I’ve written before about the one-size-fits-all suggestion made by so many popular financial planners that everyone should always make avoiding probate one of their highest when putting together their estate plan. Here, for instance, is an article by Suze Orman, advising, without exception, that everyone create a trust and fully fund it right away. I appreciate Ms. Orman’s efforts to convey the importance of estate planning for everyone, and to try to remove some of the mystery from the process. In fact, however, probate provides certain benefits that you will miss out on if you follow Ms. Orman’s advice. And some of the steps that people take in order to avoid probate come with more difficulty, expense, and risk than probate would have had, more than defeating the purpose. When it comes to the law, one piece of advice is rarely right for everyone, and this situation is no different.
What is probate?
Probate is the court process for proving that your will really is your will and ensuring that your assets are properly distributed to your heirs and creditors. It does have a nasty reputation for being both slow and expensive, and in some states, that reputation is still well deserved. In Colorado, however, the process can frequently be relatively quick and inexpensive, as long as you have a properly executed and up-to-date will. The process includes certain deadlines that the person appointed to serve as your personal representative will have to meet for notifying your beneficiaries and creditors of your death, and getting your assets transferred to the right people.
How do I avoid probate?
Still, regardless of how simple probate can be, it’s a court process, and you might be wondering why you wouldn’t avoid it if doing so is as easy as Ms. Orman makes it sound. When determining whether trying to avoid probate is the right strategy for you, perhaps the first question you should ask is how you would go about doing it. If that process is going to be difficult and expensive, it may not end up gaining you much, even if it works.
The critical thing to understand about probate is that the only assets that will need to go through it in order to get transferred to someone else at your death are assets that you hold in your name alone. Assets that you jointly own with someone else do not get probated. If, for example, you and your spouse hold joint title to your house, that house will automatically become the sole property of whoever lives the longest after the first person passes away. No probate necessary (note, however, that probate will become necessary once that survivor passes away).
So the trick to avoiding probate is to avoid having any assets titled in your name alone when you die. Some people attempt to accomplish this by adding an adult child as an owner of their house and bank accounts. I’ve written about the problems with this strategy before. In short, while it has the appeal of being cheap and easy, and it will help you avoid probate, it comes with some enormous risks. Most notably, it opens your assets up to collection by the creditors and ex-spouse(s) of the person whom you bestowed joint ownership upon. It can also create tax problems, depending on the value of the assets transferred.
A more frequently advised approach to avoiding probate is to create a trust. A trust is sort of like an account that you open for yourself and then can put all your assets into. And although you can, for the most part, continue to use the assets as you would if you held them in your own name, the trust is considered to a separate legal entity from you. What that means is that when you die, the trust lives on, and the assets that it contains don’t need to go through probate. Instead, the trust document provides the instructions about who should get what after you’re gone.
A trust is a highly flexible tool that provides you with more control to determine what happens to your assets after you die than you will be able to accomplish with a will. It’s a great option for a lot of people. Because trusts can do so many different things, however, setting one up is often quite a bit more complicated, and therefore more expensive, than just drafting a will. Moreover, they take work to maintain. In order to receive the full benefits of the trusts, you have to take whatever steps are necessary to transfer the property, just like if you were transferring it to a person. And once you do that, the assets really are held by something that is separate from you. Once you create a trust, there will be certain steps you need to take to keep track of what’s inside of it. This can become a real pain for assets that you use frequently, like a bank account.
What are the benefits of probate?
As I mentioned above, not only can probate be fairly straightforward, but it actually comes with certain benefits that you will miss if you avoid it entirely. The most important of those might be that going through probate can dramatically shorten the amount of time that creditors with unfiled claims against you can collect from your estate, from a year all the way down to as few four months.
Also, if you plan on putting real property into your trust, such as land or your house, you might need to take certain steps in order to ensure that you retain marketable title to that property. Your mortgage lender and your insurer might require certain paperwork or additional steps be taken before conducting business with you that they wouldn’t have required if you held the property in your own name.
Again, my point is not that probate is definitely right for you, or that you shouldn’t set up a trust. Probate can be a pain in the butt, and a trust might be necessary if you want to do more than just leave assets to adults who you know are capable of handling them. But that’s not always the right path for everybody. When a potential client first contacts me, I ask quite a few questions to determine what kind of plan might be right for them. Your goals and your situation are unique. There is a good chance will need to be too.