If you die with any property titled in your personal name, there must be a probate process for that property (assuming the estate is above a minimal size). Probate is the state’s legal procedure for handling three major functions for your estate. (1) A final and definite identification of and appropriate payment to the estate’s legitimate creditors and claimants, (2) Identification of the rightful heirs to the estate and the share size that each heir will receive, and (3) getting the legal title of the property out of your name and into the name of the heirs. Having a will drawn up in advance of your death will take care of the second function, identification of the rightful heirs and their share. With no valid will for your estate the state will use its own formula for determining heirs and their share. But even with a will, the creditor/claimant identification and the re-titling of your property still must be handled through a court administered probate procedure. When an estate owner dies the only way that their property can be legally re-titled in the heirs’ names is by a court order in a court supervised process, or probate.
Avoiding probate is desirable because it can be a time consuming and expensive process. Reliable estimates are that on a national average probate costs run from 4% to 10% of the value of the estate. This means that an estate worth only $200,000 could cost $8,000 to $20,000 to probate. These costs are based on the fair market value of the property, and not on just the net worth or equity. In other words, an estate with debt against it will cost the same to probate as one without debt. In some cases probate ends up in litigation that drags on for years. Probate encourages creditors and claimants to appear who might not otherwise, whose claims may be inaccurate or fraudulent but only the deceased estate owner would be able to prove otherwise. Probate frequently leads to family battles, and it often causes or allows the decedent’s wishes to be ignored. In addition, probate procedures are made public, causing family privacy to be lost.
One good way to avoid probate is through the use of a family estate planning trust, either a living trust or a life estate trust. Think of the trust as a bridge that will allow a trustee to move your assets safely across the intestacy and probate chasm to your heirs on the other side. The way a trust avoids probate is by titling your property in the name of the trust before your death. You retain complete control of the property during your life, but the trust is considered to be the legal owner of the property for title transfer purposes. Upon your death a trustee that you pre-selected will simply handle the transfers or payments to your heirs which you specified in the trust. You have a great deal of flexibility in specifying the details of these payments and transfers (see the “Estate Transfer & Heir Planning” topic below). After your death the trustee can handle everything quickly and simply without lawyers, court supervision, excessive costs or delays.
Problems With Joint Tenancy Ownership:
Most married couples, and many parent-child combinations, choose joint tenancy with rights of survivorship as their method of holding title. This may be done with both real estate and financial assets. The idea is that when one joint owner dies, the surviving joint owner or owners will automatically receive the decedent’s interest in the property without probate. As a probate avoidance technique, this approach does work, but there are several potential problems:
The whole amount of the estate held in joint tenancy is subject to all of the liabilities of all joint owners. If one owner gets a judgment, tax lien, etc., the lien holder can take the entire property to satisfy the judgment. (There are some exceptions to this problem with personal residences in some states, but those exceptions don’t hold up when the asset is either sold or when both tenants die.) If a parent holds a home in joint tenancy with a child, and that child gets a divorce, the divorcing spouse of the child can potentially take a portion of the house in the divorce settlement.
When a spouse dies and leaves assets to the surviving spouse through joint tenancy, the surviving spouse then has outright control of the assets. The danger is that the surviving spouse may give some or all the assets away to a new spouse or lover, leaving the original heirs cut out of the estate.
Often times the surviving spouse doesn’t do any formal estate planning, so that probate was avoided on the death of the first spouse, but isn’t on the death of the second.
The use of a family trust is one of the best ways to hold property title, because it can avoid the three problems mentioned above.
Problems With Beneficiary Arrangements:
Many assets may be transferred to heirs quite well with beneficiary arrangements. For example, beneficiaries may be specified on pension plans, insurance policies, annuities, bank and investment accounts. When the original owner dies, the remainder amounts or death benefit will be paid quickly to the named beneficiaries, in the amounts specified to each beneficiary and without probate. There are some problems and limitations with this system, however:
There can be no controlled or timed pay outs to the beneficiaries with most beneficiary arrangements.
There are no provisions for beneficiaries who become incapable of handling their financial affairs.
Beneficiary distributions will be subject to the lawsuits, liens, bankruptcies and divorce problems of the beneficiary.
There will often be problems if the beneficiary predeceases the original owner. One problem is the payment of the money to the spouse of the beneficiary, rather than the money being held for or paid to the beneficiary’s children.
Problems Due to Incapacitation:
When a property owner has either sole or joint tenancy ownership, and then becomes mentally incapacitated, the property is in legal limbo. This is due to the incapacitated owner being incapable of conveying legal title or signing legally binding documents. This can prevent the property from being sold or even being leased. Often times an expensive and time delaying court conservatory procedure is the only answer. A family trust is the most comprehensive and best detailed manner to deal with incapacitation issues. But, a simple device known as a durable power of attorney will also take care of many of the problems.
Protecting Estates From Divorce, Lawsuits and Judgments:
Lack of formal and specialized estate planning leaves the estate owner(s) extremely vulnerable on this issue. This topic is known more simply as “asset protection”. The use of a special type family trust is one of the best ways to achieve asset protection. This type trust will also deal with the problems of probate, method of holding title and incapacitation.
Protecting Estates From Con Artists And Dishonest Relatives:
As more and more people live longer lives, more of them are living beyond their ability to protect their own financial interests. These problems afflicting senior citizens are due both to the natural aging process and debilitating diseases. Con artists and opportunistic relatives look for these situations and, unfortunately, have made an industry out of fleecing the elderly who are no longer able to protect themselves. It is very common for these senior citizens to be left virtually penniless and even homeless. This issue is a variation on the topic above, asset protection. Generally the most formal and effective method for protecting yourself in your later years is through the use of a special type of family trust designed for asset protection (see Section 3 of this publication).