How to Avoid Probate

One of the biggest frustrations I see in my line of work is when people who are already going through a crisis because of the death or a long-term illness of a family member end up in probate. This time-consuming, frustrating, and paperwork intensive process only compounds the grief and agony they are already going through, and if they want to hire an attorney to help, it also becomes expensive. So people who plan ahead naturally want to avoid these hassles.

Unfortunately, there is also a lot of misinformation, half-truths, and folk tales around this topic, and it is often too late to pivot once things are set in motion if you haven’t planned ahead. Today, we’ll break down the what’s, how’s, and why’s of avoiding probate both during life and after death, and which techniques work best.

First, we’ll talk about the most common form of probate, and that’s after someone dies. Right off the bat, let’s dispel the biggest myth which is that a Last Will and Testament avoids probate. It doesn’t, so if anyone ever told you “I have a Last Will and Testament, so my estate avoids probate,” they were 100% wrong. In the words of the late, great Henry W. Abts III, “A Last Will and Testament does not avoid probate… it’s your ticket to probate.”

A Will is simply your wishes in writing for who you want to administer your estate and, after the probate process is completed, who gets your estate. It can also handle other matters, such as what happens to your remains, how certain death taxes are apportioned, and age and other beneficiary restrictions are handled through a testamentary trust. It can also nominate guardians for minor children or disabled adults, although my firm generally does this last part through a separate form.

So, despite having a Will, the whole probate court process is still required to legally clear your estate over to your beneficiaries resulting in what we call the four big downsides of probate, which I’ll cover in more detail later in the video.

I would also be negligent if I didn’t mention the biggest, most ridiculous, pile-of-garbage thinking I’ve commonly heard when people are avoiding having to think about doing an estate plan at all, and that’s the wishes and rainbows thinking that “oh, my family knows what I want” as if that will magically make it happen. No, that’s when families generally tear themselves apart because everyone thinks they know what you would have wanted, and, of course, each person thinks you would have wanted them to have more. No, time to put on your adult pants and be serious about putting together a real estate plan, because if you don’t have your wishes written down and executed in a proper legal document like a Will or a Trust, then you’re just asking for the family to fight after you’re no longer here to speak up.

Let’s now move on to what I call duct tape solutions for avoiding probate, and to do that I have give away the big secret to avoiding probate that most attorneys won’t tell you. When someone dies, probate court will only grab hold of assets titled in your name and not “automatically transferred” upon death. Once those assets go through the probate court process, the court gives it’s blessing to all of the accountings and tomes of paperwork submitted, and the assets can be retitled into the beneficiaries’ names. So that’s realty all probate is: It’s a massive, expensive, time-consuming, frustrating, and open-to-the-public retitling process.

So now we get to the duct tape solutions, which are not recommended as the main way to avoid probate. I call these duct tape solutions because they don’t come with sufficient protections, contingencies, and safeguards to really constitute a plan. If your car’s engine is on the verge of falling out, duct taping the engine in place is possibly a sufficient solution to get your car to the repair shop, but it’s not the ultimate fix for a major problem. In this same way, joint property with a right of survivorship and beneficiary designations are not the final solutions to avoiding probate.

First, we’ll discuss joint property with a right of survivorship. Basically, when you hear that someone doesn’t really want to do the work of avoiding probate by putting together a revocable living trust or other comprehensive plan, they’ll “put their kids’ names on” accounts, real estate, and other assets so it passes to the other joint owners when you pass on. However, these come with some huge drawbacks.

• Those joint owners already have legal ownership and possession over those assets. So if any of those joint owners are going through a lawsuit, divorce, or creditors are chasing them, then you better believe those assets are going to be dragged into the court proceedings;
• You are also putting your heirs in a bad tax position. When you pass on, your capital gains cost basis gets bumped up to fair market value for anything you owned. So if you buy a house for $50,000, put your four kids on a joint owners, and when you die the house is worth $500,000, then only your 1/5 gets bumped up to fair market value and now the kids will have capital gains taxes on the “extra’ $400,000 of gain; and
• Because the account or asset is partially theirs already, they may have full access to it. I spoke with a group of bankers once about avoiding probate, and they told me the story of how an elderly woman came into the bank with her son to review the set up her accounts, and she insisted that her son be put on the accounts as joint with a right of survivorship. The staff person started to go over the different ways to give her son access, but she slapped her hand on the desk and angrily said, “No! Joint with a right of survivorship!” so the whole bank could hear her. So that’s what they did. A week later, the same woman comes into the bank screaming about how she’s going to sue the bank and they’re all going to jail… because you let my son steal all of my money. The bank manager and the staff person sat down with her to review what happened, and how the woman insisted that they make her son a joint owner, which gave him complete access to her accounts by making it joint with a right of survivorship. You know what she said: That’s not what she meant. She meant she wanted her son to have access in case she got sick or to inherit it when she died.

So, no, joint with a right of survivorship is not the best way to avoid probate for all of these reasons and more. But what about beneficiary designations that “pay on death” or “transfer upon death?” They are also not the best way to handle things, although there is a significant exception that we’ll get to.

