PROBATE AVOIDANCE:
A LOGICAL GOAL

Most people, if asked, would prefer to avoid the expense and time delay of having their estate probated.  Twelve to eighteen months can be the expected length of time involved between a person’s death and completion of all paperwork required to conclude the probate process.  Some of these delays occur in order to gather information on current assets and outstanding liabilities and may occur whether probate is required or whether non-probate techniques are used to transfer assets after death.  Other delays occur due to notice and mandatory-waiting periods required under probate statutes and can be avoided through estate planning.

THE COST OF PROBATE

Although probate fees vary considerably, a recent informal poll taken by Edenhofer Law Offices, S.C. showed informal probate fees ranging from $2,500.00 to more than $50,000.00. These fees to settle an estate don’t include special fees for sale of assets, tax preparation and litigation, or personal representative’s fees.

AVOIDANCE TECHNIQUES

Although avoiding probate is generally less expensive than probate, avoiding probate does not necessarily avoid all of the fees described above.  Expense is involved in gathering asset information, paying debts and expenses, tax planning and filings, distribution of assets, and other activity regardless of whether probate is required or not.  However, utilizing probate avoidance techniques does avoid requirements of signed waivers from heirs, various notices and waiting periods, paperwork required to be filed with the court, and potential court hearings.  In many cases, use of probate avoidance techniques is advantageous to minimize expense, but also to prepare for management in the event of incapacity, and to coordinate titling and beneficiary designations on assets so your wishes are carried out.

Various methods of avoiding probate exist.  Probate takes place when the owner of property dies.  If a joint owner or beneficiary exists for the property, the property avoids probate. Examples of situations where a joint owner or beneficiary exists if one legal owner dies are:

1.  Ownership in joint tenancy with right of survivorship.  Upon the death of one joint tenant, the surviving joint tenant remains the legal owner, the probate is not required.  Probate will be required upon the death of the last surviving joint tenant, since no other owner will survive.  If you have questions about joint tenancy contact us.

2. Life insurance with a named beneficiary.  Upon the death of the insured, the surviving beneficiary is legal owner of the life insurance proceeds and probate is avoided.  However, probate is NOT avoided if the insured’s estate is listed as beneficiary or if the beneficiary is deceased.  Therefore, it is very important to have a primary and a contingent beneficiary listed, so the proceeds are paid to the contingent beneficiary if the primary beneficiary is not available.  Then the proceeds still avoid probate.  Beneficiary designations my also be used on IRAs, annuities, and various other types of assets.  If you have questions about life insurance beneficiaries contact us.

3. POD AND TOD.  Bank accounts may be set up with Payable On Death (POD) account designation so as to have the account funds given to a designated person(s) upon the death of the account owner.  Investment accounts can have a similar designation to Transfer On Death (TOD) so as to have an investment account transferred upon death.  If you have questions about POD or TOD contact us.

Although in some situations, all assets can be structured so that they fall into the above categories, thereby totally avoiding probate, some problems exist with these methods of probate avoidance.

With joint tenancy, probate is avoided IF there is a survivor.  If a husband and wife own all property as joint tenants and they are both killed (e.g. in a common accident), no joint tenant survives and the estate is probated.  Even if a joint tenant survives, when the surviving joint tenant passes away, probate is required.  Therefore, when husband and wife own property as joint tenants, when one is deceased, the survivor must do estate planning to avoid probate of his or her own estate.  A period of grief is not a good time to be in need of estate planning.

Probate could be avoided by the surviving joint tenant by adding other joint tenants as owners of the property.  This would avoid probate, since a surviving joint tenant would remain if one joint tenant died.  However most people prefer NOT to add other joint tenants upon the death of their spouse, since this is giving up part ownership in the property.  This also makes the jointly held property subject to claims of the creditors of those added as joint tenants, and creates problems with long term care under Title XIX.

Tax ramifications should also be considered before entering into joint tenancy with a non-spouse.  The exception from income tax on the sale of a personal residence may be lost if the second joint tenant does not live in the home.  Gift taxes should also be considered, since the joint ownership will be considered a gift to the new joint tenant (either immediately or later depending upon exactly how the account is titled and the type of asset involved).  Additionally, if property which has appreciated in value is gifted, rather than inherited, substantial income tax benefits can be lost.

If an asset is transferred to a child outside the will or trust through titling or beneficiary designation on an account, life insurance policy or other asset, the child will receive the asset at the age of majority, even though the will or trust provides that children will not receive assets until a later age.  For an in person discussion about probate avoidance contact us.