By: Investor Solutions, Inc.
Each year millions of dollars are wasted paying steep attorney & court fees related to probate proceedings that simply could have been avoided with a little preparation and perhaps a simple phone call. It doesn’t matter if your 35 or 75 years of age, you should review your estate and financial plans every year. In general, probate is a waste of your hard earned money and just another way to fatten up your attorney.
What is Probate?
Probate is the process of authenticating a deceased person’s will in the local court. If there is no valid will (called intestacy), the court determines who, under state law, will inherit the deceased property. To the surprise of many, a will does not exempt your property from the probate process.
Although these tips may save your inheritors on taxes and the costs of probate, the main goal here is to guide you to establish a comprehensive estate plan that ensures your assets are distributed to your beloved heirs in a timely manner.
Why is it worth your while to avoid probate?
Probate proceedings can take up to a year or two, which during this time your beneficiaries receive nothing. The probate process is made public for everyone to see your financial and family matters and each state will require a court proceeding for property located in its state (no fun there). So why do many lawyers simply recommend an inexpensive will? Because wills are a profit center for most lawyers. Many lawyers will purposely charge much less for drafting wills as compared to similar documents with equivalent complexity, because they are hoping to cash in later when the will needs to be probated. The probate costs typically range from 5% to 8% of the value of the property left behind at death, this includes the probate attorney, court, and other fees that usually vary from state to state. Should you die with $500,000 to your estate, you could pay as much as $40,000 in probate costs!
What precautions can you take to protect your family and your estate from the dreaded probate?
Check your named Beneficiaries on your Retirement Accounts at least Annually – Get yourself into the habit of contacting your plan administrator or IRA custodian to verify your listed beneficiary. Since retirement accounts pass by contractual beneficiary they are not subject to probate. Avoid naming your estate as the beneficiary since this will subject the account to probate proceedings. Make sure you re-evaluate your plan beneficiaries after major life events such as marriage, divorce, and retirement.
Hold Property in Joint Ownership – Just to name a few, this applies to real estate, bank accounts, stocks, bonds, vehicles, and brokerage accounts. The types of joint ownership that avoid probate are Joint Tenancy with right of survivorship, Tenancy by the entirety, and Community Property with right of survivorship. Basically, when one owner dies, the survivor transfers the property into their name alone-bypassing the probate process. Be cautious with high-net-worth individuals, since too much in assets in the survivors name might create a tax consequence to them upon their death.
Create a Revocable Living Trust Property – in a Living Trust will go directly to your inheritors, unlike property left to will that must go through probate. You create a trust document then transfer your property to the trustee, who becomes the legal owner. In most cases, you or your spouse are the trustees of the Revocable Living Trust, so you keep complete control of all the trust property.
Make Gifts – Each year you can gift up to $11,000 to any person without a gift tax penalty (indexed for inflation in future years). Of course, you must be willing to part with the asset, since you are no longer the owner it will not be subject to probate when you die.
Transfer-on-Death Registration of Accounts – Almost all states have adopted the Uniform Transfer-on-Death Securities Registration Act. This Act allows you to name a beneficiary for your bank accounts, stock, bonds, and brokerage accounts so they pass directly to the heir of your choice thereby avoiding probate.
From my experience, the most overlooked planning tool is the Transfer-on-Death Registration, only the states of Louisiana, New York, North Carolina, and Texas have yet to recognize TOD’s as a uniform standard. TOD is available at most brokerage firms and custodians as a free service in most cases, however; some firms will charge a small setup fee around $25. Banks sometimes tend to refer to the Transfer-on-Death Registration as a “Payable-on-Death Account”.
In most cases, when you name beneficiaries to your accounts and set up trusts for your assets they will take precedence over the wording in the will. Court challenges to trusts are very rare since your continuous involvement with the living trust after its creation is evidence that you were competent to manage your affairs.
As powerful as all these tools may seem, don’t think that you can totally eliminate the need for a will. These techniques will cover only that property that you have transferred or named primary beneficiaries, there is always a chance that you might acquire property shortly before you die or overlook some piece of property. Take it upon yourself annually to review all of your financial plans, update your beneficiaries, and evaluate your trust and will for accuracy.
It’s always a good idea to consult with an attorney that specializes in estate planning to set up the best protective vehicles that fit your particular situation. Search the website of the American College of Trust and Estate Counsel for attorneys in your area. ACTEC is a non-profit association of lawyers who have at least ten years of experience in estate planning and are elected based on their reputation and ability.