Updated: Apr 5
Last week, in part one of this series, we explained how the probate process works and what it would entail for your loved ones. Here in part two, we will discuss the major drawbacks of probate for your family and outline the different ways you can help them avoid probate with wise planning.
What is At Stake for Your Family Probate court proceedings can take months, and sometimes even years to complete. In the immediate aftermath of a loved one’s death, that is the last thing you want the family to have to endure.
Easy and immediate access to your assets could help your family avoid facing serious financial hardship at a time when they need the most support. It can also provide them with the means to navigate any necessary legal proceedings. Other expenses besides attorney fees that could add up are court costs, executor’s compensation, and all of the various other administrative expenses related to probate. By the time all of those costs have been paid, your estate could be completely exhausted or seriously depleted.
Another drawback of probate is the fact that it is a public process. Whether you have a will or not, all of the proceedings that take place during probate become part of the public record. This means that anyone who is interested can learn about the contents of your estate, who your beneficiaries are, and what they will inherit, which can set them up as potential targets for scammers and frauds.
Probate also has the potential to create conflict among your loved ones. This is particularly true if you have disinherited someone or plan to leave significantly more money to one relative than the others, in which case, a family member may contest your will. If those contests are unsuccessful, such court fights will only increase the time, expense, and strife your family has to endure.
How To Avoid Probate
Before we discuss the more advanced ways to use estate planning to avoid probate, it is important to point out that not all of your assets will have to go through the probate process—and that is true even if you do not have an estate plan at all. Assets That Do Not Require Probate: Certain assets, such as those with beneficiary designations like 401(k)s, IRAs, and the proceeds from life insurance policies, will pass directly to the individuals or organizations you designated as your beneficiary, without the need for any additional planning.
Following are some of the most common assets that use beneficiary designations and therefore, bypass probate:
Retirement accounts, IRAs, 401(k)s, and pensions
Life insurance or annuity proceeds
Payable-on-death (POD) bank accounts(where you have named a beneficiary)
Transfer-on-death (TOD) property, such as bonds, stocks, vehicles, and real estate (where you have named a beneficiary)
Outside of assets with beneficiary designations, other assets that do not go through probate include assets with a right of survivorship, such as property held in joint tenancy, tenancy by the entirety, and community property with the right of survivorship. These assets automatically pass to the surviving co-owner(s) when you die, without the need for probate.
It is critical to note here that if you name your “estate” as the beneficiary of any of these assets, those assets will go through probate before being distributed. The same goes if you overlook a beneficiary designation, or if you die at the same time as a joint property owner—each of those assets will also go through probate, even though they have beneficiary designations. In addition, we generally recommend that you do not rely solely on beneficiary designations to handle the distribution of your assets. These designations give you little to no control over how your assets are distributed. They can also result in negative outcomes you did not intend, especially if you have a blended family with children from a prior marriage or if you have no children at all. While there are several different types of assets that automatically bypass probate, the majority of your assets will require more advanced levels of planning to ensure your loved ones can immediately access them, without the need for any court proceedings in the event something happens to you. The primary estate planning tool for this purpose are trusts.
Avoiding Probate with a Revocable Living Trust Trusts are a popular estate planning tool for avoiding probate. Although there are a variety of different types of trust, the most commonly used trust for probate avoidance is a revocable living trust, also called a “living trust.”
A trust is a legal agreement between the “grantor” (the person who puts assets into the trust) and the “trustee” (the person who manages those assets) to hold title to assets for the benefit of the “beneficiary.” With a revocable living trust, this agreement is typically made between you as the grantor and you as the trustee for the benefit of you as the beneficiary. You act as your own trustee during your lifetime, and then you name someone as a “successor trustee” to take over management of the trust when you pass away or in the event of your incapacity.
It might seem odd to make an agreement with yourself to hold title to assets for yourself in order to benefit yourself. Yet by doing so, you remove those assets from the court’s jurisdiction in the event of your incapacity or passing. Instead, those assets transfer to your successor trustee without any court intervention required. At that point, your successor trustee is responsible for managing the trust assets and eventually distributing them to your beneficiaries, according to the terms you spell out in the trust agreement. This is how a trust avoids probate, saving your family significant time, money, and headache.
The Key Benefits of a Living Trust
Unlike a will, if your trust is properly set up and maintained, your loved ones will not have to go to court to inherit your assets. Instead, upon your death or incapacity, your successor trustee can immediately step in on your behalf and carry out your wishes for the assets held by the trust. Since you can include specific instructions in a trust’s terms for how and when the assets are distributed to a beneficiary, a trust can offer greater control over how your assets are distributed compared to a will.
For example, you could stipulate that the assets only be distributed upon certain life events, such as the completion of college or marriage, or when the beneficiary reaches a certain age. In this way, you can help prevent your beneficiaries from blowing through their inheritance and offer incentives for them to demonstrate responsible behavior. And as long as the assets are held in trust, they remain protected from the beneficiaries’ creditors, lawsuits, and divorce—which is something else wills do not provide.
Finally, trusts remain private and are not part of the public record. So with a properly funded trust, the entire process of transferring ownership of your assets can happen in the privacy of your lawyer’s office, not a courtroom, and on your family’s time.
Transferring Assets into a Living Trust
For a trust to function properly, it is not enough to simply list the assets you want the trust to cover. When you create your trust, you must also transfer the legal title of any assets you want to be held by the trust from your name into the name of the trust. Retitling assets is known as “funding” a trust. Funding your trust properly is extremely important, because if any assets are not properly funded to the trust, the trust may not work as planned.
While many lawyers will create a trust for you, few will ensure your assets are properly inventoried and funded into your trust, and then ensure the inventory of your assets is kept up-to-date as your life and assets change over time. As your Life & Legacy Attorney, we will not only make sure all of your assets are properly titled when you initially create your trust, but we will also ensure that any new assets you acquire over the course of your life are inventoried and properly funded to your trust. This will keep your assets from being lost, as well as prevent your family from being forced into court because your plan was never completed.
Living Trusts, Taxes, Creditors, & Lawsuits
When you create a revocable living trust, you are free to change the trust’s terms or even completely terminate the trust at any point during your lifetime. Because you retain control over the assets held by a living trust during your lifetime, those assets are still considered part of your estate for estate tax purposes. Similarly, assets held in a living trust are not protected from your creditors or lawsuits during your lifetime. This is an important and often misunderstood point.
The primary benefit of a living trust is to pass your assets to your loved ones without any need for court or government intervention, and to ensure your assets pass in the way you want to the people you want.
Life & Legacy Planning: Do Right by Those You Love Most Although a living trust can be an ideal way to pass your wealth and assets to your loved ones, each family’s circumstances are different. The best way for you to determine which estate planning strategies are best suited for your situation is to meet with us for a Family
Wealth Planning Session, which is the first step in our Life & Legacy Planning Process. During this process, we will take you through an analysis of your assets, discuss what is most important to you, and discuss what will happen to your loved ones when you are no longer able to be there with them.
Sitting down with us will empower you to feel 100% confident that you have the right combination of estate planning solutions to fit with your unique asset profile, family dynamics, and budget. We see estate planning as far more than simply planning for your death and passing on your “estate” and assets to your loved ones—it is about planning for a life you love and a legacy worth leaving by the choices you make now. Contact us today to get started: Book a consultation
This article is a service of Reflections Life Planning LLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.