Many people believe that probate is something that should be avoided in all cases. When asked why probate should be avoided, people often express that probate will be a very expensive and time consuming process. These perceptions are not necessarily true. The efforts that are made when trying to avoid probate are sometimes more costly than had there actually been a probate administration.
Probate is the process whereby assets that were held in a decedent’s name alone are passed to his or her beneficiaries (if there is a will) or heirs (if there is not a will). Through the probate process, the court ensures that creditors and taxes owed by the decedent are paid.
Assets that are not held in a decedent’s name alone are not subject to the probate process. These assets include jointly held assets, assets with beneficiary designations, assets with a pay on death designation and assets held in trust.
Even if assets are not subject to probate, some administration is required for non-probate assets, including assets held in trust. Many people believe that if they have a trust, it will completely eliminate all administrative expenses. Certain steps must be taken to administer a trust and the trustee must ensure that he or she is meeting the legal obligations of being fiduciary. The trust will only avoid the probate administration if all of the assets potentially subject to probate are held in the trust. If assets are held outside of the trust, then a probate administration will be necessary in order to transfer the assets to the trust. Holding assets outside of the trust negates the effectiveness of the trust as a vehicle to avoid probate.
Depending upon an individual’s situation, it may be possible to avoid probate, without a trust, but by careful consideration of the titling of accounts. Sometimes if a person has only one or two beneficiaries, he could set up a pay on death account for the beneficiaries, thus avoiding probate. Problems can arise if one of the beneficiaries should die before the individual owning the assets dies. Then the contractual provisions with the financial institution will control who ultimately will get the assets. These contractual provisions may or may not reflect the wishes of the asset owner.
Avoiding probate with joint ownership is a particularly risky proposition. Relationships sometimes change and when they change, funds can be at risk. Even when the joint owner intends no harm to the other, the assets can be put at risk if the joint account holder faces divorce, other legal judgments, or bankruptcy.
Probate avoidance not involving trusts can sometimes cause family disputes because no fund has been allocated to pay expenses including the funeral bill. Sometimes children share expenses disproportionally. Sometimes people add one of their children to an account thinking that this will allow that person to pay expenses both before and after death. What many do not understand is that this child automatically receives all funds in this account upon death. This child has no obligation to share the assets with his siblings. If the child wants to share pursuant to the parent’s wishes, the money is considered a gift, and the limits on yearly and lifetime gifts will apply.
Decisions about how assets are titled are often made without regard to the big estate planning picture. Periodically reviewing how assets are titled is essential in ensuring that your wishes are still reflected in your plan.