PROBATE: WHAT IS IT & HOW TO AVOID IT - PART 2
Unless you’ve created an estate plan that works to keep your family out of court, when you die (or become incapacitated) many of your assets must go through probate before those assets can be distributed to your heirs. Like most court proceedings, probate can be time-consuming, costly, and open to the public, and because of this, avoiding probate—and keeping your family out of court—is often a central goal of estate planning.
To spare your loved one’s the time, cost, and stress inherent to probate, last week in part one of this series, I explained how the probate process works and what it would entail for your loved ones. Here in part two, I’ll discuss the major drawbacks of probate for your family, and outline the different ways you can help them avoid probate with wise planning.
What’s At Stake For Your Family Probate court proceedings can take months, and sometimes even years, to complete. In the immediate aftermath of your death, that’s the last thing you likely want your loved ones to have to endure. And the cost of their time and emotional strain are just the start of the potentially devastating consequences your family could face if you don’t plan ahead. Without easy and immediate access to your assets, your family could face serious financial hardship at a time when they need the most support. North Carolina allows for a one-year spousal allowance of $60,000 and a child allowance of $5,000 from the decendent's personal property. A higher spousal allowance can be petitioned with the clerk of court for up to one-half of the annual net income of the decendent, averaged from the preceding three years. Often, your loved ones will need to hire a lawyer, which can result in hefty attorney’s fees, especially if there is a dispute. All of that is on top of the 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 seriously depleted. North Carolina has capped "probate fees" at $6,000, but that doesn't include the other expenses, so a typical estimate is 3-10% of the value of the estate.
Another drawback of probate is the fact that it’s 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 someone can easily learn all about the contents of your estate, who your beneficiaries are, and exactly what they will inherit, setting your family 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. And even if those contests don’t succeed, such court fights will only increase the time, expense, and strife your family has to endure.
At my most recent mammography (go get yours, ladies!), the tech told me a sad story about how her husband and his six siblings used to get together once a week for Sunday dinner, but after their mother's death and a long drawn-out probate, they now only speak about court proceedings and bicker about sharing her assets. I do not want your family to end up in such a stressful, unfortunate situation!
How To Avoid Probate
Before we discuss the more advanced ways you can use estate planning to allow your loved ones to avoid probate, it’s important to point out that not all of your assets will have to go through the probate process—and that’s true even if you don’t have any 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.
The 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
Transfer-on-death (TOD) property, such as bonds, stocks, and vehicles.
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.
However, it’s 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, I 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, and they can 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. Although there are several different types of assets that automatically bypass probate, the majority of your assets will require slightly 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 basically a legal agreement between the “grantor” (the person who puts assets into the trust) and the “trustee” (the person who agrees to manage 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 die 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 when you die. 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, headache and hopefully conflict too.
The Key Benefits Of A Living Trust
Unlike a will, if your trust is properly set up and maintained, your loved ones won’t have to go to court to inherit your assets. Instead, your successor trustee can immediately transfer the assets held by the trust to your loved ones upon your death or in the event of your incapacity. And since you can include specific instructions in a trust’s terms for how and when the assets held by the trust 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 can 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’re protected from the beneficiaries’ creditors, lawsuits, and divorce—which is something else wills don’t 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 at a convenient appointment in the privacy of your attorney's office, not in a courtroom.
Transferring Assets Into A Living Trust
For a trust to function properly, it’s 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 in this way is known as “funding” a trust.
If any assets are not properly funded to the trust, the trust won’t work, and your family will have to go to court in order to take ownership of that property, even if you have a trust. In light of this, funding is critical to ensure your trust works as intended. If you choose to do the funding yourself, rather than have my firm do it for you, you will still receive a lot of support and follow-up regarding this important task. At the signing meeting you will receive a funding toolkit, with detailed instructions and pre-drafted letters for changing the title to your various assets. As your Personal Family Lawyer®, I will not only make sure all of your assets are properly titled when you initially create your trust, but I will also help 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 inadvertently forced into court because your plan was never fully 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.
Again, a revocable living trust does not protect your assets from creditors or lawsuits, and it has no impact on your income taxes. However, as mentioned earlier, as long as the assets are held by a living trust or a Lifetime Asset Protection Trust, those assets can be protected from your beneficiaries’ creditors, lawsuits, and even divorce settlements. Be sure to ask me about the different trust-based estate planning options to find one that’s best suited for your particular situation.
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. This is why I will not create any documents until I know what you actually need and what will be the most affordable solution for you and your family—both now and in the future—based on your family dynamics, assets, and desires.
The best way for you to determine which estate planning strategies are best suited for your situation is to schedule a Life & Legacy Planning Session, which is the first step in the Life & Legacy Planning Process. During this meeting, I’ll take you through an analysis of your assets, what’s most important to you, and what will happen to your loved ones when you die or if you become incapacitated. I see estate planning as far more than simply planning for your death and passing on your “estate” and assets to your loved ones—it’s about planning for a life you love and a legacy worth leaving by the choices you make today. Contact me today to get started.
This article is a service of Jeni Snider, Personal Family Lawyer®. I do not just draft documents; I ensure you make informed and empowered decisions about life and death for you and the people you love. That's why I offer a Life & Legacy 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.