Estate planning primer, Pt. 2: Avoiding probate

By Julius Giarmarco

Giarmarco, Mullins & Horton, P.C.


Author's note:This is part two of a five-part series on estate planning. Part one dealt with minimizing death taxes. In part two, we’ll discuss how to avoid the costs, delays and publicity associated with probate in the event of your death or incapacity. Part three will look at ways to set forth your dispositive wishes (i.e., who gets what, when and how). In part four, we’ll examine how to coordinate the myriad technical rules relating to IRAs and other retirement plans with your overall estate plan. And in part five, we’ll discuss advance directives regarding your medical decisions upon incapacity, including end-of-life decisions.

Avoiding probate
The term "probate" comes from the Latin word "probare," meaning "to prove." The legal definition is the "act or process of proving a will valid or invalid." But, in reality, the probate process encompasses more than just proving the validity of a will. It is the court supervised process of locating and determining the value of a deceased person's assets, paying the decedent's final bills and then distributing what's left to the decedent's heirs. If the decedent left a valid will, then the decedent's property will be distributed pursuant to the terms of his/her will. But if a decedent left an invalid will or died without a will (i.e., intestate), then state intestacy laws determine who the heirs are.

Depending on state law, there may be an advantage to probate in that all debts and liabilities of the decedent are terminated with respect to creditors who fail to file a claim against the estate within the allotted time period. But in most states, the opportunity to bar the claims of creditors is also afforded to estates that are not probated (i.e., where the decedent had a living trust). Thus, for the reasons discussed below, probate should usually be avoided.

There are basically three problems with probate. The first is delay. It usually takes several months to settle an estate, during which time the decedent's assets could be tied up. Second is expense. Probate involves legal fees and court costs. The overall cost of probate will vary, depending upon the type and value of the property that is being probated. Third is publicity. Probate creates a public record. Thus, privacy is lost. These problems are compounded when the decedent owns tangible personal property or real estate in different states. This is because the law of the state where the property is physically located will govern what happens to it after the owner dies, not the law of the owner's domicile. This leads to "ancillary" probate.
Only assets in the decedent's name alone, or assets payable to the decedent's "estate" by beneficiary designation or otherwise have to be probated. Assets held jointly or payable to someone other than the estate do not. For example, jointly-titled real estate and jointly-held accounts do not go through probate. Instead, they pass automatically to the surviving joint tenant. The same is true for a beneficiary of an IRA, retirement plan, payable-on-death account, life insurance policy or annuity. At death, the asset passes directly to the beneficiary. However, when the surviving joint tenant or named beneficiary subsequently dies, those assets may have to be probated.

Living trusts
The best way to avoid probate is with a revocable living trust. In the typical living trust, you are the grantor, trustee and beneficiary. You reserve the right to amend or revoke the trust; the right to add property to and remove property from the trust; and the right to control and direct payments from the trust. Until your death — when the trust becomes irrevocable — the living trust uses your Social Security number, and all trust income and losses are reported on your personal income tax return (Form 1040).

Upon your death, the person or persons you named as successor trustee(s) (i.e., spouse, child, trusted friend or adviser, or a financial institution) take over and manage the trust's assets for those beneficiaries named in the trust agreement upon the terms set forth therein. All assets owned by your living trust at the time of your death avoid probate. The assets in your living trust also avoid probate in the event of your incapacity. The typical living trust provides that, should you become "incapacitated" (as that term is defined in the trust agreement), a successor trustee takes over. In such event, the successor trustee is usually directed to manage the trust property for your benefit, for the benefit of your spouse (if you are married), and your dependent children.
Dealing with incapacity
Probate courts not only handle the administration of decedents' estates, they also have jurisdiction over incompetent or incapacitated individuals. The best way to avoid the necessity of probate court proceedings to establish a guardianship or conservatorship is to have all of your assets in the name of your living trust. The next best alternative is to have a durable general power of attorney (POA). The term "durable" means the POA is not affected by your subsequent incapacity. A POA allows you to name a spouse, parent, child or other trusted person to make decisions for you in the event of incapacity.

A POA prepared and signed prior to incapacity eliminates the delays, publicity and expense of probate, thereby easing the emotional trauma caused by court proceedings. The POA can be drafted so that it is effective immediately, or only upon your becoming incapacitated (i.e., a "springing power"). If a springing power is used, then the document must define how your incapacity will be determined. For example, the POA might provide that you shall be deemed incapacitated if, in the written opinion of two licensed physicians, you cannot effectively handle your personal and financial affairs.

A "pour over" will is also needed for property that you failed to transfer to your living trust during lifetime. In such event, your will "pours over" those assets into your living trust, but only after they have been probated. Therefore, when you have a living trust, it's important that all of your assets be transferred into or made payable to your living trust. However, for income tax purposes, retirement plans and IRAs may be best payable directly to an individual beneficiary in order to "stretch" those retirement benefits over the longest time period permitted.

In part three of this series, we’ll look at the various techniques to assure that your dispositive wishes (i.e., who gets what, when and how) are carried out.