How to Avoid ProbateBy Natalie Page, Esq
Making It Easier for Loved Ones Requires Planning
You have probably heard about the “horrors” of probate and why it should be avoided at all costs. You might wonder what probate is, and what makes it so onerous. As an elder law attorney, I hope to provide you with some insights that might help better your understanding.
Generally speaking, probate is the legal process of distributing the assets included in a deceased person’s probate estate. While it may not be as horrible as you’ve been led to believe, it is important both to understand the process and to have a strategic plan in place that will make the process of transferring your assets as efficient as possible.
The Probate Process
The first step in the probate process is for the executor or, if you do not have a Will, the administrator of your estate to be sworn in by the court clerk and receive the Certificate of Qualification. For the purposes of this article, we will refer to both the executor and the administrator as the executor. The Certificate of Qualification allows the executor to gather up the assets of the estate, pay your last bills, and distribute your assets to your beneficiaries. During this process your executor is required to report to the court and will have to file inventory of your assets and accounting that show every penny that comes into the estate and every penny flows out of it. While this might seem like a simple procedure, it can be complicated.
Many people wish to avoid the probate process for three reasons:
- Probate is public.
Anyone can see your will, the inventory of your assets and where all your assets went.
- Probate is costly.
Your estate will have to pay probate tax and the fees associated with the various reports required by the court.
- Probate can be a slow process.
Finalizing an estate, especially a contested estate, can take years.
It’s clear: While you will do everyone (especially your executor and beneficiaries) a big favor by taking steps to avoiding probate, probate avoidance techniques can have unintended consequences and need to be carefully considered in the context of your overall estate plan.
Understand the Risks of Avoiding Probate
The key to understanding the techniques used to avoid probate is that the only assets subject to probate (your “probate estate”) are those no one can access after your death. Once you understand this, you can explore ways to pass assets outright to individuals so they don’t become part of your probate estate. You might consider having beneficiary designations, transferrable or “payable upon death” designations, and/or holding assets as joint tenants with right of survivorship. All of these designations allow your beneficiaries to take the assets outright upon your death immediately.
“Joint tenants with right of survivorship” or, for the purposes of this article “joint tenants,” means that the survivor of the joint tenants takes the account or property outright in their sole name. This is desirable when everyone involved agrees that each is an equal owner of the asset and/or the entire asset should be passed immediately upon death to the survivor. There are risks involved in this approach.
People often add another person as a joint tenant in bank, brokerage or other accounts so that they can help pay bills in the event of incapacity while living and/or have access to the account after death to pay final bills, particularly funeral expenses. Understand that each joint tenant has an immediate ownership interest in the joint asset and can legally use those assets for their own benefit. Those assets are also vulnerable to the creditors of each joint tenant. Furthermore, a surviving joint tenant legally owns the entire account and has no legal obligation to share the proceeds of the account with anyone, regardless of the deceased joint tenant’s wishes. Finally, any distributions the surviving joint tenant makes from the account will be taxable gifts.
In the case of real estate, “adding” a person to a deed as a joint tenant is an immediate gift of a share of the real estate. As an owner of the real estate, the joint tenant is entitled to a share of the proceeds of the sale of the property, can force the sale of the property, can block any sale of the property, and their creditors could place a lien on the property.
A Transfer on Death Deed can be used to pass real estate to one or more people immediately upon your death. Such a deed does not grant any present right to the real property and is fully revocable. A Transfer on Death Deed is a good tool to avoid probate but may still have unintended consequences in the context of your entire estate plan.
The best way for many people to avoid the unintended consequences of probate avoidance techniques is to use a trust that is established and funded during your lifetime. The assets held by the trust are not part of the probate estate because the trustee can manage them immediately upon the presentation of the death certificate. The trustee does not have an ownership interest in the trust assets and is obligated to use those assets to finalize your affairs and manage or distribute the remaining assets of the trust in accordance with the directions you have included in the trust.
A trust is not recorded in the court, is not a public document and is not subject to court oversight. A trust also allows the trustee to manage assets for you during your lifetime if you become incapacitated. However, the terms of the trust must be carefully thought out to ensure that your goals are met.
Hopefully this article helps explain that while it is desirable to avoid the probate process, trying to do so without a coherent plan is likely to create more problems than it solves. In another upcoming article for The Good Life, I will explain trusts.
Natalie T. Page is an elder law attorney of the Life & Estate Planning Law Center, PLLC in Alexandria, Virginia. This article is intended only to provide general information, not formal legal advice and does not establish an attorney-client relationship. You can learn more about estate planning, estates, trusts, and Elder Law at www.LifeandEstatePlanningLaw.com. If you have questions, please contact Natalie through the website or by telephone at (703) 820-3600.