How do living trusts keep assets from being subject to probate? To answer that question, you need to know a little bit about the probate court process. Assets that are subject to probate might include items that are in your sole name when you die, with no surviving designated beneficiary.
Here's a very simple example. Bob and Betty Brown are married and own most of their assets jointly. Bob has a life insurance policy and retirement accounts. He has designated Betty as his sole beneficiary. Betty dies before Bob.
Bob now owns all of the couple's jointly held assets himself, with no other joint owner. Prior to changing the beneficiary designations on his life insurance policy and retirement accounts, Bob also dies. Bob's probate estate might consist of all assets which were jointly owned with Betty during his lifetime, and assets he owned in his own name without surviving beneficiaries designated.
In contrast, if Bob and Betty had transferred their assets into a joint revocable living trust, their jointly owned assets would not have been owned by either Bob or Betty at the time of their deaths (because they were owned by the trust). Because the assets are owned by the trust and not by the person who died, they are not subject to probate.
Bob will still have to be careful to designate a new beneficiary for his life insurance and retirement accounts - or he could simply name a contingent or alternate beneficiary at the outset which would cover the possibility that Betty might die first.
Simply put, a living trust is like a basket. To fund a trust, you place your assets in the basket (i.e. you change the title of the assets so that they are owned by the trust and not by you). Although with most trusts you can still control the basket and its contents as the creator of the trust - they don't technically belong to you anymore, they belong in the basket.
As a trustee, you may be responsible for taking care of the assets in the basket, but you don't have the right to take anything out of the basket for yourself unless and until the trust agreement allows it. Think of the trust agreement as a set of rules which govern how the assets in the basket can be used and to whom they should ultimately be distributed.
If the creator of the trust has become disabled and is unable to transfer his or her assets into the trust, in some circumstances it may be possible for other fiduciaries to take action to fund the trust. More about this in future posts...