If you start to look into the subject of estate planning, you will invariably come across the term “probate avoidance.” Misconceptions and half-truths about this topic tend to circulate, and in this post, we will provide absolute clarity.
What Is It?
First, you have to know exactly what it is to understand why people avoid it. Let’s say that you use a simple will to state your final wishes. A lot of people assume that you name an executor or personal representative when you create a will, and they follow your instructions.
The idea is that it is a simple, straightforward process that is wrapped up quickly. In reality, the executor would be required to admit the will to probate, and the court would provide supervision during the administration process.
Probate Drawbacks
During probate, creditors can come forward seeking repayment before the estate is distributed among the heirs. The court will determine the validity of the will during this interim. If someone wants to contest the terms of the will, they can do so while probate is underway.
Though it serves a purpose, there are drawbacks that negatively impact the rightful inheritors. A simple case with no particular complications can pass through probate in about nine months, so there is a considerable waiting period.
Probate expenses add up to reduce the value of the estate before it is distributed. Lastly, it is a public proceeding, so interested parties can pry into the final affairs of the decedent.
Risky and Constraining Probate Avoidance Notions
Now that you know what probate is and why you may want to avoid it, we can look at some mistakes people make. There are certain types of asset transfers that are not subject to probate. This leads to the belief that you can embrace a simple solution to sidestep the process.
Joint Tenancy
One of these possibilities is joint tenancy with right of survivorship. The idea here is to add a co-owner to your property while you are still living. This individual would be referred to as a “joint tenant,” and they would inherit your share of the property after your death.
The probate court would not be involved, and that’s the good news. On the other side of the coin, the joint tenant would own half of the property immediately. If they run into tax problems, a lawsuit, or a divorce proceeding, their portion of the property could be at risk.
You would also have to gain their cooperation to sell the property or get a second mortgage. As you can see, there are some risks and complications involved if you go this route.
Payable on Death Accounts
When you open an account at a bank or brokerage, you can add a beneficiary. The beneficiary would not have access to the account while you are living, but they would assume ownership of it after your death. Probate would not be a factor.
People have exercised this option while giving verbal instructions to the beneficiary. They explain how they want the assets to be distributed among all of the family members.
This sounds good on the surface, but the beneficiary would not be bound by the verbal instructions. As far as the law is concerned, the assets in the account belong to them.
Even if you want to leave all the money to one beneficiary, there are limitations. They would receive it in a lump sum with no asset protection, and there would be no spending safeguards.
Revocable Living Trust
In spite of the problems with these do-it-yourself methods, probate avoidance does make sense if it is done correctly. A revocable living trust can be the ideal device to utilize if you want to streamline the administration process.
When you are living, you would be the trustee, so you would maintain control of the assets. In the trust declaration, you name a successor trustee to assume the role after your death. This trustee could also be empowered to manage the trust if you become incapacitated.
After your passing, the successor trustee would follow the instructions that you recorded. The assets would be distributed to the beneficiaries in accordance with your wishes, and probate would be avoided.
Moreover, after your death, the trust will become irrevocable. The principal would not be directly accessible to the beneficiaries, and this would also apply to their creditors.
With regard to guardrails, you could instruct the trustee to provide incremental distributions over an extended period. Some people will allow for larger lump sum distributions when beneficiaries reach certain age thresholds.
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