Estate Planning and Elder Law: Strategies for Avoiding Probate

Avoiding Probate

            When a person passes away, accessing his assets to distribute them to heirs may require the institution of a probate proceeding. Because these proceedings can be time-consuming, expensive and public, avoiding probate is a common goal of estate plans. In this presentation, we will discuss the reasons that avoiding probate may be desirable and discuss various ways in which to position assets so that they will not need to be probated after death.

Disadvantages of Probate

            There are three distinct disadvantages of a probate proceeding:

Time

            Probate proceedings take a lot of time. They start with consultations with attorneys and then require preparations of complicated probate forms and myriads of accompanying documents. They then require filings with probate courts and notices to be sent to potential heirs and named beneficiaries in the will. In many cases, court dates need to be set up to allow potential challenges to the will. It’s always many weeks and often several months (or years, in some extreme cases) before the administrator or executor can access the decedent’s money. Bills may have to be paid and beneficiaries can get restless while this is going on, while their inheritances, while seeming so close, become bogged down in red tape. Avoiding probate saves months of waiting and aggravation.

Expense

            Probate proceedings are expensive. There are probate court fees, attorneys’ fees and, when the final estate accounting must be completed, perhaps also accountants’ or appraisers’ fees. These will often run into the tens of thousands of dollars. For medium-sized estates that hold hundreds of thousands of dollars, 5, 10 or even 20% maybe eaten by probate expenses. Because many probate costs are fixed, smaller estates are hurt even worse, on a percentage basis.

Publicity

            Probate proceedings, like most other court proceedings, are matters of public record. This means that the probate petition, which lists the estate assets and beneficiaries, the accounting that describes everything in the estate and even the will itself go into a publicly accessible file. Anybody, including neighbors, family members, the press and total strangers can access these by walking into the probate court filing office and asking to see the file. Many clients are understandably uncomfortable with the idea of their family dynamics and asset levels being publicly accessible after their deaths.

Operation of Law

            So, that brings us to the question: How can probate be avoided? The central answer is that if assets are transferred during life or pass to their intended beneficiaries automatically by “operation of law” upon death, then those assets pass without need for a probate proceeding. So, to avoid probate, we can position assets so that they pass by operation of law upon death. Assets that pass by operation of law include:

1.    Proceeds of life insurance policies.

2.    Qualified retirement accounts with named beneficiaries.

3.    Assets in bank accounts with designated beneficiaries. These are often called “payable on death” accounts.

4.    Joint accounts. When one joint account holder dies, the other joint account holder is automatically vested with full ownership of the account.

5.    Real estate held as joint tenants with rights of survivorship or tenants by the entirety. In such cases, when one joint owner dies, the other is vested with full ownership. Note, however, that this does not happen when assets are held as tenants-in-common (which is the most common form of dual ownership).

Naming beneficiaries on bank accounts and holding real estate as joint tenants are excellent ways to avoid probate when the client has simple distribution plans and knows precisely to whom she’d like to give certain assets. If the client, for example, wants his daughter, Jane, to receive $100,000 upon death, putting her name on the account holding the money as a payable on death beneficiary or as a joint account holder is a simple way to avoid probate. Since spouses very often hold all their accounts jointly and hold real estate as tenants by the entirety (which is a form of souped-up joint tenancy available only to spouses) and because individual retirement accounts typically have named beneficiaries, it’s common for a decedent survived by a spouse to not need a probate proceeding.

Trusts

            Sometimes it’s not practical to hold assets in a device that automatically avoids probate. Perhaps the beneficiary list is uncertain or contingent or perhaps there are too many beneficiaries to put all their names on joint accounts. Or, perhaps, the client wants her estate to be distributed unevenly amongst several beneficiaries.

            Probate can still be avoided in this scenario with the use of a living trust. A trust can instruct the distribution of assets upon the death of the grantor in virtually any manner the grantor dictates. In fact, a trust can establish distribution plans to the same extent that a will can. Therefore, establishing a trust that will put into effect the desired estate plan upon the grantor’s death and funding the trust with the grantor’s assets during lifetime is an excellent way to avoid probate.  On death, the trustee merely carries out the dictates of the trust. Because the assets are already in the trustee’s name, the trustee can access the accounts and assets without court intervention or approval.

            Trusts that avoid probate can be revocable or irrevocable. Using a revocable trust avoids probate while maintaining flexibility, though an irrevocable trust may be necessary to achieve other estate planning goals. The differences between these types of trusts are covered in more detail in our presentations on trusts.

            The key to a probate avoidance plan that involves trusts, however, is that the client’s assets must be retitled in the name of the trust. If the client establishes a trust but then fails to transfer real estate or bank or brokerage accounts, and he dies with property or accounts still in his sole name, then a probate proceeding will be necessary for an administrator to gain access to that property. This could nullify the entire strategy. It is therefore very important that probate avoidance strategies be comprehensive and leave no property or money titled in the sole name of the client.

Conclusion

            Probate avoidance is a key strategy in many estate plans. By using mechanisms that allow assets to pass by operation of law and by punctiliously ensuring that all assets are transferred to these devices, the hassle, expense and time-consuming nature of probate can be avoided.