IS YOUR ESTATE PLAN PROBATE-PROOF?

Why Proactive Estate Planning with Your Attorney Is the Smartest Way to Probate-Proof your estate

Here’s an important question: When was the last time you had an estate planning attorney thoroughly review your long-term plans for your financial affairs, family, and legacy? If not, it is unlikely that your estate is probate-proof.

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?

Many people are blissfully unaware of how vulnerable their estates are to probate. Many individuals believe they have protected their estates against probate. But thanks to changes in your finances – and perhaps misconceptions you hold about the probate process and what triggers it – that protection can erode or disappear entirely.

This lack of awareness can severely affect your spouse, 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 it’s probate-proof and otherwise up to date.

Understanding the probate process

Technically speaking, probate is not a bad thing. The process is simply the government’s way of ensuring your property is distributed in the right direction 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 remains 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 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 titled solely in your name at the point of your death is subject to probate, regardless of the existence of a will.

Why probate is generally something to avoid

• Probate can be costly. The cost of probate can be anywhere from 5 percent to 15 percent of the estate’s total value, varying in cost from state to state. The administrator deducts these costs from the estate, which means your beneficiaries will never see that money. 

• Probate can be time-consuming. Your heirs won’t receive their inheritance until probate is complete. Even for a modest-size estate, probate can last six months to a year, providing no complications. Some places have “independent” or “summary” administration rules that speed probate up, but they still cost money and are a public process.

• Probate is public. One of the most significant drawbacks to probate is that it makes private matters public. When your estate goes through probate, your financial information, identities of your heirs, and other personal information become a matter of public record. They can be accessible to anyone who wants to look it up, possibly even online, depending on the court system of your probated estate.

Strategies for probate-proofing your estate

The good news is that probate is quite easily avoidable, and several practical planning tools can help you. Since probate only applies to assets listed solely in your name, your estate-planning strategy’s primary goal might be to ensure 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.

Let’s look briefly at two general strategies for probate-proofing your estate and the pros and cons of each.

Strategy 1: The “Piecemeal” Approach

Designating a beneficiary may be sufficient to protect them from probate for insurance policies and certain other assets. 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 death. For example, for any real estate holdings, you might add one or more beneficiaries as joint owners 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.

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 most significant and essential assets. On the other hand, this approach requires constant, vigilant updating; in many cases, one can overlook crucial updates.

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, and you sell the house and reinvest the proceeds into some stocks listed in your name. You also cancel the life insurance policy due to rising premiums but haven’t yet opened a new one. What happens if you suddenly pass away under these circumstances without updating your estate plan? 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 administrator pays necessary fees, debts, and taxes.

Strategy 2: Creating a trust

A more thorough and highly effective strategy to probate-proof your estate 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, except 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 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 more excellent asset protection in the case of disputes, and you can continue to grow your wealth on behalf of your beneficiaries after you die. Perhaps most importantly, a trust properly constructed and managed is your best protection against probate.

Probate-Proof your estate: HOW TO AVOID SENDING YOUR ASSETS AND LOVED ONES INTO PROBATE COURT

Over the years, we’ve discovered that many people make a BIG mistake, catapulting their assets and loved ones right into the court system. Most of our clients want probate-proof their estate because probate has a reputation for being expensive, time-consuming, stressful - and public, meaning anyone anywhere can see who got what and how to contact them. Beneficiaries may become victims to nosey neighbors, predators, and unscrupulous “charities.”
 
Q:  What’s the one mistake that causes all these problems? 
 
A:  An unfunded trust.
 
Here’s what we’ll cover below:

• What does it mean to fund your trust?
• What happens to assets left out of your trust?
• Which assets should and should not be funded into your trust?
• How funding your trust will ensure your final wishes are carried out and save your loved ones valuable time, money, and the frustration of going to court – while preserving privacy.

What Does it Mean to Fund Your Trust?

Funding a trust is simply the process of transferring assets from your name into the name of your trust. Often, beneficiary designations are changed to your trust as well.
 
You can accomplish funding in three ways:

1. Changing the title of the asset from your individual name (or joint names if you’re married) to the name of your trust – for example, from Jane Smith to Jane Smith, Trustee of the Jane Smith Living Trust, dated January 1, 2016. 
2. Assigning your interest in an asset without a title (such as artwork, jewelry, collectibles, or antiques) to your trust.
3. Changing the primary or contingent beneficiary of the asset to your trust. Think life insurance, retirement accounts, and annuities.

Planning Tip:  Put together a list of your assets, their values, and locations, then start funding the most valuable ones and work your way down. Keep plugging away until you’ve fully funded your trust.

What Happens to Assets Left Out of Your Trust?

 
For many people, avoiding probate court is the primary reason they set up a revocable living trust in the first place. Unfortunately, you are not “done” when the trust documents are signed. The probate court is guaranteed if you don’t take the next step to fund. 
 
WARNING:  If your trust is left unfunded, you will send your family and assets to probate court.

Which Assets Should and Should Not, Be Funded Into Your Trust?

 
In general, you will probably want to fund the following assets into your trust:

• Real estate – homes, rental properties, vacant land, and timeshares
• Bank and credit union accounts – checking, savings, CDs
• Safe deposit boxes
• Investment accounts – brokerage, agency, custody
• Notes payable to you
• Life insurance – if you don’t have an irrevocable life insurance trust
• Business interests
• Intellectual property
• Oil and gas interests
• Personal effects – artwork, jewelry, collectibles, antiques

On the other hand, you will probably not want to fund the following assets into your trust:

• IRAs and other tax-deferred retirement accounts – you should only change the beneficiary designation
• Incentive stock options and Section 1244 stock
• Interests in professional corporations
• Foreign assets – in some countries, funding an asset into a U.S.- based trust causes adverse tax consequences, while other countries do not recognize trusts or ignore them due to forced heirship laws
• UTMA and UGMA accounts – your minor grandchild is the owner, not you as the custodian; instead, name a successor custodian
• Cars, trucks, boats, motorcycles, and scooters – most states allow a small number of assets, including vehicles, to pass outside of probate; in others, you can designate a beneficiary for vehicles, and in others, vehicles don’t have to go through probate at all

Planning Tip:  Work closely with your estate planning attorney to determine what should go into your trust and what should stay out. Our office can help.

Funding your trust makes it possible to obtain trust benefits:

• Your trust is easy to update.
• Instead of a judge, your trustee will take control of your trust assets if you become incapacitated or die.
• Your trustee will directly access your trust assets without a court order.
• Your trustee will be empowered to pay bills and manage, invest, sell, and reinvest your trust assets without court intervention.
• Your private wishes will remain private instead of being publicized.
• Settlement time, costs, and frustration are reduced.

The Bottom Line on Trust Funding

 
A trust has a myriad of benefits, including probate avoidance. Yet, in the end, an unfunded trust doesn’t avoid probate.

We can help you probate-proof your estate.

If you haven’t reviewed your estate plan in a while, now is the best time to ensure your estate is probate-proof. 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. We’re happy to help you! Book a call.