Probate Avoidance

by Michael P. Cannady

Many people have the mistaken impression that if they have a properly-prepared Will, they will avoid probate. That is not true. A Will basically means nothing until it is admitted to probate. While the probate process is not nearly as bad as what you might have heard, it can be costly and take a significant amount of time to complete. There are, however, a number of ways you can avoid probate, and this article will briefly discuss the most common methods which are used.

Joint Tenancy

Joint tenancy is accomplished by adding one or more persons’ names to an item of titled property which you own. It needs to be set out clearly that the property is held by the persons as joint tenants with rights of survivorship, and not as tenants in common.  

When one joint tenant dies, the remaining joint tenant automatically becomes the owner of the property. Joint tenancy does, therefore, work effectively to pass property upon death, and does avoid probate. There are, however, at least a couple of drawbacks to joint tenancy.

First, the person or persons whom you add as joint tenants become actual owners of the property. This means that a creditor of any one of the joint tenants can attach a joint tenant’s interest in the property. In addition, in relation to real estate, since each joint tenant is an owner of the property, all of the joint tenants, and all of their spouses must sign a deed in order to transfer Joint Tenancy real estate.

Second, probate avoidance occurs only when there is still at least one joint tenant surviving. For example, if a husband and wife own property in joint tenancy, when the first spouse dies, the surviving spouse automatically becomes the sole owner of the property and no probate is needed. When the surviving spouse dies, however, or if both spouses die at the same time, probate would be necessary to transfer the property on to their children.

POD/TOD/Beneficiary Designation

Traditionally, insurance proceeds and individual retirement accounts have been paid out to a named beneficiary. Fairly recently, statutes have been passed which allow beneficiary designations on a number of additional types of property. Now bank accounts (including CDs), securities, motor vehicles, and even real estate can be transferred to named beneficiaries. The beneficiaries are named on forms referred to as Pay on Death (POD) or Transfer on Death (TOD). Following the death of the owner, all that is needed to transfer the property is a death certificate and in some cases some kind of a claim form. No probate is necessary to complete the transfer.

One drawback to estate planning with beneficiary designation forms is that they are fairly inflexible. They work pretty well as long as you want everything to go to specific persons in specific shares. But be careful as to what will happen if one of the named beneficiaries predeceases you, or if one of them is a minor or otherwise incapacitated. Different forms provide for different results, and in some cases, the prior death of a named beneficiary will result in a lapse of the gift.

One significant advantage of beneficiary designation over joint tenancy is that beneficiaries do not become part owners of the property until the owner’s death occurs.

Living Trusts

With a Living Trust you can avoid probate and, at the same time, have a great deal of flexibility in estate tax planning and dealing with beneficiaries who die, are incompetent or are too young or immature to properly manage money. Any property which is held by the Trustee of a properly-drafted Trust will avoid probate. The Trustee of the Trust can be you or you and your spouse. Therefore, while you are living, you have total control over your assets and you pay no trustee’s fees. Furthermore, upon your death, you can name anyone you wish as the successor Trustee. That person simply distributes your property just as your executor would if you had a Will. Your successor Trustee, however, can make those distributions with little delay and without going through the probate process.

There are also other advantages of having a Living Trust. One would be the ability of the successor Trustee to manage your assets for you while you are living (in case you become incompetent). Another is that, upon your death, the administration of your Trust remains private, as opposed to the administration of an estate, which is done through the probate process and becomes public record.

There are a couple of misconceptions relating to Living Trusts which should be corrected. As long as you are living and competent, you do not give up any control over your assets. You can continue to buy and sell assets just as you did before setting up your Trust. Also, while you are living, no special tax returns have to be filed. The income earned by assets in the Trust is reported on your personal tax return, and generally your social security number is the tax ID number for the Trust.

(Article Appeared in Adams Jones July 2010 Newsletter)