Probate: What It Is & How To Avoid It—Part 2
When you die or become incapacitated, many of your assets must go through probate before those assets can be distributed to your heirs unless you’ve created a proper estate plan. To spare your loved one’s the time, cost, and stress inherent to probate, last week in part one of this series we explained how the probate process works and what it would entail for your loved ones. Here in part two, we’ll discuss the major drawbacks of probate for your family and outline the different ways you can help them avoid probate with wise planning.
What’s At Stake For Your Family
Probate court proceedings can take months, 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. The cost of their time and emotional strain are just the start of the potentially devastating consequences your family could face if you don’t plan ahead because without easy and immediate access to your assets, your family could face serious financial hardship at a time when they need the most support.
Not only that, your loved ones will almost certainly need to hire a lawyer which can result in hefty attorney’s fees and the real risk of them hiring a lawyer who is uncommunicative. All of that is on top of the court costs, executor’s compensation, and all of the various other administrative expenses related to probate. By the time all of those costs have been paid, your estate could be totally wiped out, or at the very least, seriously depleted.
Another drawback of probate is the fact that it’s a public process. Whether you have a will or not, 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, setting them up as potential targets for scammers and frauds.
Probate also has the potential to create conflict among your loved ones, particularly if you have disinherited someone or plan to leave significantly more money to one relative than the others, leading a family member may contest your will. 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
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. Certain assets, such as those with beneficiary designations will pass directly to the individuals or organizations you designated as your beneficiary without the need for any additional planning. 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
- 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.
In addition, 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 different 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. The primary estate planning tool for this purpose are trusts.
Avoiding Probate With A Revocable Living Trust
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 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, so 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.
Finally, trusts remain private and are not part of the public record. So, with a properly funded trust, the entire process of transferring ownership of your assets can happen in the privacy of us, your Personal Family Lawyer®’s office, not a courtroom, and on your family’s time.
Transferring Assets Into A Living Trust
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, then it cannot keep them out of probate and your family will have to go to court in order to take ownership of that property. In light of this, it’s critical to work with us, your Personal Family Lawyer® to ensure your trust works as intended.
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. Because you retain control over the assets held by a living trust during your lifetime, 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. However, as mentioned earlier, 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.
Do Right By 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. This is why us, your local Personal Family Lawyer® will not create any documents until we know what you actually need and what will be the most affordable solution for you and your family—both now and in the future—based on your family dynamics, assets, and desires. Meet with us, your local Personal Family Lawyer® for a Family Wealth Planning Session. We’ll take you through an analysis of your assets, what’s most important to you, and what will happen to your loved ones when you die or if you become incapacitated. Contact us today to get started.
This article is a service of Levi Alexander, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.