A last will and testament (“Will”) has no meaning until a person dies, and merely directs how assets should be distributed at death. There is a court procedure that oversees the distribution of assets under a Will, to ensure the deceased’s wishes are followed. Not all property goes through a probate process — a probate estate consists of assets owned by the deceased individual in individual, personal name at death, without a beneficiary designation. These assets are subject to the legal (and public) process of a probate, which is a state specific court procedure that oversees the orderly distribution of assets in accordance with a decedent’s wishes. The person entrusted with managing and distributing assets as directed under the Will is the “executor.” Each state’s laws concerning probate are different but there are some similarities. A court supervises the distribution of an individual’s estate, either by following the terms of a validly executed Will or through a legal process for when a person dies without leaving a Will or a trust (known as “intestate”). A probate often is not quick process, as there are court-mandated steps and, depending on the complexity of the estate, it can take up to a year or more.
Because beneficiaries need to wait to receive assets under an estate, and given the court involvement in a probate, it is easy to understand why many folks want to avoid unnecessarily entangling assets in a probate. Fortunately, there are steps you can take to avoid probate and streamline the inheritance process. (Note: even if an estate plan uses a trust to avoid probate, we always recommend a Will be signed in order to deal with a potential “stray” asset, meaning one that accidentally remains titled in individual name without a beneficiary designation).
Avoiding probate requires assets to be titled in such a that the property has a clearly defined legal method of immediate transfer at death. One technique some individuals have employed to avoid probate is to simply “give away” property during life, by perhaps transferring it to family members. However, gifting property during life requires the donor to consider various issues including a future need for Medicaid assistance to pay for long-term care, potential capital gains for the persons receiving lifetime gifts if they later sell the property, and possible gift tax consequences depending on the value. While not owning an asset when you die avoid probate, it can open up many more problems, including exposing the asset to the creditors of the person who receives the property. Lifetime giving should be undertaken carefully and only after assessing all of the pros and cons.
How property is owned is another way to help avoid probate. Holding accounts and real estate with another person (such as a spouse) as joint tenants with rights of survivorship ensures the property will pass directly to the surviving owner. Again, there can be drawbacks, including exposure of the assets to litigation in the case of either party being sued or being involved in a divorce proceeding. It is important to verify how financial accounts are titled, and to know that merely naming someone as an authorized signatory on an account does not automatically make them a joint owner or avoid probate on death. There are also certain types of deeds, known as life estate deeds, which allow for you to use real estate during life and pass the property to remainder beneficial owners at death. While life estate deeds avoid probate as well, they should be undertaken carefully and only after assessing the implications of adding other persons’ names to property.
Beneficiary designations also ensure assets pass outside of a court probate process. Many folks recall designating beneficiaries on their life insurance policies or retirement accounts, but it is important to name not only primary beneficiaries but also contingent beneficiaries to ensure the asset avoids probate if the first person named is deceased. What is not so commonly known is that many institutions allow beneficiaries to be named on bank accounts non-retirement investment accounts (either called a “payable on death” or “POD” account, or a “transfer on death” or “TOD” account). Making sure your beneficiary designations are up to date, and reviewed over time as circumstances change, helps keep certain assets out of probate process by putting in place a legal path to transfer assets directly. Because beneficiary designations put assets directly in the hands of the person name, a trust may be a better option if the goal is to manage assets for loved ones longer term.
A revocable living trust is perhaps the most comprehensive and flexible way to avoid probate. Essentially, the trust is a legal entity created during life to hold ownership of assets. If you create a revocable trust, you are considered the the “grantor” or “trust maker”, the lifetime “beneficiary” who uses the trust assets and the “trustee” who legally owns and controls the trust property. A revocable trust generally would benefit you while living, and direct the distribution of assets after your death. Under a trust, as opposed to outright beneficiary designations, the grantor can rule from the grave by naming a successor trustee to manage trust assets for minors, or persons with special needs, or perhaps loved ones who are spendthrifts. A trust also a private document that avoids the public process of a probate administration. The mistake many individuals make is creating the trust, but then failing to “fund” it by retitling their assets into the trust during life or failing to name the trust as a beneficiary if they want assets managed for another long term.
How you position your assets now will determine whether probate is needed, and how quickly and easily assets will transfer after death. Everyone’s situation is different and the legal complexities many.