Recently, a lady who attended one of my seminars discussing revocable living trusts was determined to obtain a trust rather than allow her children to go through the probate process. This is not an unusual reaction if you have ever been involved in a probate proceeding. This lady was the personal representative of her mother’s estate and had just closed probate after five years of arguments with her siblings!
What is probate? When you die, if you are holding assets in your sole name (house, bank accounts, brokerage accounts, etc.) the only way the assets are going to get to your beneficiaries is by going through the probate process. Some people think that if you have a will you do not have to go through the probate process. This is untrue. Probate applies whether or not you have a will.
Every state has a probate process, ordinarily starting with a Register of Wills for the county in which the decedent resided and held property. Forms are filed with the Register of Wills to apply to open an estate in the decedent’s name and apply to be the personal representative for the estate. The personal representative then makes various filings accounting for the assets in the estate, the cash flows in an estate bank account, naming and informing the persons interested in the estate, completing transactions involving the estate, etc. Because these filings can be complicated, personal representatives ordinarily use the services of an attorney to help them. The probate process in Maryland takes between 8-12 months and attorney’s fees range up to 3.5% of the assets. Prior to closing probate, no funds can be distributed to beneficiaries.
Probate proceedings are public. Every filing that is made becomes a public record available to anyone who wants to see it, including disgruntled siblings or relatives, and those persons can challenge the will or accountings in probate at any time. It is not uncommon for probate proceedings to take several years because of challenges and arguments among beneficiaries. And, if you own assets in your sole name in more than one state, your loved ones will have to undergo probate proceedings in every state in which you hold assets.
The key to avoiding probate is to ensure that when a person dies they do not hold any assets in their sole name. Here are four ways to avoid probate:
1. Set Up a Living Trust.
The only way to truly avoid probate is to create a Living Trust. Living Trusts were invented to allow people to avoid probate. How? With a Living Trust, all of a person’s assets are re-titled into the name of their own trust. The person becomes the Trustee of their own trust. When they die, they appoint someone to be the Successor Trustee of the trust. Since all assets have been re-titled into the name of the trust, when the person dies they are not holding any assets in their sole name. Therefore, no probate. The assets transfer immediately upon death to the Successor Trustee who distributes the assets to the beneficiaries you have designated in your trust. There are many other benefits to creating a Living Trust. First, it is private, not public. There is no court supervision since there is no probate. No filings need to be made accounting for assets. The Living Trust is usable in all states, and there are no legal or filing fees required when you die.
2. Create “Payable on Death” accounts.
Every bank has a form used to designate who takes the money in your bank accounts when you die. This is called a “Payable on Death” or “POD” form. If you fill out this form for your bank accounts, the bank will pay over the monies in your accounts to whomever you designate when you die, without those accounts having to go through probate. Of course, there are limitations on this way of avoiding probate. If the person you have designated to take your accounts when you die is deceased at the time of transfer, then the monies in your accounts will have to go through the probate process to reach your loved ones.
3. Put your assets in joint name.
Many people will add a child’s name to their house deed so that when they die the property will go to the child without the need for probate. However, there are potential tax problems with this approach. Let’s say you buy a house for $10,000 thirty years ago. The house is now worth $100,000. If you put your child’s name on the deed to the house, they take their ownership interest in that house at your “basis” or what you paid for the house, in this case $10,000. That means, when you die and they own the house and want to sell it, they will have to pay capital gains taxes on the difference between what you paid for the house and what it is worth when you die. In our example, that means capital gains taxes on the difference between $10,000 and $100,000. A big tax. Under both a Will and a Living Trust, anyone inheriting a house from you gets what is called a “step-up” in basis so that your loved ones inherit the house at the market value of the house when you die. In our example, $100,000. If your loved ones want to sell the house, they can do so without tax. With a house that has appreciated in value, putting a child’s name on the deed will avoid probate but may cause more harm than good. The other problem with putting a child’s name on a deed or bank accounts is that when you do so, you inherit the child’s creditors.
4. Give away your assets while you are still alive.
Many people “spend down” their own assets by giving them away before they die. This avoids probate since you have given away the assets and do not own them when you die. The issues with this approach are obvious. Suppose you do not want to relinquish control of your assets before you die. What if you need the assets to survive? You need to think carefully about your own needs before you give away your assets.
Anyone that has been through probate understands the difficulties of the process. Hopefully, you will be able to use some of these methods to allow your beneficiaries to avoid the difficult process of probate and make it a little easier on those you leave behind.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over 30 years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.