Probate Avoidance: A Logical Goal
Most people, if asked, would prefer to avoid the expense and time delay of having their estate probated upon their death. Cost of probate includes attorneys' fees, cost of ads notifying creditors of the probate, payment to personal representatives and other administrative costs. The total cost of probate averages nationally from 5-10% of the total value of the estate if contests and other complexities don't arise. Statutory requirements in probate make it more difficult for family members to know what to do, or to be able to feel in control of the process than when estate plans avoid the requirement of probate. Estate plans that avoid probate and include basic instructions for administration are especially helpful for family members or other loved ones. Even if probate is avoided, assets must still be listed and valued, tax returns filed, creditors paid and distributions made, but a much more common sense approach may be taken if individual procedures required by state probate statutes are avoided.
Various methods of avoiding probate exist. Probate takes place when the owner of property dies and no other owner is left. If another legal owner exists, the asset avoids probate. Some techniques for avoiding probate include:
• Ownership in joint tenancy with right of survivorship. Upon the death of one joint tenant, other joint tenant(s) retain ownership and probate is avoided. A termination of joint tenancy form shows that a joint tenant is deceased and legally designates the remaining joint tenant(s) as owners. Probate will be required upon the death of the last surviving joint tenant since at that time, no legal owner survives. In some states, spouses may own assets as tenants by the entirety, with the end result the same as for joint tenancy. In the State of Wisconsin, survivorship marital property effectively transfers assets to the surviving spouse without probate at the time of the first spouse's death.
• Life insurance with named beneficiary(ies). 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 or if the beneficiary is deceased.
• Payable on death (P.O.D) designations on bank accounts or transfer on death (T.O.D.) designations on securities accounts avoid probate. The named beneficiary receives assets upon the account owner's death.
Although, in some situations, all assets can be structured so they fall into the above categories to totally avoid probate, some issues exist with these methods of probate avoidance.
With joint tenancy, probate is avoided IF there is a survivor. However, at the point that no joint tenant survives, probate is required. If spouses own assets as joint tenants, if neither survives, the estate IS probated. Probate could be avoided by the surviving joint tenant by adding other joint tenants to the ownership of the asset. However, most people prefer not to name joint tenants who are not 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 can become an issue if a child or other joint tenant goes through a divorce.
Tax implications should also be considered before entering into joint tenancy with a non-spouse. Gift, income and capital gains taxes may be impacted depending on the titling on the asset.
If business assets are owned, joint tenancy may not be practical or may be restricted by buy-sell or other business agreements. (Business partners typically don't want to end up in ownership with spouses and sometimes licensing and other factors restrict ownership by non-licensed beneficiaries.) If a business is owned, estate planning is particularly important. If business assets are probated, business operations can be affected, business matters may be made more public than desired as part of a probate proceeding, and costs of administration can be high. Business owners are good candidates for use of living trusts, discussed below.
Logistical issues may also be created with use of joint tenancy, beneficiary, POD or TOD accounts. Using these techniques to avoid probate leaves no specific person in charge to make certain that debts and expenses are paid. Coordinating all beneficiaries can become problematic. Additionally, if the intention is for all beneficiaries to inherit equal percentages of the estate, all beneficiaries must be named on every asset. Otherwise, as asset values change or some assets are sold or depleted and others grow in value, inadvertent inequalities in distribution may occur. This can jeopardize the intention, and can create long-lasting conflict among family members.
The Living Trust: Avoid Probate While Maintaining Lifetime Control
A living trust avoids the expense, delay and headaches of probate, but allows the original owner to maintain complete control of assets throughout lifetime. Probate only arises when the owner of an asset dies and leaves no other owner. When a living trust is created, it's important to change ownership of assets to the trustee of the trust. That trustee is typically the person whose assets are put in the trust, so on a practical basis, little changes during that person's lifetime.
