The Right and Wrong ways to Avoid Probate

Probate is a system of laws and court procedures that exist in every state to assure a decedent’s assets pass to the intended heirs and the decedent’s bills are paid. In most cases, Probate can and should be avoided because it is expensive, time consuming and unnecessary.

While adopting a Last Will and Testament allows a person to specify their heirs, designate a Personal Representative in charge of estate administration and conduct most estate business without court order, a Will does not avoid probate. Under most circumstances, the probate process takes nine months or longer and requires the hiring of attorneys, accountants and appraisers. Professional fees typically range from 3% to 5% and any required probate court hearings may take months to schedule.

Probate can be avoided by both intentional and unintentional ways, some which are better than others.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

The joint owners of an asset can provide for the surviving owners to inherit without probate in two different ways. First, joint ownership by a husband and wife automatically transfers to the surviving spouse and is known as “tenants by the entirety” or “TBE”. Second, the same result occurs with joint ownership by two or more other persons that specifies “with right of survivorship”. Except for assets titled in the joint name of a husband and wife, ownership by other surviving owners will not be automatic unless “with right of survivorship” is specified. In that case, probate will be necessary. Following the death of a spouse and the automatic transfer of joint marital assets without probate, the surviving spouse often wants to create new joint “with right of survivorship” title with their children or other heirs. Two common pitfalls should be pointed out:

First, transfers of homestead property may result in a loss of all or part of the homestead tax exemption and other tax benefits, unless the surviving spouse retains a “life estate.” Second, future judgments or other claims against one of the new joint owners could jeopardize all or part of the asset that has been retitled.

“POD”, “ITF” AND OTHER BENEFICIARY DESIGNATIONS

The transfer of bank, credit union and brokerage firm accounts without probate following the death of the accountholder can be accomplished by having the accounts designated as “Payable on Death” (POD) or “In Trust For” (ITF). Different financial institutions offer different types of options. While these arrangements avoid the risk of joint ownership, they are not suitable for beneficiaries who may be minor children and must be kept updated in the event a designated beneficiary later dies. These arrangements also do not work for real estate and should not be used if the estate later needs funds for expenses and taxes from a beneficiary who may refuse to contribute their fair share.

Beneficiary designations also control and avoid probate on all types of life insurance, annuity contracts, retirement funds and individual retirement accounts. As discussed in previous articles, care must be taken and professional advice obtained when selecting beneficiary options and reviewing the possible tax issues that may exist.

INTER VIVOS OR “LIVING” TRUSTS

A properly drafted and funded trust agreement prepared during a person’s lifetime will avoid probate without the pitfalls described above. The owner retains complete control of the assets in the trust and has the right to amend the trust at any time. No additional tax returns or maintenance costs are necessary. An outside or successor trustee is not involved until the owner dies or becomes disabled.

The only criticism that can be made against living trusts is they involve more paperwork and effort than simply preparing a Will for the heirs to probate later. Such criticism comes mostly from probate lawyers and whose motives you can judge for yourself.

Spending the extra time, money and effort to adopt a living trust is especially important for the following persons:

1) Persons who are elderly or disabled and want to avoid the expense and complexity of guardianship proceedings;

2) Persons who own real estate outside Florida and want to avoid the delay and expense of probate in two or more states;

3) Persons who want to discourage litigation among family members and keep their financial affairs private;

4) Persons who own an active business that needs to continue operating without court interference or delay; and

5) Persons who want their heirs to save time and money.