Naming beneficiaries on an account or asset has some severe limitations that don’t make it the ideal way to avoid probate:

• It’s one or two contingencies at the most. For most accounts, you can typically list a primary beneficiary and then a contingent beneficiary, and that will go to those beneficiaries without probate. However, a typical scenario may be naming your spouse as the primary beneficiary, and the kids as the contingent beneficiaries. If both your spouse and one of your children dies, then, depending on the way the beneficiary designations are worded, the children of your deceased child (meaning those grandchildren) will not inherit their deceased parent’s share. In a Will or Trust, you can have multiple layers of contingencies. But even if they were able to get it to the grandchild level, it brings us to the second downside;
• There are only legal default age limits on when the beneficiary inherits the asset, and that’s usually 18 or 21 at the latest. Imagine what would happen if an 18 year old grandchild inherited $600,000? What do you think would happen? In a case from many years ago, the two parents avoided and put off putting together a complete plan, so they simply named their daughter as beneficiary of their $600,000 stock account. Her parents both died in a car accident when she was less than two months shy of her 18^th When she turned 18, she sold all the stock, bought a large house she could never afford to keep up long term, dropped out of high school, and got married to a 25 year old unemployed man. She then said to the financial advisor “I still have $115,000 in the bank, so I’m never going to have to work a day in my life.” It wasn’t only that this unintended inheritance was wasted, but it basically ruined her life.
• When someone is named as a direct beneficiary, there are no restrictions or protections in case they are disabled at the time. In the standard revocable living trusts we use, any beneficiary that is receiving an inheritance who would have Medicaid or other public benefits taken away because of the inheritance has that money held up in trust under the protection of a trustee so the trustee can pay for things directly without putting the beneficiary over the asset limit for their benefits. That is certainly not possible with a beneficiary designation unless it’s into a separate trust; and
• If you change your allocation or distribution plan, then you have to change ALL of the beneficiary designations. I have seen a hodge-podge of three different plans over a person’s life time collide when they passed on and major assets have gone to beneficiaries the rest of the family thought were cut out, including ex-spouses, because they didn’t “get around” to changing the beneficiaries on everything.

In both cases for estate planning, joint with a right of survivorship and beneficiary designations don’t handle avoiding probate in the best way possible. However, there are a few reasons to potentially use these techniques under the guidance of an experienced estate professional or Certified Medicaid Planner™:

• Retirement Accounts: In general, individuals can get a better inherited income tax schedule if they are named directly as the pay on death beneficiary; and
• There are some potential Medicaid protection uses for joint property for you, not the beneficiaries, using joint property with real estate.

Both of these exceptions can and are covered in other videos and blogs I’ve done, so I’m not going to explore those here.

What exactly are the four downsides of probate? Rather than write this fresh, it is probably best to simply quote from my book Estate Planning Basics:

• "Probate generally eats up between four and ten percent (4-10%) of the gross estate before any debts are subtracted.  It is also fairly typical for a law firm to charge a flat 5% to handle everything as the executor. While this does put a ceiling on the amounts a law firm will end up charging, it is a pretty high ceiling. Five percent of even a $500,000 estate would be $25,000 in fees. Most good revocable living trust packages run less than $9,500 with more of them in the $5,000-$7,000 range. There are also cheaper packages but beware of what you are getting.
• There are also typically delays of between 6 months and a year and a half, and often longer if the estate is governed by a Last Will and Testament that is contested. Most times, the family members are waiting on receiving most probate assets for the duration of the process.
• Probate leaves plans more open to being contested. Since probate is such an elaborate bureaucracy with certain tasks that have to be completed in a set order, all it takes for someone to throw a wrench in the works is for them to file an action stating that they think something is wrong. And now the process can come to a grinding halt until their problem is taken care of. More often than we would like to think, people are paid off to go away.
• Privacy is out the door when it comes to a probate estate. Because probate is a court process, the filings are typically open to the public. It is not uncommon for probate to require a listing of all of the deceased person’s accounts, date of death values of all assets, and a listing of the names, addresses and ages of the beneficiaries. And anyone can copy down this information.”

When assets go through probate, there are costs, delays, added potential for contests, and exposure of private information to the public just as with any other court proceeding. If you want to avoid all of these downsides, then you want to avoid probate. The best way to avoid probate is to have a solid, cohesive plan with a revocable living trust as the base of that plan. With a revocable living trust, all of your plans and contingencies are put in the trust document. This includes everything mentioned for a Will, except there are far more benefits to the Trust both after death and during life. For example:

• All assets that are placed into the trust, or pay into the trust after death, avoid probate;
• In the event of incapacity, all assets in the trust are governed by the successor trustee and do not end up as part of a conservator or guardianship proceeding;
• Multiple contingencies can be placed into the trust so every beneficiary right down the line, no matter how remote, can have their inheritance protected, including from having expensive court oversight and accountings for long term trusts for underage beneficiaries; and
• With the right language, disabled beneficiaries will not have their inheritance lost to pay for care that would otherwise be covered by Medicaid or other programs;

Many of my clients come to my law firm specifically to create plans that avoid probate, and they want to make sure it’s done right. That means using a revocable living trust to the extent possible, and only using joint property or beneficiary designations when there are tax and other factors that make sense.

To learn more about setting up a plan to avoid probate the right way, please check out our free program at www.FreeTrustCourse.com. If you are a resident of North Carolina and want to work with us, then please call our office at 919-844-7993 to get the process started.