An individual trust or a joint trust may be used. For married couples who want the surviving spouse to inherit all assets, a joint trust is appropriate. For an individual trust, the individual creating the trust is the trustee (manager) during lifetime. Upon that individual's death, whomever is named as successor trustee in the trust steps in, and as manager, follows the directives in the trust, including distribution of assets and termination of the trust. For a joint trust, both individuals creating the trust are typically trustees (managers) during lifetime, and upon the death or incapacity of one, the other may continue as trustee. When neither of the original individuals survive, just as with the individual trust, whomever is named as successor trustee in the trust steps in, and as manager, follows the directives in the trust, including distribution of assets and termination of the trust. Probate is avoided since, throughout this sequence, the TRUST remains as the owner of assets, and the trust does not die. A change of management simply takes place. Probate occurs when the owner dies. The trust doesn't die - so probate is avoided.
Living trusts may also be used to avoid court proceedings if an incapacity occurs. Methods of determining incapacity and details on rules when a successor trustee steps in to manage assets are designated in the trust agreement. Typically, trust assets are used for the benefit of the person or people who initially put assets into the trust throughout their lifetimes, and at the end of their lives, distribution is made to beneficiaries named in the trust.
Living trusts are more expensive than a basic will to draft initially because assets must be transferred into the trust. However, for an estate plan that will carry out wishes as applied to all assets, whether a trust or a will is used, the estate planner should review titling, beneficiary designations and approximate current values of all assets.
In addition to a trust agreement, it is a good idea to have a 'pourover' will drafted that 'catches' anything inadvertently not transferred to the trust into the trust after death. Although this transfer would require a probate, it minimizes the need for ongoing accounting to the probate court, since assets are immediately transferred to the trust. This allows for the plan of distribution in the trust to apply to all assets. The pourover will is typically not actually used, but is drafted as a precaution. To be effective, the will must be coordinated with the trust, so they work together to achieve the desired result.
As with all estate planning, each person's individual situation and wishes must be analyzed before a decision is made as to the most effective planning technique. In considering living trusts or other probate avoidance and estate planning techniques, it is very important that a professional knowledgeable about living trusts be consulted. Just as an obstetrician may not be the one to do heart surgery, all attorneys are not familiar with the most effective methods of using living trusts.
Living trusts may not be for everyone, but for many, many people, a bit of extra planning now in setting up a living trust can save much time, money and frustration for their loved ones. A custom estate plan that carries out your wishes can protect what you've spent a lifetime to create - including your assets and your loved ones.
Most people, if asked, would prefer to avoid the expense and time delay of having their estate probated upon their death. Cost of probate includes attorneys' fees, cost of ads notifying creditors of the probate, payment to personal representatives and other administrative costs. The total cost of probate averages nationally from 5-10% of the total value of the estate if contests and other complexities don't arise. Statutory requirements in probate make it more difficult for family members to know what to do, or to be able to feel in control of the process than when estate plans avoid the requirement of probate. Estate plans that avoid probate and include basic instructions for administration are especially helpful for family members or other loved ones. Even if probate is avoided, assets must still be listed and valued, tax returns filed, creditors paid and distributions made, but a much more common sense approach may be taken if individual procedures required by state probate statutes are avoided.
Various methods of avoiding probate exist. Probate takes place when the owner of property dies and no other owner is left. If another legal owner exists, the asset avoids probate. Some techniques for avoiding probate include:
• Ownership in joint tenancy with right of survivorship. Upon the death of one joint tenant, other joint tenant(s) retain ownership and probate is avoided. A termination of joint tenancy form shows that a joint tenant is deceased and legally designates the remaining joint tenant(s) as owners. Probate will be required upon the death of the last surviving joint tenant since at that time, no legal owner survives. In some states, spouses may own assets as tenants by the entirety, with the end result the same as for joint tenancy. In the State of Wisconsin, survivorship marital property effectively transfers assets to the surviving spouse without probate at the time of the first spouse's death.
• Life insurance with named beneficiary(ies). 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 or if the beneficiary is deceased.
• Payable on death (P.O.D) designations on bank accounts or transfer on death (T.O.D.) designations on securities accounts avoid probate. The named beneficiary receives assets upon the account owner's death.
Although, in some situations, all assets can be structured so they fall into the above categories to totally avoid probate, some issues exist with these methods of probate avoidance.
With joint tenancy, probate is avoided IF there is a survivor. However, at the point that no joint tenant survives, probate is required. If spouses own assets as joint tenants, if neither survives, the estate IS probated. Probate could be avoided by the surviving joint tenant by adding other joint tenants to the ownership of the asset. However, most people prefer not to name joint tenants who are not 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 can become an issue if a child or other joint tenant goes through a divorce.
