I often receive questions about privacy in estate planning, so today, I want to discuss various privacy concerns and how they relate to an estate plan.
Privacy and Probate
One of the primary ways privacy concerns arise in estate planning is through the probate process. When an individual passes away and has assets titled in their individual name, those assets must go through probate, regardless of whether the person had a will or not. Probate is the legal process through which assets are transferred from the deceased to their heirs or beneficiaries. If there is no will, the state determines who inherits the assets according to its intestacy laws.
The problem with probate is that it is a public process. Anyone can access information about the deceased’s assets, their value, who is inheriting them, and any outstanding creditor claims. If disputes arise among family members or other interested parties, those legal battles also become public record. Many people prefer to avoid probate to maintain their privacy, especially if they live in a small community, are well-known, or simply want to keep their estate matters confidential.
The best way to avoid probate and maintain privacy is through trust planning, typically using a revocable living trust. While irrevocable trusts can also help avoid probate, they are generally used for different purposes beyond just probate avoidance.
Privacy in Real Estate and Land Transactions
Another area where privacy concerns arise is real estate transactions. Some people mistakenly believe that a revocable living trust provides privacy in real estate dealings, but the short answer is no, it does not.
A potential alternative is a land trust, though not every state allows them. A land trust is a revocable trust where someone other than the owner is named as trustee, meaning their name appears on public records instead of the actual owner. The drawback is that you must trust the appointed trustee to act in your best interest when managing or selling the property.
Even without a land trust, you can take steps to enhance privacy in a revocable trust by choosing a discreet name. Many attorneys name trusts after their clients, such as “The John Smith Revocable Trust,” but this immediately ties the trust back to the individual. Instead, it’s better to use a generic or unrelated name. Additionally, even if you serve as the trustee, people won’t necessarily know who the beneficiaries of the trust are, which adds another layer of privacy.
Privacy and Lawsuits
Many people also ask about privacy in the event of lawsuits. A common misconception is that a revocable living trust provides asset protection—it does not. Only irrevocable trusts can offer asset protection from creditors and lawsuits.
In most states, if a trust is involved in litigation, details about the trust become public record as part of the court proceedings. However, some states have laws that seal trust-related information from public access. South Dakota has the strongest trust privacy laws, offering an indefinite and automatic seal on trust details, meaning information about the trust will never become public. Other states may offer temporary seals or leave it up to the judge’s discretion, while most states have no privacy protections at all. For individuals concerned about lawsuits or privacy, it may be beneficial to establish a trust in South Dakota or another state with strong privacy laws.
Quiet Trust Laws and Beneficiary Privacy
Another key privacy issue involves beneficiaries. In most states, once a beneficiary reaches a certain age—typically 18 or 21—they have the legal right to access information about the trust, including its terms and how it benefits them. However, some states, including South Dakota, allow for “quiet trusts,” meaning that beneficiaries can be completely prevented from accessing trust information. This can be useful for individuals who do not want their beneficiaries to know about or exert pressure regarding their inheritance.
Key Takeaways on Privacy in Estate Planning
- Avoiding Probate: Using a revocable living trust prevents assets from going through probate, keeping asset details and beneficiary information private.
- Real Estate Transactions: Land trusts may provide some privacy, but naming a revocable trust discreetly can also help avoid unnecessary public exposure.
- Lawsuits and Trust Privacy: Most states allow trust details to become public if involved in litigation, but South Dakota offers the best protection with a perpetual, automatic seal.
- Beneficiary Privacy: In most states, beneficiaries can access trust details upon reaching adulthood, but quiet trust laws (available in states like South Dakota) allow complete confidentiality.
Privacy in estate planning comes in multiple forms, so it’s important to consider all these factors when structuring a plan. Reviewing your state’s laws and determining whether it makes sense to establish a trust in a state like South Dakota with strong privacy protections can be a valuable step in achieving greater confidentiality.