Keeping Private Matters Private – 5 Ways to Structure Your Assets to Avoid Probate

Estate Planner, Oct-Nov 2005

Suppose someone told you that after your death much of your personal financial information, as well as a detailed description of who received your assets, would become a part of the public record. Oh, and for the privilege of making all of that information available, you’d incur significant court fees and legal expenses.

Perhaps you’d prefer to save those costs and keep your estate plan private. The good news is that avoiding probate is not terribly difficult.

Probate avoidance strategies

In a nutshell, probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly transfer of assets. But because probate can be time-consuming, expensive and public, you may want to include avoiding probate as part of your estate plan. If so, consider these strategies:

1. Set up a revocable trust. A revocable, or living, trust is a simple way of titling assets so you can avoid the probate process at your death or similar court proceedings if you become legally incompetent. But just creating the trust isn’t enough. Until you transfer assets to the trust, it’s useless with respect to probate avoidance. Once your assets are re-titled into the trust, though, it becomes an extremely powerful estate planning tool that lies in wait until needed.

Technically, you no longer own the assets, the trust does; but during your life the trust is virtually disregarded. You have complete control over the assets, for example, how they’re invested, when they’re sold and when you spend the funds. All tax-related activity of the funds is still reported on your personal income tax return. In a sense, all you’ve done is transfer the assets from one pocket to another.

On your death, the trust’s assets are included in your taxable estate but they aren’t included as a part of your probate estate. Thus, the revocable trust is not designed to avoid, or even reduce, estate tax. It’s designed solely to reduce the expenses of administration. That is, it will reduce your probate costs.

2. Hold assets in joint tenancy with right of survivorship. A revocable trust may pack the biggest punch, but perhaps the most popular way for married couples to hold assets to avoid probate is in joint tenancy with the right of survivorship. Here, title in the joint property vests only in the survivor immediately on the death of the other joint tenant.

Although joint tenancy with right of survivorship may be easy to set up, what you gain in simplicity you can lose in your ability to reduce or even avoid estate tax. For instance, unless your and your spouse’s combined estate is less than the estate tax exemption available to one spouse, if in fact all of your assets are owned jointly, then you may have to pay some estate tax on the survivor’s death that you could easily have avoided.

Joint tenancy with right of survivorship also is sometimes used when a parent (especially a widow or widower) wants to leave assets to his or her child. But keep in mind that the joint tenant has immediate access to funds in the account. Therefore, if your child withdraws funds from the account prior to your death, you may be treated as having made a taxable gift. Thus, it’s vital that you understand the ramifications of creating a joint tenancy, lest you be negatively impacted by an unintended consequence. (For the impact on home ownership, see the Estate Planning Red Flag in this issue.)

3. Establish a life estate. A life estate allows you to continue enjoying all the benefits of owning your property during your life without having the potential issues involved with joint tenancy. Using a life estate accomplishes essentially the same thing as a revocable trust. But it’s geared for use with a specific piece of property rather than a variety of assets that would be held in the trust.

At your death, title automatically vests in your remainderperson, such as your child or grandchild, without having to go through a lengthy probate process. Real property is a great candidate for retaining a life estate and transferring the remainder. There are, as with anything, technical aspects of a life estate that will vary depending on where the property is located.

4. Designate retirement plan beneficiaries. Retirement plans with properly designated beneficiaries aren’t subject to probate. When you initiated your IRA, 401(k) or other retirement plan accounts, you likely filled out a beneficiary designation form. Even if you know that you provided the custodian with the right information, be sure the form is readily accessible. That way, on your death, there will be no delay in your beneficiaries gaining access to the funds. Plus, retirement accounts have specific rules with respect to distributions in the hands of beneficiaries. A lot of flexibility can be lost if the estate is deemed to be the beneficiary.

5. Designate life insurance and annuity beneficiaries. As with your retirement plan accounts, insurance policies and annuities with properly designated beneficiaries aren’t subject to probate. When you purchased a life insurance policy or an annuity you likely designated a beneficiary. Over time, though, situations can change. Be sure to verify that the beneficiary you designated is still the one you want. You should also confirm that you and your heirs know where the documentation is located. If you are unable to find it, or if your beneficiary designation is outdated, be sure to take the time to locate or change it.

Privacy protected, time and money saved

Avoiding probate is easy and can be extremely worthwhile. Whatever steps you decide to take, be sure that everything is properly documented. After all, taking action today to ensure that you’re able to avoid probate will allow your family to protect your privacy and will enable your heirs to save time, money and aggravation.