Have you read Part 1 of our probate blog series? If you’re wondering how probate works, and how to avoid probate, keep reading! We discussed that if you haven’t created an estate plan for when you die (or become incapacitated), many of your assets must go through probate before those assets can be distributed to your heirs.

To spare your loved one’s the time, cost, and stress of probate, last week in part one of this series, we explained how the probate process works and what it would entail for your loved ones. Here in part two, we’ll discuss the major drawbacks of probate for your family, and outline the different ways you can help them avoid probate with proper planning.

What’s At Stake For Your Family

Probate court proceedings can take months, and sometimes even years, to complete. In the immediate aftermath of your death, that’s the last thing you likely want your loved ones to have to endure. And the cost of their time and emotional strain are just the start of the potentially devastating consequences your family could face if you don’t plan ahead.

Without easy and immediate access to your assets, your family could face serious financial hardship at a time when they need the most support. The combination of legal fees, court costs, executor’s compensation, and many other administrative expenses related to probate can add to their burden. By the time all of those costs have been paid, your estate could be wiped out or seriously depleted.

Another drawback of probate is the fact that it’s a public process. Whether you have a will or not, all of the proceedings that take place during probate become part of the public record. This means that anyone who’s interested can learn about the contents of your estate, who your beneficiaries are, and what they will inherit, which can set them up as potential targets for scammers and frauds. Avoiding probate is important for your family’s privacy.

Probate also has the potential to create conflict among your loved ones. This is particularly true if you have disinherited someone or plan to leave significantly more money to one relative than the others. In this case, a family member may contest your will. And even if those contests don’t succeed, such court fights will only increase the time, expense, and strife your family has to endure.

How To Avoid Probate

Before we discuss the more advanced ways you can use estate planning to allow your loved ones to avoid probate, it’s important to point out that not all of your assets will have to go through the probate process—and that’s true even if you don’t have any estate plan at all.

Assets That Do Not Require Probate: Certain assets, such as those with beneficiary designations like 401(k)s, IRAs, and the proceeds from life insurance policies, will pass directly to the individuals or organizations you designated as your beneficiary, without the need for any additional planning.

The following are some of the most common assets that use beneficiary designations and, therefore, bypass probate:

  • Retirement accounts, IRAs, 401(k)s, and pensions
  • Life insurance or annuity proceeds
  • Payable-on-death (POD) bank accounts
  • Transfer-on-death (TOD) property, such as bonds, stocks, vehicles, and real estate

Outside of assets with beneficiary designations, other assets that do not go through probate include assets with a right of survivorship, such as property held in joint tenancy, tenancy by the entirety, and community property with the right of survivorship. These assets automatically pass to the surviving co-owner(s) when you die, without the need for probate.

However, it’s critical to note here that if you name your “estate” as the beneficiary of any of these assets, those assets will go through probate before being distributed. The same goes if you overlook a beneficiary designation, or if you die at the same time as a joint property owner. Each of those assets will also go through probate, even though they have beneficiary designations.

In addition, it’s better not to rely on beneficiary designations to handle the distribution of your assets. These designations give you little to no control over how your assets are distributed, and they can result in negative outcomes you did not intend, especially if you have a blended family with children from a prior marriage, or if you have no children at all.

Although there are several different types of assets that automatically bypass probate, the majority of your assets will require slightly more advanced levels of planning to ensure your loved ones can immediately access them without the need for any court proceedings. The primary estate planning tool for this purpose are trusts.

How to Avoid Probate With A Revocable Living Trust

Trusts are a popular estate planning tool for avoiding probate. Although there are a variety of different types of trust, the most commonly used trust to avoid probate is a revocable living trust, also called a “living trust.”

A trust is basically a legal agreement between the “grantor” (the person who puts assets into the trust) and the “trustee” (the person who agrees to manage those assets) to hold title to assets for the benefit of the “beneficiary.” With a revocable living trust, this agreement is typically made between you as the grantor and you as the trustee for the benefit of you as the beneficiary. You act as your own trustee during your lifetime, and then you name someone as a “successor trustee” to take over management of the trust when you die or in the event of your incapacity.

It seems odd to make an agreement with yourself to hold title to assets for yourself in order to benefit yourself, right? But by doing so, you remove those assets from the court’s jurisdiction in the event of your incapacity or death. Instead, those assets transfer to your successor trustee, without any court intervention required.

At that point, your successor trustee is responsible for managing the trust assets and eventually distributing them to your beneficiaries, according to the terms you spell out in the trust agreement. This is how a trust avoids probate, saving your family significant time, money, and headache.

The Key Benefits Of A Living Trust

Unlike a will, if your trust is properly set up and maintained, your loved ones won’t have to go to court to inherit your assets. Instead, your successor trustee can immediately transfer the assets held by the trust to your loved ones upon your death or incapacity. And since you can include specific instructions in a trust’s terms for how and when the assets are distributed to a beneficiary, a trust can offer greater control over how your assets are distributed compared to a will.

For example, you could stipulate that the assets can only be distributed upon certain life events, such as the completion of college or marriage, or when the beneficiary reaches a certain age. In this way, you can help prevent your beneficiaries from blowing through their inheritance and offer incentives for them to demonstrate responsible behavior. And as long as the assets are held in trust, they’re protected from the beneficiaries’ creditors, lawsuits, and divorce—which is something else wills don’t provide.

Finally, trusts remain private and are not part of the public record. With a properly funded trust, the entire process of transferring ownership of your assets can happen in privacy.

Transferring Assets Into A Living Trust

For a trust to function properly, it’s not enough to simply list the assets you want the trust to cover. When you create your trust, you must also transfer the legal title of any assets you want to be held by the trust from your name into the name of the trust. Re-titling assets in this way is known as “funding” a trust.

Funding your trust properly is extremely important, because if any assets are not properly funded to the trust, the trust won’t work. This means your family will have to go to court in order to take ownership of that property, even if you have a trust.

While many lawyers will create a trust for you, the best will ensure your assets are properly inventoried and funded into your trust, and then ensure the inventory of your assets is kept up-to-date as your life and assets change over time. This will keep your assets from being lost, as well as prevent your family from being inadvertently forced into court because your plan was never fully completed.

Living Trusts, Taxes, Creditors, and Lawsuits

When you create a revocable living trust, you are free to change the trust’s terms or even completely terminate the trust at any point during your lifetime. Because you retain control over the assets held by a living trust during your lifetime, those assets are still considered part of your estate for estate tax purposes. Similarly, assets held in a living trust are not protected from your creditors or lawsuits during your lifetime. This is an important and often misunderstood point, especially for business owners.

Be sure to ask your lawyer about the different trust-based estate planning options available to find one that’s best suited for your particular situation.

Life and Legacy Planning: Do Right By Those You Love Most

Although a living trust can be an ideal way to pass your wealth and assets to your loved ones, each family’s circumstances are different.

The best way for you to determine which estate planning strategies are best suited for your situation is to meet with an experienced estate planning lawyer. Let us guide you! During this process, we’ll take you through an analysis of your assets, what’s most important to you, and what will happen to your loved ones when you die or if you become incapacitated.

Sitting down with us will empower you with confidence that you have the right combination of estate planning solutions to fit with your unique asset profile, family dynamics, and budget. Estate planning is far more than simply planning for your death and passing on your “estate” and assets to your loved ones—it’s about planning for a life you love and a legacy worth leaving by the choices you make today!