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But I Have a Will – I Didn’t Think My Estate Would Require Probate?


Joint-ownership, proper titling and trusts help keep assets private

There is a common misconception that if you have executed a Last Will and Testament, probate will not be required to transfer your assets to your intended beneficiaries upon your death.  Unfortunately, this is not the case.   In fact, a Last Will and Testament requires that the probate of your estate occurs upon your death in order for that to happen.

A Last Will and Testament is the document that in general terms dictates:

  1. Who you want to handle the probate on your behalf. i.e.: Who is your executor or personal representative?;
  2. Who you want to receive your assets. i.e.: Who are your beneficiaries?; and
  3. Who is designated as guardian for your minor children i.e.: Who will raise your children if they do not have a surviving parent?

Although probate is the default way of retitling assets and making sure your creditors get paid after your death (even if you don’t have a Last Will and Testament), there is often a better way to get this same result.  The downsides of probate include that it is public, the process generally takes at least nine months to a year to be completed (IF it is not contested and there are no extraordinary issues), and it is costly.  Potentially even worse, beneficiaries often get their distribution outright and immediately upon the close of the probate.   As we all know, there are many times this is not the best outcome for heirs or beneficiaries, especially if the person is a minor, immature, not a good money manager, has special needs or would benefit from creditor protection.

If you would like to avoid the probate process, there are three main methods that can be used to pass assets to beneficiaries after you die:

1. Owning Assets Jointly with a Right of Survivorship:

The first way to accomplish transferring an asset outside of probate is by owning an asset jointly with another person with a right of survivorship.  By doing this, the ownership of the entire asset will pass directly to the surviving owner.  In other words, the asset goes to “the last person standing.”  This can work well when the first owner dies, but the surviving owner will need to make sure that they have a plan in place after their own death or else we are back to the drawing board and a probate will take place.   Also, if one of the owners becomes incapacitated, it may make it difficult for the spouse or other owner to manage the asset, especially when it comes to the sale of real estate.  The surviving owner will also have full discretion about who will ultimately get this asset, so this is something to keep in mind when choosing this option.  Joint ownership also raises a risk of creditor issues.  Some clients add children as joint owners for probate avoidance purposes.  If a child is pursued by a creditor, the creditor might end up with part of the asset.  A creditor could include an ex-spouse, a plaintiff in a lawsuit, the IRS and a bankruptcy trustee.  Examples of assets where you could utilize this option would be: bank accounts, investment accounts, vehicles and real estate.

2. Adding a Person or Charity as a Beneficiary of an Asset:

Assets that have a person or charity listed as a beneficiary will also avoid the probate process.  These assets will be paid out directly to the listed beneficiary immediately and outright.  There are several downsides of relying on this option:

  1. Listing minors will ultimately create issues because it will require a conservator be named until they reach the age of majority,
  2. If one of your named beneficiaries predeceases you, the deceased beneficiary’s interest may or may not pass to the deceased beneficiary’s heirs depending on how the beneficiary designation was completed.  This could result in unintentionally disinheriting grandchildren from a particular asset or going back to the “drawing board” with the asset going through probate where the court will determine who should receive the asset; and
  3. If you don’t update the beneficiaries on these assets when there is a death, marriage, divorce, etc., these assets may not go where you want them to and could potentially create litigation or conflict after your death.

Examples of assets that may list a beneficiary who shall receive the asset directly upon your death:  IRAs, 401ks, investment accounts, “payable on death” designations on bank accounts, and “transfer on death” designations on titles for vehicles and deeds for real estate.   Please note that some states do not allow transfer on death deeds for real estate, so in those states it is not a viable option to pass real estate on to beneficiaries and this will have be done in another way, such as through a Revocable Living Trust.

3. Creating a Revocable Living Trust:

Another popular way of passing assets upon death (outside of the probate process) is through the creation of a Revocable Living Trust.   When explaining this concept to clients, I always tell them to visualize a bucket that will hold their assets.  The creator of the trust is the Grantor of the Trust.  This means the client is the “owner” of the Trust and the only one who can amend or revoke it.  The Grantor of the Trust is almost always the Trustee of the Trust, as well.  This means that person is not only the “owner” of the trust, but also the Trustee or “manager” of the trust assets, as well.  Therefore, a person creating a Revocable Living Trust still owns and controls all the assets in the Trust just as they did before creating the Trust.  They are merely changing how title to the Trust assets is held.  While the Grantor of the Trust is living, all Trust assets continue to use the Grantor’s social security number as the Tax ID and any tax implications pass through to that person’s individual tax return.  Once the Grantor dies, the Trust gets a new Tax ID and continues to “live on” beyond the life of the Grantor.

There are a number of benefits to creating a Revocable Living Trust, including:

  1. Eliminating the need for probate (so long as all the assets have the trust listed as the owner or beneficiary of the person’s assets);
  2. Allowing a Successor Trustee to be named who can step in and manage the assets upon the death of the Grantor, but also at the Grantor’s incapacity, without court involvement;
  3. The ability to include provisions that can reduce or eliminate state and federal estate tax for beneficiaries;
  4. Provisions that create trust shares for beneficiaries which will hold the beneficiary’s inherited share in trust until the Grantor thinks they should receive it.  For instance, there could be a provision that says the principal and income in a beneficiary’s trust share can be used for his/her health, education, maintenance and support, but the remainder of the funds cannot be distributed out to the beneficiary until the person reaches the age of 30;
  5. The ability to create a Special Needs Trust for a beneficiary with disabilities so that their eligibility for government benefits is protected, and
  6. Provisions that give creditor protection to beneficiaries while their inherited share is held in trust.

Every person and family have different needs when it comes to creating their own estate plan.  Some situations are simple and others are very complex.  Consulting with an estate planning attorney about your individual circumstances will help you evaluate what your particular needs are and implement a comprehensive plan that will ensure you and your family are taken care of in the event of your incapacity or death.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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