Avoiding Probate

Probate is the name given to the process by which the law guarantees that your wishes as to disposition of your property will be implemented after death. Many people spend a great deal of time and money trying to avoid probate, but the process remains one of the most time tested and effective means of guaranteeing an end result. Depending upon the estate involved the costs connected with probate avoidance can rival probate costs and create considerably more confusion during life. While probate avoidance should always be given consideration it is not the be all end all, however as between spouses it is almost always recommended.  Interestingly living trusts, though highly touted and commercially promoted, are not always the best way to avoid probate and they are certainly the most complicated and expensive way and necessary in some cases.  Under the right facts and circumstances simple "payable on death" or "transfer on death" arrangements which cost little to nothing are often just as effective.  

 Additionally, though Probate has been highly demonized, often as a sales tool to promote living trusts, it is not as bad as it has been made out to be. Probate does cost time and money, however, it generally lasts only about six months and when it is longer it is generally for reasons which exist exclusive of whether probate is avoided or not. To the extent delay is caused by tax issues (a common cause) these problems will exist with or without Probate. Eliminating Probate does not completely eliminate expenses and delay and it can create a false sense of security. 

In Ohio, Probate costs can be limited with proper planning, to about three percent of your estate and the cost is closer to two percent as the estate increases in size.  Even two percent can be a lot of money on a larger estate but it pales in comparison to federal estate taxes that can be as much as forty-five percent of your estate and nursing home costs which can consume an entire estate.  Accordingly, when someone warns you against the “twin monsters” of probate and taxes you should be aware that tax avoidance should be the priority and neither may cost as much as nursing home expense.  It is always wise to spend the extra time and money to avoid estate tax but avoiding probate is more of a cost benefit analysis.  In other words, how much time, effort, energy, money and hassle do you want to spend during your life to save your heirs two or three percent of your estate after your death. For example, with three children each child might receive thirty-two (32%) percent instead of thirty-three percent (33%) if you go through probate. Avoiding probate should always be evaluated while devising your estate plan. An important initial step when preparing an estate plan is to be aware of the legal forms of property transferred upon death. Assets pass from an estate to recipients in one of three basic ways:

Designation of Beneficiary: The immediate successor of some forms of assets are predetermined by law. These assets include life estates, joint tenancy, life insurance and annuities, and any account with a named beneficiary. They are passed on at death and do not go through the probate process.

Contracts: Some forms of assets, such as trusts (including revocable and irrevocable trusts), some retirement benefits, partnership agreements, and buy-sell stock purchase agreements specifically define successor ownership. This form of transfer also passes property to the defined party without being subject to probate.

Probate: Any monies or properties that do not pass by designation of beneficiary or by contract are passed through probate proceedings. These assets are processed by a personal representative, called an executor or administrator whose job it is to see that property passes as you have designated in your will or, if you have no will, as provided by law.  

Proper planning can reduce administration costs, minimize estate and gift taxes, and prevent outside claims from complicating the execution of the will. You can ensure that your assets are properly passed down to the parties that they are intended for. 

A sample of some additional tools used for probate avoidance:

Joint Tenancy with Right of Survivorship:  This is a form of ownership where title passes automatically to the surviving joint tenant thereby avoiding probate, however some filings may still be required in the recorders office depending on the type of asset.  There may, however, be income tax disadvantages to this arrangement and creditors of either joint owner may be able to attach the asset.  It may also frustrate planning which was anticipated in carefully drafted wills and trusts.

Life Insurance:  The proceeds of life insurance are not subject to probate administration, unless the insured's estate is the beneficiary, or there is no named beneficiary or where all of the named beneficiaries have predeceased the insured.  Special attention must be paid to how title to the policy is held if there are possible federal estate tax issues.

Lifetime Gifts:  All properly made gifts avoid probate including gifts made immediately prior to death. However, the value of these gifts may be brought back into the estate for estate tax purposes.  Additionally, all outright gifts with no retained interest will have a carry-over basis which means that the donor's basis will follow to the donee. On the other hand, appreciated assets taxable in the decedent's estate will generally get a "stepped-up" basis to the fair market value at the date of death (though there is only limited stepped up basis in 2010). This creates an important planning decision since later disposition of the assets may generate significant capital gains tax where the carry over basis is low. 

Retirement Assets:  Retirement assets are the most tricky assets as they generally carry both estate tax and income tax consequences that must be carefully considered prior to any planning.  Who should be the beneficiary?  Individuals, Trusts, Charitable Beneficiaries or the Estate?  Almost always spouses will name each other because spouse have special roll over rights that other individual cannot benefit from.  Non-spouses can only receive inherited IRA's which payout during your lifetime or within five years after the original account holder passed away.  Naming your trust can cause many problems and must be done in a special way to achieve the greatest tax advantages when passed to the next generation.  

Living Trust: Living trusts are really just revocable trusts which become effective during your life (inter vivos trusts) as contrasted with trusts that do not become effective until your death such as testamentary trusts. The term “living trust” has, however, taken on a whole new life of its own due to heavy commercialization of the concept of probate avoidance. Today a living trust has come to mean a fully funded revocable inter vivos trust whereby the creator of the trust transfers ownership of all, or mostly all, of his or her assets into the name of the trust during life. This avoids Probate because at your death you do not own the assets, which are instead owned by your trust and the trust does not die so there is no need for Probate as to those assets. It is important to remember, however, that such a trust, for most people, has zero estate tax benefit. The Living Trust is an effective method of avoiding probate.  It has the advantage over other techniques of Probate avoidance in that it provides control and management of the funds during life and after the decedent's death and it makes provisions for alternate dispositions if what you expect to happen changes for some reason as, for example, due to an unexpected or premature death.  Also, if the person setting up the Living Trust (Grantor) becomes mentally incompetent or otherwise incapacitated then a Successor Trustee can take over control of the estate, but still must comply with the terms established by the Grantor. The biggest downside to establishing a trust is the cost associated with its establishment.  Some people spend more money creating a trust than they would have spent going through probate.  A/B trusts are the "living trusts" used to avoid estate taxes when you have 4.5 million or more.  It is the necessary first step in tax planning and must be done in lieu of relying on portability (government created tool to help reduce the need for A/B trust planning) due to some negative factors surrounding the use of portability.