Probate can be expensive and tedious. Properly titling assets and taking advantage of beneficiary designations help you avoid probate. Living trusts address more complicated situations.
Most people are familiar with the concept of probate and likely recall having been told to avoid it primarily through the use of trusts. But do you really understand what probate means and why you might or might not want to avoid this process for your estate? In the below paragraphs, we will outline the probate process, provide some pros and cons, and suggest some vehicles you can use to avoid probate for your own estate.
What is probate?
Probate refers to the court-supervised process of settling your estate when you die. When a person dies, the probate court of the state where that person lived generally has jurisdiction to ensure that any last will is valid and can be honored according to its terms. The probate process works to remove any doubt about how the deceased’s assets get distributed to avoid messy legal problems later.
What are the steps in a typical probate process?
The first step in probate involves proving that the deceased formed a valid will that was not effected under duress, mental incompetence, etc. Once the court declares the will valid, a personal representative (often called an executor) can be named to carry out its terms. If you name your own personal representative in the will, make sure that person is capable of performing the duties required, or the estate may experience additional problems and delays.
Next, potential creditors and beneficiaries must be notified so that they have a chance to contest the will in court. Think of it this way, if somebody who owed you thousands of dollars died unexpectedly, you wouldn’t want that money to pass to heirs where you had no chance to recover it. The state steps in to ensure a fair hearing.
Likewise, if you are an estranged child of the deceased, the state wants to give you the chance to petition for a share of the inheritance, as in a normal situation, you might be eligible. The notification process generally takes the form of a series of newspaper ads announcing the death as well as how to petition the court.
Is avoiding probate a good idea?
Probate provides important protections to creditors and heirs, but it come at a cost in dollars, time, and lost privacy. What are some reasons you might or might not want to use the probate process for your estate?
For one thing, if you have no concerns about privacy and a fairly simple estate, you may not care much whether your estate goes through probate. Many states offer a “small estate” process which avoids some probate costs and delays provided the gross assets fall below a certain level. For example, in Arizona, if someone passes away and leaves less than $75,000 in total assets, an exemption to the probate process becomes available.
Keep in mind that not all assets have to go through probate when you die. That means you can designate beneficiaries for your major assets and get your remaining estate down below the threshold defined by your state to permit the streamlined probate process or avoid it all together.
Proper planning can also make probate very straightforward for your personal representative and the court. You should ensure that your will is “self-proving” and that assets are titled correctly to make the process as smooth as possible for heirs. Given good documents, probate can proceed with few hitches.
Probate can even work to your estate’s advantage with respect to creditors. By exposing some of your estate to the probate process, you give creditors the chance to claim against those assets, and once the process is done and the time runs out, their claims are officially extinguished.
As always, consult a qualified estate attorney or experienced financial planner to take advantage of the above provisions.
The perils of probate
Probate involves numerous drawbacks, however. The probate process can add months–or even years–to an estate settlement. For example, states that require court oversight of each step in the process require you to schedule a docket and wait for the court’s timing. You generally cannot just walk into a court building and settle an issue.
If you named a paid representative such as an attorney to handle your estate, all those additional steps and delays cost the estate serious money. Conversely, if your representative is not skilled (e.g., a friend or family member who is not a professional) and the court is not overseeing all the steps to ensure correctness, there can be mistakes and do-overs that add to the probate costs. While choosing a trustee is not exactly the same as choosing a personal representative, you may wish to review our other article about trustee selection for some helpful insights.
Unfortunately, “when it comes to money, people are funny.” Estranged family members reading the public death notification could show up to contest your wishes and complicate settlement. Some heirs might feel entitled to a larger amount than you left them and can even invalidate your will in extreme cases.
If beneficiaries or creditors succeed in convincing the court that your will is not valid because of duress, mental incapacity, etc., then you end up “intestate,” meaning without a will, and the state’s own rules of distribution take over. (We think of the Clint Eastwood film, Gran Torino and how that will might have played out in real life.)
