Probate is the judicial process for transferring property from
your name to the names of your heirs at the time of your death.
The process is burdensom, to put it midly, and so one of the most
frequent questions we hear is, “How do I avoid probate?”
It makes sense; most people want to keep their personal and
financial affairs private, save every dollar they can, and get
legal matters settled as quickly as possible. In other words, most
people want to avoid probate.
There are a few ways to avoid probate. The simplest is
establishing a revocable living trust. An RLT, though, does not
responsibly provide for beneficiaries, minimize taxes or provide
asset protection. For these reasons, those with significant assets
are advised to form an irrevocable trust.
There are other methods for avoiding probate, but each provides an
incomplete solution to a much larger problem. Such methods are not
guaranteed to avoid ancillary probate either. For example, real
estate and certain personal property that’s located out-of-state
may need to go through the probate process in the state where it’s
located before it can be passed on.
What if you own property in one or more other states when you pass
away? Without planning, your out-of-state property may be subject
to a process known as Ancillary Probate. Under Ancillary Probate,
property that’s located out-of-state may need to go through the
probate process in the state where it’s located before it can be
passed on. This presents two potential complications for your
loved ones at the time of your death.
Time and Expense
One or more additional probate processes means additional court
costs and attorney’s fees, not to mention the amount of time that
your out-of-state property may be tied up and inaccessible by your
family members. Plus, your loved ones might need to travel back
and forth to facilitate the Ancillary Probate process, which will
likely only add to the expense and stress already associated with
settling a probate estate.
Multiple Sets of Heirs
If you pass away without a Will, then you’ll have what’s called an
“intestate estate.” This means that the laws of each state where
you have probate property will determine who inherits that
property. And intestacy laws can vary from state to state. The
result? You could end up with different sets of heirs for
different items of property, depending on where that property is
Methods for avoiding probate
Method: Jointly owned assets have a
survivorship feature, meaning that upon the death of the first
joint owner to die, the asset transfers automatically, by
operation of law, to the surviving owner. In other words, jointly
owned assets avoid probate, but only on the first death.
Downside: This method does not help the
surviving spouse. It merely kicks the can down the road.
Method: Gifting assets during your lifetime
avoids probate. If you don’t own it, it’s not in your estate.
Downside: Gifting assets also means losing
control of them and placing them at risk in case the beneficiary
has their own credit event. This amounts to giving your assets
away, hoping the beneficiary does the right thing and that no
unexpected events occur.
Method: Life insurance and retirement assets
avoid probate if you have a designated beneficiary. This means
that you name an individual as your beneficiary, not your estate.
Life insurance and retirement assets are ruled by contract law.
Downside: Unlike a trust, if you change your
mind, then you must change every account a beneficiary is or is
not on. A trust allows you to change one document, instead of
Method: Any assets that you own with a
transfer on death (TOD) or payment on death (POD) designation also
avoid probate. They transfer by contract to the named beneficiary.
Downside: You must change the title on every
asset whenever you change your mind. We once had a client who
forgot certain assets, and the result was a previous wife
receiving assets which were not intended for her.