What’s Probate? And How Can You Avoid It? - Part Two
Unless you’ve created an estate plan that works to keep your family out of court, when you die many of your assets must go through probate before those assets can be distributed to your heirs. In part one of this series, we explained how the probate process works and what it would entail for your loved ones. This week, we’ll discuss the major disadvantages of probate for your family, and outline the ways you may help them avoid probate with thoughtful life and legacy planning.
WHAT’S AT STAKE FOR YOUR FAMILY
Probate court proceedings can take months, and sometimes even years, to complete. In the immediate aftermath of your death, that’s the last thing you likely want your loved ones to have to endure.
Without easy and immediate access to your assets, your family could face serious financial hardship at a time when they need the most support. They’ll also likely need to hire an attorney to help them navigate the legal proceedings, pay court costs, handle executor’s compensation, and account for all of the various administrative expenses related to probate. By the time all of those expenses have been paid, your estate could be totally wiped out, or seriously depleted.
Additionally, probate is a public process. So, whether or not you have a will, all of the proceedings that take place during probate become part of the public record. This means that anyone who’s interested can learn about the contents of your estate, who your beneficiaries are, and what they will inherit. This leaves your loved ones with no privacy, and at worst makes them potential targets for scammers and frauds.
Probate also has the potential to create conflict among your loved ones. This is particularly true if you have disinherited someone or plan to leave significantly more money to one relative than the others. In these circumstances, a family member may contest your will. And even if those contests don’t succeed, such court fights will only increase the time, expense, and strife your family has to endure.
HOW TO AVOID PROBATE
Before we discuss the more advanced ways you can use estate planning to avoid probate, it’s important to point out that not all of your assets will have to go through the probate process—and that’s true even if you don’t have any estate plan at all.
Assets That Do Not Require Probate
Certain assets, such as those with beneficiary designations like 401(k)s, IRAs, and the proceeds from life insurance policies, will pass directly to the individuals or organizations you designated as your beneficiary.
The following are some of the most common assets that use beneficiary designations and therefore, bypass probate:
Retirement accounts, IRAs, 401(k)s, and pensions;
Life insurance or annuity proceeds;
Payable-on-death (POD) bank accounts; and
Transfer-on-death (TOD) property, such as bonds, stocks, vehicles, and real estate.
Outside of assets with beneficiary designations, other assets that do not go through probate include assets with a right of survivorship, such as property held in joint tenancy, tenancy by the entirety, and community property with the right of survivorship. These assets automatically pass to the surviving co-owner(s) when you die, without the need for probate.
However, it’s critical to note here that if you name your “estate'' as the beneficiary of any of these assets, those assets will go through probate before being distributed. The same goes if you overlook a beneficiary designation, or if you die at the same time as a joint property owner—each of those assets will also go through probate, even though they have beneficiary designations.
We generally recommend that you do not rely on beneficiary designations to handle the distribution of your assets. These designations give you little to no control over how your assets are distributed, and they can result in negative outcomes you did not intend, especially if you have a blended family with children from a prior marriage or if you have no children at all.
Although there are several types of assets that automatically bypass probate, the majority of your assets will require slightly more advanced levels of planning to ensure your loved ones can immediately access them, without the need for any court proceedings in the event something happens to you.
Avoiding Probate with a Revocable Living Trust
Trusts are a popular estate planning tool for avoiding probate. Although there are a variety of different types of trust, the most commonly used trust for probate avoidance is a revocable living trust, also called a “living trust.”
A trust is basically a legal agreement between the “grantor” (the person who puts assets into the trust) and the “trustee” (the person who agrees to manage those assets) to hold title to assets for the benefit of the “beneficiary.” With a revocable living trust, this agreement is typically made between you as the grantor and you as the trustee for the benefit of you as the beneficiary. You act as your own trustee during your lifetime, and then you name someone as a “successor trustee” to take over management of the trust when you die or in the event of your incapacity.
It might seem odd to make an agreement with yourself to hold title to assets for yourself in order to benefit yourself. Yet by doing so, you remove those assets from the court’s jurisdiction in the event of your incapacity or when you die. Instead, those assets transfer to your successor trustee, without any court intervention required.
At that point, your successor trustee is responsible for managing the trust assets and eventually distributing them to your beneficiaries, according to the terms you spell out in the trust agreement. This is how a trust avoids probate, saving your family significant time, money, and headache.
The Key Benefits of a Living Trust
Unlike a will, if your trust is properly set up and maintained, your loved ones won’t have to go to court to inherit your assets. Instead, your successor trustee can immediately transfer the assets held by the trust to your loved ones upon your death or in the event of your incapacity. And since you can include specific instructions in a trust’s terms for how and when the assets held by the trust are distributed to a beneficiary, a trust can offer greater control over how your assets are distributed compared to a will.
For example, you could stipulate that the assets can only be distributed upon certain life events, such as the completion of college or marriage, or when the beneficiary reaches a certain age. In this way, you can help prevent your beneficiaries from blowing through their inheritance and offer incentives for them to demonstrate responsible behavior. And as long as the assets are held in trust, they’re protected from the beneficiaries’ creditors, lawsuits, and divorce—which is something else wills don’t provide.
Finally, trusts remain private and are not part of the public record. So, with a properly funded trust, the process of transferring ownership of your assets can happen privately, and on your family’s time.
Transferring Assets Into a Living Trust
For a trust to function properly, it’s not enough to simply list the assets you want the trust to cover. When you create your trust, you must also transfer the legal title of any assets you want to be held by the trust from your name into the name of the trust. Retitling assets in this way is known as “funding” a trust.
Funding your trust properly is extremely important, because if any assets are not properly funded to the trust, the trust won’t work, and your family will have to go to court in order to take ownership of that property, even if you have a trust.
While many lawyers will create a trust for you, few will ensure your assets are properly inventoried and funded into your trust, and then ensure the inventory of your assets is kept up-to-date as your life and assets change over time. As your trusted legal advisor, we will not only make sure all of your assets are properly titled when you initially create your trust, but we will also ensure that any new assets you acquire over the course of your life are inventoried and properly funded to your trust. This will keep your assets from being lost, and prevent your family from being inadvertently forced into court because your plan was never completed.
Living Trusts, Taxes, Creditors, & Lawsuits
When you create a revocable living trust, you are free to change the trust’s terms or even completely terminate the trust at any point during your lifetime. For this reason, those assets are still considered part of your estate for estate tax purposes. Similarly, assets held in a living trust are not protected from your creditors or lawsuits during your lifetime. This is an important and often misunderstood point.
Again, a revocable living trust does not protect your assets from creditors or lawsuits, and it has no impact on your income taxes. However, as mentioned, as long as the assets are held by a living trust or a Lifetime Asset Protection Trust, those assets can be protected from your beneficiaries’ creditors, lawsuits, and even divorce settlements. Be sure to ask us about the different trust-based estate planning options we offer to find one that’s best suited for your particular situation.
The primary benefit of a living trust is to pass your assets to your loved ones without any need for court or government intervention, and to ensure your assets pass in the way you want to the people you want.
LIFE & LEGACY PLANNING: PROTECT THOSE YOU LOVE MOST
Although a living trust can be an ideal way to pass your wealth and assets to your loved ones, each family’s circumstances are different. We would be honored to help you determine which estate planning strategies are best suited for your situation. Contact us today to get started.
This article is a service of Cedar Counsel. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.