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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.

 

Preparing for the Unexpected

Estate Planning: Preparing for the Unexpected

All of us know of someone who has become incapacitated and unable to tend to their financial affairs. However, most people don’t realize that without proper advance planning, this situation can quickly turn into a nightmare. For example, assume that you are married and your husband is left mentally incapacitated as a result of a stroke. You own your home jointly and he owns $250,000 in stocks in his name. You need access to cash for special medical treatments so you plan to sell his stocks, right? Wrong! You do not have the legal right to sell his stocks and since he cannot give you permission, your only alternative is a potentially lengthy and expensive legal process to gain access to his assets…if the court grants you access.

The best defense is to prepare now for the possibility that you may become incapacitated in the future. There are four legal documents that you should consider.

1. Durable power of attorney. With this document, you appoint another person to be your ‘attorney-in-fact’, giving that person the responsibility of making financial decisions on your behalf. You may choose language that provides very broad or narrow powers. For instance, the document can be drafted to allow your attorney-in-fact to act on your behalf only if you are incapacitated (springing power) or it can allow your attorney-in-fact to act on your behalf at any time (general power). Your attorney or financial advisor can advise you which document will be best for you.
2. Revocable living trust. With this strategy, you set up a trust that is revocable (you can terminate it anytime) and transfer title to your assets to the trust. Typically you will be your own trustee, but will also name a successor trustee should you become incapacitated or die. This allows you, not the courts, to control who will continue to manage your financial affairs should you be unable to do so. The revocable living trust also protects your privacy whereas court proceedings may not. However, because of the cost and complexity of this trust, I only recommend it in special situations. For example, I had a client whose relatives threatened to have her declared incompetent and themselves declared trustee for her money as well as her legal guardian. As a safeguard, we used the revocable living trust to make certain that, regardless of the outcome, my client could decide who took control.
3. Healthcare proxy. Similar to the durable power of attorney, the healthcare proxy allows you to appoint the person who will be responsible for making healthcare decisions for you should you be unable to do so.
4. Advanced healthcare directive. With this document, you indicate the level of life-prolonging procedures, pain treatment, etc. that you wish should you be terminally ill and unable to communicate your desires. In Alabama, our legislature has drafted a document that combines the healthcare proxy and advanced healthcare directive. You can receive a copy by visiting the Resource Center at www.welchgroup.com; click on ‘Links’; then click on “Living Will- State by State” .

As you read this column, I urge you to look beyond your own situation and send a copy of this column to friends and family members who may benefit from this advice.