For many families, avoiding probate may be a worthwhile endeavor in which to invest time and money. Estate planners, wealth management advisors and attorneys have built an industry helping people bypass probate. However, there are also common misconceptions about probate and the need to avoid it. To help give you a better understanding of the issues, this article provides an overview of probate, planning strategies to avoid it, and how to determine whether a probate-avoidance estate plan is appropriate and necessary.
What Is Probate?
Probate is the legal proceeding for identifying the assets of a deceased person (the “decedent”), paying their debts and distributing assets to their heirs. An “estate” refers to the assets and liabilities of the decedent. If the decedent made a valid last will and testament, their estate is “testate” and if they didn’t, it’s “intestate.”
The most common reason to avoid probate is to save your heirs the expenses involved. These include attorneys’ fees and court costs. There may also be delays and complications associated with identifying and transferring assets.
The larger the estate, the more it will cost to administer. It’s been said, “more money, more problems,” and this wisdom applies to probate. A valuable and diversified estate may include business interests, real estate, varied investments and other assets to be identified, appraised, maintained during probate and distributed. This process may require attorneys, accountants and financial advisors, among others, with the estate paying their fees.
Another concern is that probate is a court action that will compromise the family’s privacy, including filing the will in court as a public record. Problems also may result from creditor claims or business disputes against the estate or conflicts among heirs.
Probate Misconceptions
Before discussing probate avoidance tools and strategies, it’s worth addressing some common misconceptions. Having a will does not avoid probate. Making a will is important for multiple reasons, including publishing the decedent’s wishes to be carried out, but the will won’t avoid probate.
Another misconception is that the assets of an intestate decedent go to the state. That would be extremely unlikely because, for that to occur, there would have to be no survivors from a long list of heirs who would inherit under the intestate succession law.
This law creates a distribution path when there’s no will. This makes it crucial to have a will if you want to provide for anyone who falls outside of the legal default mode. The intestate succession laws would not provide for extended family members, friends, charities or others if you leave a surviving spouse or children, who sit atop the hierarchy and usually get everything.
Strategies to Avoid Probate
1. Jointly-Owned Assets With Survivor Rights
The simplest way to avoid probate is through joint ownership of assets with survivor rights. These assets typically fall into two categories—jointly-owned with survivor rights and assets with beneficiary designations. If you can own everything through these methods, there will be no need for probate because the surviving owner or beneficiary automatically takes title upon death.
Most married couples own some, if not all, of their assets jointly as marital property. The term for legal ownership of marital property is “tenancy by the entireties,” or “T by E.” The marital home is usually owned as T by E, but many other assets may be titled this way, including bank accounts.
After the death of one spouse, all of their T by E property passes automatically to the surviving spouse outside probate. That’s why there may be less concern with probate avoidance if you’re married, but that equation changes when the first spouse dies. Also, if spouses die simultaneously, probate will be required, unless the couple designed a probate avoidance plan, such as through a trust.
Outside of matrimony, assets may be owned jointly with survivor rights. This type of ownership is known as “joint tenancy with rights of survivorship.” Joint tenancy is common for real property, but as with T by E, many kinds of assets may be structured this way.
What About Real Estate?
If the deed to real property doesn’t clearly state co-ownership as marital property or joint tenancy, title defaults to a “tenancy in common.” If a tenant in common dies, that share passes to their estate, which would mean through their will or intestate succession, and probate is required.
Another option for real property is known as the life estate deed. A life estate deed gives the title owner legal rights to the property in their lifetime as a “life tenant,” with a “remainder” person lined up to become owner upon their death, without probate. In most cases, it’s better to use an “enhanced life estate” deed.
The difference under the latter version, commonly known as a “Lady Bird” deed, is the life tenant reserves many legal rights to the property, including the right sell, mortgage and revoke the remainder interest entirely, without consent of the remainder person. Under the non-enhanced life estate deed, the remainder person owns a future interest in the property requiring their consent for the life tenant to take significant action with the property.
2. Assets With Named Successors
Pay or Transfer on Death
Other types of assets that pass outside of probate are those with beneficiary or successor clauses baked into the asset. Bank and investment accounts often allow for “pay on death” or “transfer on death” designations made by simply filling out a form. Life insurance death benefits have designated beneficiaries, as do qualified plan retirement accounts such as a 401K or IRA.
LLC Interests
Membership interests in limited liability companies may also be set up to transfer outside of probate. The owners of an LLC own percentage membership interests, as opposed to shares of a corporation. An LLC member may use the company’s operating agreement to designate beneficiaries to receive that interest upon the member’s death.
This strategy allows the operating agreement to treat membership interests like life insurance death benefits or qualified plans. Otherwise, a member’s interest becomes part of their probate estate, with its transfer subject to the costs and delays discussed above.
3. Revocable Living Trust
A versatile and effective legal tool to own assets outside of probate is a trust. There are many kinds of trusts that serve various legal and financial purposes. A relatively simple type that helps avoid probate is called a revocable living trust.
A trust is an agreement among parties to own assets, among other purposes. The person who creates the trust is known as the settlor. A trustee holds legal title to the trust property on behalf of beneficiaries. Making the trust revocable allows the settlor to amend it as needed or revoke the trust completely. Trust assets avoid probate because, upon the settlor’s death, a successor trustee disposes of the assets according to the trust’s terms. Probate is avoided because the trust itself doesn’t die, as individuals do.
It’s most important to fund the trust by transferring title of assets into it. Otherwise, you have a legal empty bucket that fails to avoid probate. If the settlor owns any assets outside the trust, a helpful tool is a “pour-over will.” This is a will stating that all of the decedent’s assets shall pour-over into the trust. If a trust is properly funded and the settlor takes care to title assets to the trust as they’re acquired, probate should be much simpler and the estate smaller than it otherwise would have been without the trust.
Conclusion: Should You Avoid Probate?
The answer is the most common attorney response to any client’s question — “It depends.” Whether anyone should design an estate plan to avoid probate and how far they should go to achieve that goal depends on their circumstances.
Money should always be a consideration. This means deliberating on the value of the estate and a reasonable planning budget. An estate plan built around a revocable living trust will be more expensive and time-consuming to set up and maintain than a simpler plan based on a will.
This is because a trust-based estate plan requires the attorney to do more work, both with document preparation and consulting time with the client. The client also has more homework, including doing an inventory of assets and transferring them into the trust, along with maintaining and updating the trust over time.
If you can avoid probate without setting up a trust, the decision should be easier. Being married helps, as many families don’t need to worry about avoiding probate until the last spouse dies, if they own everything together. I advise clients to own as much of their wealth as possible through the probate-avoidance strategies discussed above, including joint title with survivor rights, pay/transfer on death, and beneficiary clauses.
If, after doing that, there remains much that would pass through probate, it’s worth considering a trust. Do a cost/benefit analysis considering what you own in relation to both versions of money necessary to keep it all out of probate — time and cash. To discuss your estate plan, including probate and its avoidance, or if you have questions about the information in this article, please contact me.
