What is Probate? How and Why to Avoid Probate

Probate is a court administered process whereby at death, the court oversees the transfer of your probate property from your name to the persons or organizations designated in your will.  If you die without a will, your probate property is transferred according to state law.  Probating a will can be expensive and typically takes from six to twelve months to complete but it can take much longer.  Because of this, lots of people prefer to avoid probate. At death, property is transferred from your name (ownership) in one of three ways: by title; by beneficiary designation; or by probate.  The trick to avoiding probate is to make sure all of your assets are set up as transfers under either joint title or beneficiary designation.  Examples of transfers by title include joint bank accounts and real estate held in joint names.  Examples of transfers by beneficiary include your 401k plan, IRA or life insurance.  The best way to make this happen is to make a list of every asset you own and be sure each asset is set up under either a joint title transfer or beneficiary designation.  This can be very tricky and, in many cases, is ill advised so you should not do this without the assistance and advice of a competent professional.

The key is to make a list of every asset you own and then make sure each asset would transfer by either title or beneficiary designation.  For example, if you owned a piece of real estate in your name, and you wanted it to go to your child at your death and avoid probate on that property, you’d need to add the child to the deed as a joint owner.  I added that you need to be very careful to avoid adverse tax consequences and you should have a professional advisor help you.

A little more complicated strategy is to set up a revocable living trust.  These trusts are extremely popular in high probate costs states such as California and New York.  In the typical living trust, you set up the trust and make yourself the trustee. You then retitle your property in the name of the trust. Once this is completed, you manage your property as you always have, with one or two key exceptions. One of the key ingredients in the living trust is that you will name a successor trustee in the event of your death or incapacity.  Having this successor trustee is similar to the power of attorney also discussed in last week’s column.  Here’s an overview of some of the advantages and disadvantages of this strategy:

Advantages of a Revocable Living Trust

  • Any property that you transfer to your living trust will avoid the probate process altogether. This means you avoid some expenses and lengthy delays as they relate to the property owned by the living trust.
  • Because property placed in a living trust is not subject to probate, your records are not made public. If you prefer to keep your financial matters out of the public eye, a living trust is an excellent tool.
  • At your death there are minimal time delays incurred in transferring assets to heirs. The assets are already in your trust, and the only thing that changes is your trustee. The trustee is someone whom you have selected.
  • Should you become incompetent due to an accident or illness, your living trust can provide for a quick transfer of management of your assets.
  • A living trust is simple to establish. Any attorney versed in estate planning should be able to set up one.
  • Generally, it is more difficult for someone to challenge a trust than to challenge a will.
  • Living trusts have low maintenance costs. A living trust is treated much the same as outright ownership of property for income tax purposes. If you are your own trustee, there are not any additional taxes, tax returns, or other costs associated with your living trust.
  • Without a living trust, if you own property in multiple states, you may face probate in each of those states. Since a living trust avoids probate altogether, you avoid this problem.
  • If your job causes you to move from state to state, your living trust removes the necessity of having to draw a new will every time you change your state of residence.

Disadvantages of a Revocable Living Trust

Two of the most-often cited disadvantages of the living trust are the costs to draft the trust and the time and costs of transferring your property into the trust.

  1. Costs—with a living trust your attorney must draft both the trust document and a will. The reason for the will is that at death it ‘sweeps’ into your trust  any assets that you might have failed to retitle in the name of your trust while you were alive.  The result of drafting two documents often means more fees than just doing a will alone but in the long run it may not be any more expensive, and might even be less expensive since you avoid the expenses associated with probate.
  2. Time and effort—The key to a successful living trust is to actually transfer all of your assets into your trust while you’re alive. It does take time but if you don’t do it now, someone will have to do it at your death.

There are a number of other intricacies that you should consider related to the living trust but if avoiding probate, privacy and management continuity are of concern to you, the living trust is worth a look.

The preceding is a modified excerpt from J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning, which I co-authored.


Strategies for Avoiding Probate at Death

My associates and I were recently working through a complex multimillion dollar estate planning case where the client owned real estate in multiple states. One of the central topics of discussion was how the probate process would work under the current will which we were in the process of revising. Probate is the court supervised process of transferring one’s property at death to his or her rightful heirs. The costs of probating an estate varies according to state law and based on case complexity but can easily be three to seven percent or more of the probate estate. Not all assets go through probate and, with proper planning, probate can be avoided altogether. That’s exactly what we are doing with this client. Since the family has real estate in more than one state, their current will would have required probate in each state that they owned real estate adding to the costs and complexity of settling their estate. In addition to fees, the probate process results in making public some of what was private information. That’s because the filing documents are part of the public record which may include listing of assets and beneficiaries. Finally, the probate process typically takes a minimum of six months and can take several years.

Here are three ways that you can avoid probate:

Create a Revocable Living Trust. With a revocable living trust, you establish a trust and move all of your probate assets into the trust. You can act as your own trustee but designate a successor trustee should you become incompetent or die. This sounds more complicated than it is, for once it’s set up it’s easy to maintain.
Own property as Joint Tenancy with Right of Survivorship. A good example would be to own your home with your spouse under this form of title. At death, your interest in your home automatically passes to your spouse by title rather than going through probate. Some states use a slightly different version known as Tenancy by the Entirety and community property states such as California use Community Property with Right of Survivorship.
Name beneficiaries to your retirement accounts, bank accounts and life insurance. I’ve run into lots of cases where someone named their estate as the beneficiary of their life insurance. This not only subjects the assets to potential probate fees but also potential creditors. For bank accounts and brokerage accounts, you can use a ‘Payable on Death’ designation to direct who gets your account assets at death.

Take a moment to review your own estate situation. If you own property in more than one state or you put a high value on privacy of your financial affairs, consider the revocable living trust. If your estate is simple and will not be subject to estate taxes, the strategies above may simplify the transfer process and greatly reduce the time required to get your assets to your heirs at your death. Care must be taken in executing a plan for avoiding probate for there are many potential pitfalls and tax traps so your best strategy is to seek the advice of a professional experienced in estate planning.