Avoiding Probate
There are many forms of ownership which avoid probate, including Revocable Living Trusts, Joint Tenancy with Rights of Survivorship, and Payable on Death or Transfer on Death beneficiary designations. Each has benefits and risks. The following list is by no means exhaustive, but discusses some of the more popular (and widely used) alternatives. It is important to disclose all assets to your attorney when beginning the discussion of options and effect of each option. We can advise on the potential benefits and risks of each of these options as they relate to your particular situation.
A Revocable Living Trust is a widely publicized mechanism for probate avoidance. A Revocable Living Trust is created and all assets of the grantor must be transferred to the trust while the grantor is alive in order to avoid probate. Income or interest on trust assets usually continues to be taxed to the grantor and the grantor usually retains control over the assets for as long as they are alive and competent.
Assets which are owned by the grantor at death and which have not been placed in the trust will be subject to probate. This presents the greatest problem we see with living trusts. Often, when the trust is created some assets are not placed in the trust.
Additionally, changes in assets which occur during the time between creating the trust and the grantor's death can result in the grantor, and not the trust, owning some assets. A typical lender will not allow an individual to borrow money secured by a home owned by the trust, and will not loan to the trust, so the lender or escrow company prepares a deed by which the house is removed from the trust, and then the loan is made. Without further action, the house is no longer owned by the trust and is subject to probate.
Because Trust assets are not subject to probate, the assets owned by the trust are not governed by the grantor's will and changes must be made to the trust (not just the will) as changes are desired or required.
A Revocable Living Trust can be a valuable tool depending on the type, location and value of a person's assets, but assets must be properly maintained in the trust to avoid probate. When helping a client determine whether a trust is appropriate for their situation we usually need to know the value, type and location of all of the client's assets as well as the client's desires regarding distribution on their death.
Joint Tenancy with Rights of Survivorship (JTWROS) may be the simplest mechanism to avoid probate. Most often this type of ownership is created when two or more people have a bank account that both can access. They are often created with the funds of only one of the owners, but can be funded by multiple owners. When one joint owner dies, the surviving owner(s) are generally entitled to the remaining funds in the account when they provide the bank with a death certificate. Real Estate can also be owned in this manner, but specific language is required in the deed to create a Joint Tenancy with Rights of Survivorship.
Unfortunately, relatives' names are often added to accounts for convenience of bill paying, etc., but without the intent that the surviving owner(s) would receive the remaining funds. Even if there is a Will that establishes other beneficiaries, the joint owner will keep the funds and court proceedings may be required to force that joint owner to contribute to payment of debts, taxes, etc., or to prove the intentions regarding the account and allow those funds to be distributed in accordance with the Will. Even if a surviving joint owner wants to honor the provisions of the Will, they may encounter tax complications because the IRS may consider such distribution a gift to the beneficiaries in the Will.
Another potential problem may arise while all owners are alive. An owner may have an unexpected financial problem as a result of an accident, illness, divorce or other unforeseen circumstance, and those jointly owned assets can be attached or otherwise used to satisfy the financial obligations of that joint owner.
Payable on Death (POD) or Transfer on Death (TOD) accounts are similar to Joint Tenancy with Rights of Survivorship. An account owner can set up an account and name a beneficiary to receive the account upon the owner's death. These assets will generally transfer to the named beneficiary when the owner dies regardless of what the Will says. Usually the beneficiary will only need to present a death certificate for the deceased owner in order to receive the assets. The primary difference between these assets and JTWROS assets is the beneficiary's right to access the assets while the owner is alive. A POD or TOD account is not the property of the beneficiary until the owner dies, so the account cannot be used by the beneficiary to help pay the owner's bills. It also cannot be taken to satisfy the debts of the beneficiary while the owner is alive. For better or worse, these assets will be distributed to the beneficiary regardless of what the Will says. Unfortunately, as with JTWROS accounts, if the beneficiary does not want to contribute to debts, taxes, etc. these accounts can also be the subject of court proceedings to force contribution.
Gifting Assets while an individual is alive means that the person giving away the assets, the donor, will not own them anymore. The gift recipient will own the assets. While this can seem like an attractive option to avoid probate, it should be utilized with the utmost caution. Even if you trust a child or other recipient not to spend gifted assets, once gifted, those assets are subject to the recipient's creditors and any judgments or claims against the recipient of the gift. If the recipient dies before the donor, those assets are subject to the estate of the recipient and the donor will often have no legal claim to the gifted assets.
Another complication of giving away assets is that if the gifted assets are capital assets, like real property or stocks, the recipient receives the assets with a tax basis equal to the donor's tax basis, often quite low compared to current values. Conversely, when a beneficiary inherits property after the owner dies, they generally receive a tax basis at the current value of the asset. This can have a significant impact on the financial advisability of the transaction.
Why Probate might be best
Because of the potential risks and costs identified above, often a simple Will is the best and clearest way to ensure that assets are appropriately divided among beneficiaries. One document controls distribution and provides clear instruction, including identification of the appropriate person to handle tax matters and resolve creditor issues.
When there is a possibility or likelihood of a challenge to the disposition of assets, a probate can be the clearest way to settle those challenges or ensure that a challenge cannot be brought. The law provides for very specific time frames for bringing challenges to a Will. Challenges to the nonprobate distributions discussed above often times do not have specific time limits.
Similarly, handling creditors within a probate is often the most clear and inexpensive option. During a probate we typically publish a notice to creditors and notify each ascertainable creditor, by mail, of the individual's death and the time limits (4 months from publication) for making a claim. Going through this process has the benefit of cutting off the possibility of a claim after the four month time period is up. This notice option is available without probate, but the Court costs are the same as for a full probate. Without probate or this notice process, creditors can make claims against the estate or anyone receiving assets from the estate for two years following an individual's death.