is titled into your name alone or doesn't even have a formal title to reference, then your last will and testament controls the administration. The terms of the will provide for who is to receive what from your estate; a pour-over will simply means that asset goes to the living trust for administration and distribution; and having no will means intestate succession takes over.
However, what if we're in a strange case where an asset, like a bank account or real estate, is titled into the name of a trust, but the trust is not in existence? Maybe it was revoked or, for whatever reason, never established despite the title of an asset referencing such. In that case, your family would likely need to petition a probate court to make a ruling that the titling was either done in error initially or never updated after the living trust was revoked. If the court finds the petition has merit, then they will hold the asset is not "in trust" and it becomes a part of your estate in general. Then, the total value of your estate determines whether the probate court stays involved in the matter or not from then on.
Lastly, one thing to keep in mind is that if an asset has a beneficiary or pay-on-death designation on it, then that designation will control where that asset goes at your death. For example, let's say I have a bank account in my name as an individual, and I have a pay-on-death designation for my son on the account. Under the law, that account (and thus all the funds in it) become the property of my son at my death. It is not a part of my estate or becomes a part of my trust even though I have a pour-over will pouring my assets into my trust. Additionally, this holds true no matter the value of the account, meaning no court involvement. My son would just need a death certificate and to go claim the account funds himself.
Trust accounts, those are accounts tilted into your trust, cannot have pay-on-death designations on them as the trust itself doesn't die, only you. The trust will continue in existence beyond your passing. This is how the administration is done, by your trust acting as a "holding entity" while your assets are gathered, bills are paid, and your estate is distributed.
Thus, as you have likely gathered from today, title to assets is paramount. Title is what determines which document - the living trust or last will and testament - your heirs need to look to first when determining how to distribute the asset in question.
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