Finally, the most common reason to avoid probate for wealthy families is probably privacy. Think of all the famous people who died and immediately you got to read all the sordid details about how much money they had (or didn’t have), who got it, who was fighting over it, etc. You may know of tense or embarrassing family situations that you do not want to air out in front of the public. If you are a known person, reporters will chomp at the bit to get stories like this.
Ways to avoid probate
Most people have been told that they can avoid probate by forming a trust. This is generally true as long as the trust has been funded, but it’s not the only way to avoid probate and certainly isn’t the cheapest. Remember, probate only affects assets that are still in your name when you die, so if by giving away assets or titling them in such a way that they are not in your name at death, those assets avoid probate.
Life insurance always names a beneficiary. Retirement accounts such as IRAs, 401(k)s, 403(b)s, etc., usually request that you identify a beneficiary. Likewise, non-retirement financial accounts (including bank accounts) might have “payable on death” or “transfer on death” options available whereby you can identify the account’s beneficiary in advance. As long as you don’t just write “my estate” as the beneficiary, these assets go straight to the named beneficiary at your death.
How you title your accounts can help you avoid probate as well. Joint Tenancy with Rights of Survivorship (often abbreviated “joint tenancy” or “JTWROS”) means each named owner has a total ownership of the account separate from the other owner. If one owner dies, the jointly owned property automatically belongs to the survivor.
While no probate is involved for JTWROS, each joint tenant has full control over the asset. Large assets placed in joint name with a non-spouse can also incur gift tax or affect estate tax. For these and other reasons, joint tenancy usually works best with your legal spouse.
Tenants in Common (TIC) structures attribute set percentages of an asset to each owner; if one owner dies, the only part of that account subject to probate is the percentage in that owner’s name. And that owner might have put his or her percentage into the name of a trust or even a JTRWOS account so that those assets, too, avoid probate. (This can get complicated, so please consult your advisor or attorney for help.)
Some states follow community property rules, which automatically divide all assets acquired after marriage 50/50 between the spouses. In community property states, it might be necessary to add a “with rights of survivorship” phrase to the title to ensure the entire holding moves to the other spouse’s name upon death.
Your state may allow you to title your real estate using what is called a “beneficiary deed.” A beneficiary deed identifies who will inherit your real estate, just like in the transfer on death arrangement above. Just be sure you record the deed with the county where you live. And realize that by recording this, the beneficiary becomes public knowledge.
Some states permit you to designate a beneficiary for motor vehicles. Of course, this might not work out well in cases where someone died in an accident involving that same vehicle, but as they are usually significant assets and can avoid probate just like financial accounts and real estate, it makes sense to consider designating your vehicle beneficiary in advance to reduce your remaining estate further.
In all cases, make sure you leave enough cash for your executor to pay estate expenses. It could make sense to leave a single bank account in your name for this purpose. Also, if you have assets in more than one state, particularly real estate, you may face probate rules in all states. So be sure to review each state’s rules and understand your exposures.
Do I need a trust?
At last we come to the trust structure (e.g., revocable living trust). A trust sets out the rules by which your assets will be distributed at death and a trustee whom you appoint oversees their distribution. Trusts work well for complicated distribution instructions. In your trust document you may specify who will administer your trust without relying on a court’s appointment. A trust can include restrictions on how money is invested, which financial advisor handles the assets, and really any legal restrictions or contingencies on giving money to your heirs.
Assets in the trust avoid probate because the trust owns them. The court need not get involved, and the process remains private. However, a trust only serves you if you have titled your assets in the name of the trust. If you forget to put an important asset into the trust, then it goes to your estate and is subject to probate.
How Alpha Fiduciary can help
As a fiduciary investment advisor and financial planner, Alpha Fiduciary can guide you to the simplest, most effective way to structure your assets according to your wishes. Alpha Fiduciary is happy to make referrals to competent estate attorneys for trusts and more complex needs. We maintain relationships with trust companies that can administer your trust both during your lifetime and after you pass.
We look forward to discussing your situation with you and doing our best to make sure you get the service and solutions you need. Click here to schedule a meeting with a fiduciary advisor today.