Tax implications should also be considered before entering into joint tenancy with a non-spouse. Gift, income and capital gains taxes may be impacted depending on the titling on the asset.
If business assets are owned, joint tenancy may not be practical or may be restricted by buy-sell or other business agreements. (Business partners typically don't want to end up in ownership with spouses and sometimes licensing and other factors restrict ownership by non-licensed beneficiaries.) If a business is owned, estate planning is particularly important. If business assets are probated, business operations can be affected, business matters may be made more public than desired as part of a probate proceeding, and costs of administration can be high. Business owners are good candidates for use of living trusts, discussed below.
Logistical issues may also be created with use of joint tenancy, beneficiary, POD or TOD accounts. Using these techniques to avoid probate leaves no specific person in charge to make certain that debts and expenses are paid. Coordinating all beneficiaries can become problematic. Additionally, if the intention is for all beneficiaries to inherit equal percentages of the estate, all beneficiaries must be named on every asset. Otherwise, as asset values change or some assets are sold or depleted and others grow in value, inadvertent inequalities in distribution may occur. This can jeopardize the intention, and can create long-lasting conflict among family members.
The Living Trust: Avoid Probate While Maintaining Lifetime Control
A living trust avoids the expense, delay and headaches of probate, but allows the original owner to maintain complete control of assets throughout lifetime. Probate only arises when the owner of an asset dies and leaves no other owner. When a living trust is created, it's important to change ownership of assets to the trustee of the trust. That trustee is typically the person whose assets are put in the trust, so on a practical basis, little changes during that person's lifetime.
An individual trust or a joint trust may be used. For married couples who want the surviving spouse to inherit all assets, a joint trust is appropriate. For an individual trust, the individual creating the trust is the trustee (manager) during lifetime. Upon that individual's death, whomever is named as successor trustee in the trust steps in, and as manager, follows the directives in the trust, including distribution of assets and termination of the trust. For a joint trust, both individuals creating the trust are typically trustees (managers) during lifetime, and upon the death or incapacity of one, the other may continue as trustee. When neither of the original individuals survive, just as with the individual trust, whomever is named as successor trustee in the trust steps in, and as manager, follows the directives in the trust, including distribution of assets and termination of the trust. Probate is avoided since, throughout this sequence, the TRUST remains as the owner of assets, and the trust does not die. A change of management simply takes place. Probate occurs when the owner dies. The trust doesn't die - so probate is avoided.
Living trusts may also be used to avoid court proceedings if an incapacity occurs. Methods of determining incapacity and details on rules when a successor trustee steps in to manage assets are designated in the trust agreement. Typically, trust assets are used for the benefit of the person or people who initially put assets into the trust throughout their lifetimes, and at the end of their lives, distribution is made to beneficiaries named in the trust.
Living trusts are more expensive than a basic will to draft initially because assets must be transferred into the trust. However, for an estate plan that will carry out wishes as applied to all assets, whether a trust or a will is used, the estate planner should review titling, beneficiary designations and approximate current values of all assets.
In addition to a trust agreement, it is a good idea to have a 'pourover' will drafted that 'catches' anything inadvertently not transferred to the trust into the trust after death. Although this transfer would require a probate, it minimizes the need for ongoing accounting to the probate court, since assets are immediately transferred to the trust. This allows for the plan of distribution in the trust to apply to all assets. The pourover will is typically not actually used, but is drafted as a precaution. To be effective, the will must be coordinated with the trust, so they work together to achieve the desired result.
As with all estate planning, each person's individual situation and wishes must be analyzed before a decision is made as to the most effective planning technique. In considering living trusts or other probate avoidance and estate planning techniques, it is very important that a professional knowledgeable about living trusts be consulted. Just as an obstetrician may not be the one to do heart surgery, all attorneys are not familiar with the most effective methods of using living trusts.
Living trusts may not be for everyone, but for many, many people, a bit of extra planning now in setting up a living trust can save much time, money and frustration for their loved ones. A custom estate plan that carries out your wishes can protect what you've spent a lifetime to create - including your assets and your loved ones.
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