This month we'll discuss reasons you might want to avoid probate; we'll suggest a couple of strategies to avoid probate and discuss the pros and cons of two strategies.
Many clients tell me that they want to avoid probate at all costs. Usually that is because they have heard horror stories about a probate or estate administration that went horribly wrong, took too long, or cost too much. Those are good reasons to avoid probate, but there are other reasons as well. Although I tell my clients that probate is not horrible or too expensive in Georgia compared to some other states, that does not mean the process isn't slow, confusing or frustrating. During this time of COVID, the courts have slowed down considerably and the probate process is taking months longer than it used to. We assume this is a temporary condition, but we anticipate the courts will still be playing catch-up for quite some time and the probate process will continue to take longer even when we are supposedly back to normal.
Although the probate process always takes time to wind through the legal and practical steps that must be taken, a slow process means that for a beneficiary or heir, such as a spouse, minor child, or person with a disability who needs access to the funds of a decedent, waiting for months can be a real hardship. If if there is a mortgage on a home that is shared by others, the inability to access funds to pay that mortgage can cause default on the loan and potential foreclosure on the property.
Blended families, such as married couples who have children and grandchildren from previous relationships, may wish to have separate assets and estate plans to take care of their children and grandchildren.
Do you own real property and more than one state? If so, you may end up with a probate process in more than one state causing even more expense and delay.
One way to avoid these issues is to have a living trust as the basis of your estate plan. I've often described the trust as being similar to a little red wagon. A wagon is a receptacle – a place to put your “stuff”. As a kid, you might have pulled a wagon to haul your valuables through the neighborhood. You were in charge of that wagon, putting in whatever you wanted to carry and taking the things out when you didn’t want them anymore. If you wanted, you could allow someone else to take the handle and haul your stuff for you. You made the rules for your wagon.
A trust is like that. You put your assets – your adult “stuff” – in the trust. While you are alive and well, you can be the trustee. The trustee is the person that puts the stuff in the trust, makes sure the stuff is taken good care of, and takes the stuff out of the trust whenever necessary. When you no longer want to be the trustee, or you can no longer serve as trustee because of incapacity or death, someone else will pick up the handle and serve as the trustee.
As the trust maker, you get to decide the rules of the trust. Just like you could decide who got to pull your wagon, you get to decide who will be the trustee. You can also decide who will benefit from the things in that trust and when they can benefit.
Unlike the rules you made up as a child, though, the rules of the trust are written in a document so that the person serving as trustee knows the rules and must legally follow those rules.
A trust avoids probate because ownership of assets is transferred to the trustee of the trust. The assets are not owned by the decedent and the probate court does not have jurisdiction over those assets. The trust outlines where the assets will go after death. Because the probate court doesn't have jurisdiction, that court cannot entertain lawsuits about distributions of these assets.
The pros of a living trust are control over assets during lifetime and the ability to transfer responsibility of the management to another person, the successor trustee, in case of disability or death. The trust document outlines the plan for distribution of those assets in case of disability and after death. A successor trustee can legally access the assets without going through a probate court process, usually meaning that the successor trustee has access and control shortly after the death of the trust maker.
What are the cons? Initially, the assets have to be transferred to the trust. That means taking the time to contact financial institutions to fill out forms to transfer or retitle the assets. Although income earned on the assets during the trust maker’s lifetime will not be taxed differently because the income is reported on the trust maker’s or grantor’s tax form, after death, when the trusts generally become irrevocable, the tax rates can be higher. This article is not meant to explain the taxation of trusts, so be sure to consider tax issues when discussing with your estate planning attorney.
Another way to avoid probate is through joint ownership of assets. When assets are held jointly, at the death of the first owner to die the survivor becomes the sole owner without going through any court process. One basic advantage is that while you're alive a joint owner can access the accounts to pay bills and deposit money.
The cons are that the joint owner becomes a sole owner after the first death, and there is likely to be a probate after the survivor’s death when the assets are held individually. In addition, if you're planning to leave your estate equally to all of your children, making one a joint owner can mess up that plan because a joint owner who becomes the sole owner does not have to share with the other children. There can also be some tax consequences to transferring partial ownership to a joint owner. For example, if you transfer ownership of a home that has appreciated in value to a joint owner, that owner may have some capital gains tax issues upon the sale of the property.
In blended families, joint ownership of assets can mean that the estate plan of the first to die can be undone and the children and grandchildren may get disinherited at the death of the first spouse.
Also, of concern is that a joint owner who has total access to the assets can use those assets for their own purposes. Money or property jointly held may be available to the creditors and potential ex-spouses of the joint owner, as well as for judgments if the joint owner gets sued. Clients have also told me that if the joint owner has a bank account in the same bank and overdraws, the account in joint ownership is fair game for the bank to satisfy that overdraft.
Next month, we will talk about the pros and cons of other probate avoidance strategies.