Here’s an important question to consider: When was the last time you had an estate planning attorney perform a full review of your long-term plans for your financial affairs, your family, and your legacy?
For that matter, have you ever sought out such a review? Have you taken the necessary steps to keep your estate out of probate when you pass on?
Many individuals believe their estates are protected against probate. But thanks to changes in your finances over time – and perhaps misconceptions you hold about the probate process and what triggers it – that protection can erode or disappear entirely. In fact, many people are blissfully unaware just how vulnerable their estates are to probate.
This lack of awareness can have serious consequences for the next generation and any charities and causes you support. If you fail to identify these issues, your family may discover them at the worst possible time.
So, what can you do to stay current and complete? The answer is simple: conduct periodic strategic reviews of your estate plan to ensure that it’s probate proof and otherwise up to date.
Technically speaking, probate is not a bad thing. The process is simply the government’s way of making sure your property is distributed in the right directions when you pass away. This process includes proving the validity of your will (if you left one), evaluating your property, paying off your taxes and debts, and disbursing whatever is left to your heirs.
Most people understand that if someone dies without a will (or “intestate,” in legal circles), that person’s belongings will go through probate. Perhaps fewer people realize that creating a will in itself does not protect their property from probate. The process can move more smoothly when you have left a will stating your intentions for your belongings, but any part of your estate that is titled solely in your name at the point of your death is subject to probate, regardless of the existence of a will.
The good news is that probate is quite easily avoidable, and there are a number of effective planning tools that can help you. Since probate only applies to assets listed solely in your name, the primary goal of your estate-planning strategy might simply be to make sure you’re not the sole owner of those assets when you pass away.
The safest way to create a probate-proof estate plan is to work with an estate planning attorney to devise a customized solution. Then update that plan regularly to reflect any changes that occur in the future.
For now, let’s look briefly at two general strategies for probate-proofing your estate, and the pros and cons of each.
This strategy involves going through all your assets one by one and structuring them so that they are either joint-owned with one or more of your heirs or transferred immediately upon your death. For example, for any real estate holdings, you might add one or more beneficiaries as a joint owner, or insert a Transfer on Death (TOD) clause that immediately transfers ownership to the other party when you pass away. You can also establish joint ownership on bank accounts, or insert a Payable on Death (POD) provision; and for insurance policies and certain other assets, designating a beneficiary may be sufficient to protect them from probate.
PROS and CONS: For simpler or smaller estates, the piecemeal approach can be an effective and affordable strategy to bypass probate, at least for your largest and most important assets. On the other hand, this approach requires constant, vigilant updating, and in many cases these updates can be overlooked.
To illustrate, let’s assume you have an estate valued at $400,000, which includes a home worth $200,000, a life insurance policy for $100,000 and $100,000 in savings. You decide to divide your estate equally among your four children, so you list two children as transfer on death recipients on the deed to the house and one child as the sole beneficiary on the insurance policy; and you create joint ownership on your savings account for the fourth child.
A few years pass, during which time you sell the house and reinvest the proceeds into some stocks listed in your own name. You also cancel the life insurance policy due to rising premiums, but you haven’t yet opened a new one. If you pass away suddenly under these circumstances without updating your estate plan, what happens? The child on the life insurance policy now has no inheritance; neither do the two children who were going to inherit the house, because you sold the house and forgot to create a TOD for them on the stocks you purchased. The only child with a secure inheritance is the one co-listed with you on the savings account. The stocks go into probate, where the other three children might eventually get a cut of them once the fees, debts and taxes are paid.
A more thorough and highly effective strategy to protect against probate is to create a revocable trust that encompasses all your holdings. A trust is a legal structure in which your property is held on behalf of your beneficiaries, to be managed and appropriated by an appointed trustee. In a living trust, you can name yourself the trustee until you pass away or become unable to manage the trust, at which point an appointed successor takes over. Under this arrangement, you have the same access to your property as you did before, with the exception that it is no longer exclusively in your name and is therefore exempt from probate. When you pass away, the holdings in the trust pass to your beneficiaries per your instructions with no interruption or interference from the probate courts.
PROS AND CONS: This arrangement requires some time, effort and cost to initiate and fully fund so that it covers all your property, but once established, it is easily adaptable to changes in your family and financial situation, and equally easy to keep updated. A trust can also handle almost any asset and easily accommodate advanced tax planning, unlike the piecemeal approach. This approach provides greater asset protection in the case of disputes, and you can even continue to grow your wealth on behalf of your beneficiaries after you die. Perhaps most importantly, a trust that is properly constructed and managed is your best protection against probate.
The advantage of hiring a skilled estate planning attorney to help with your estate plan is that an attorney has a holistic understanding of estate and tax laws. We can thus advise you on the most appropriate strategies and structures to preserve and grow your wealth. If you haven’t reviewed your estate plan in a while, now is the best time to make sure your estate is probate proof. Call our offices today for an appointment; we’re happy to help you!