Probate Avoidance Strategies

Probate avoidance is not as important as it used to be because of the many states that are bypassing the formal probate process with simplified probate procedures. But there are still a number of states that have not provided relief from the high cost and time involved. In addition, even in those states where it is simplified, it is often much easier to avoid the process altogether. Here are some of the more common strategies

Pay on Death for Bank Accounts

Almost any bank will establish a pay on death for savings, CDs and checking accounts. This is not automatic and this option must be initiated by the owner. This is not a joint account and the person or persons who are listed on the pay on death card has no access to the funds while the owner is alive. At death of the owner, the beneficiary on the account presents a death certificate and evidence of identity and can take over the account thus avoiding probate.

Tax Qualified Retirement Accounts

These accounts are such things as IRAs, 401(k)s, 403b's, 401(a)s, SEPP, SIMPLE and so on. Contract provisions of these accounts are governed by the IRS. All these qualified accounts allow for naming a beneficiary or beneficiaries in the event of death. As a result, these accounts automatically bypass probate. It should be noted that in community property states, if the account was acquired and funded while the couple was married, half of any of these accounts belongs to the surviving spouse.

Transfer on Death of Securities

Almost every state has adopted the Uniform Transfer on Death Securities Registration Act. The provisions of this act allow a person to name someone to inherit ownership interest in stocks, bonds, brokerage accounts and mutual funds. This bypasses probate. When setting up these accounts, the owner must request what's called a "beneficiary form" to set up appropriate beneficiaries. As with the pay on death accounts, the beneficiary has no access to the assets while the owner is alive. At death, the beneficiary provides proof of death and identification to the transfer agent or other entity that controls the investment. The beneficiary becomes the new owner.

Simplified Ownership Transfer for Motorized Vehicles and Trailers

For conveyances -- including mobile homes -- that are registered with the Department of Motor Vehicles, most states have adopted strategies to bypass probate for a change in ownership. In a few states, titles can actually have beneficiaries on them. In most states title transfer is simply done after death by presenting a death certificate and evidence of the relationship of the person requesting the title change. Most states have a standard form for this purpose.

Joint Tenancy with Right of Survivorship

Many folks are tempted to place their children or someone else on the title of their home as joint tenants with rights of survivorship. This certainly works to bypass probate. It also has its pitfalls. As long as the choice of joint owners is a judicious one and there is no anticipation of experiencing any of the pitfalls, this strategy will work. On the other hand, a better plan might be one that involves the use of specialized deeds such as the one discussed below or strategies involving trusts.

Community Property States and Tenancy by the Entirety

Tenancy by the entirety is very similar to the way property is treated in community property states. With tenancy by the entirety, the surviving spouse obtains ownership of the property at death. This bypasses probate. In community property states, typically, only half of the value of the property is inherited at death and the other half may have to go through probate. Recognizing this dilemma, many community property states allow for a right of survivorship such that the entire property passes to the surviving spouse exactly as with a tenancy by the entirety.

Gifting

Gifts are not subject to probate. They may be subject to estate or gift taxes. In all states except for two, the estate and gift tax are unified under one federal tax and generally the tax is paid at the death of the last spouse. The state is paid its portion of the tax out of the federal tax. In Tennessee and Connecticut, a separate gift tax is assessed on even relatively small gifts. In these states, gifting might become expensive.

Revocable Living Trusts

In the past the sole purpose of setting up these trusts was to avoid probate and to avoid the pitfalls of joint tenancy with rights of survivorship. With simplified probate being instituted in a number of states, these trusts are not as valuable as they once were.

Small Estates and Simplified Procedures

Real estate and other property below a certain value can easily be transferred in many states without the formal probate process. Usually the change in title is accomplished through presenting a death certificate and signing an affidavit that proves relationship and the title is changed or the money in the account is released.

Enhanced Life Estate Deed

This is a very simple strategy for transferring real property at death. This deed is also commonly known as the "ladybird deed" -- named in honor of former first lady, Ladybird Johnson. Apparently, her husband Lyndon Johnson transferred his property in Texas using one of these deeds. This form of transfer does not work in all states. This is not necessarily because state law prohibits the use of such deeds, but it may be due to the fact that these deeds are not used frequently and the courts may not yet except their use. Apparently more and more states are allowing the use of this strategy.

The concept is not only simple but the language is short and to the point. Here's the typical language used in such deeds.

For good and valuable consideration paid by the Grantee Beneficiary, the receipt of which is hereby acknowledged, the Grantor does transfer and convey the following described property to the Grantee Beneficiary effective on the Grantor's death:

Property Address: ______________________________________________________________

Legal Description: ______________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________

The Grantor reserves a life estate for himself/herself during the Grantor's lifetime coupled with an unrestricted power to convey during the Grantor's lifetime, which includes the power to sell, gift, mortgage, lease and otherwise dispose of the property, and to retain the proceeds from the conveyance.

Essentially, the grantor gifts the property to a beneficiary at his or her death. In order to maintain rights to control the property, the grantor retains a life estate on the property as well is the right to sell or mortgage or deal with the property in any other way. Because the grantor retains these rights, this is not considered a gift for Medicaid purposes or for IRS purposes. Therefore, the grantor retains the right to obtain Medicaid as well as retaining favorable tax treatment if the property is a principal residence. At death, the property goes to the beneficiary and bypasses probate. Because there are no other people on the title, the disadvantages of joint tenancy are avoided.

This strategy works well for a single individual under Medicaid. It may be too simple for more complicated Medicaid cases or for complicated estate planning. In fact, the existence of the deed may mess up a sophisticated estate plan.

Trusts

A trust is a legal document that "entrusts" property to a trustee (a bank, attorney, individual or trust company) to manage assets on behalf of a person or persons (beneficiaries of the trust) whom the maker of the trust wants to benefit. In most cases, the maker of a trust is creating a benefit for a loved one that will be distributed after the death of the creator or maker of the trust. Trusts usually involve very specific and detailed instructions on how a trustee is to carry out the duty of managing or distributing the property on behalf of a beneficiary.

A trustee will select investments, keep records, manage assets and prepare court accountings, paying bills and (depending on the nature of the trust) medical expenses, taxes due, charitable gifts, inheritances or other distributions of income and principal.

A trust relationship is also created in a will when the maker of the will specifies an entity to be an executor or personal representative of the estate. This person or company then becomes a trustee for the deceased individual who made the will. The responsibilities of an executor in settling the estate of a deceased person include collecting debts, settling claims for debt and taxes, accounting for assets to the court and distributing wealth to beneficiaries.

There are countless types of trusts created for myriads of different situations but the most common trust, useful to most of us, is the "living" or "inter vivo" trust. The purpose of this trust is to avoid the cost, public disclosure and the possible 6-month to 12-month process of probate. Probate transfers title from the deceased to the living, but by definition a trust never dies, thus it is not subject to probate. Most trust arrangements make the trust the owner of the property with the original owner(s) as trustee(s) (caretakers as it were) and beneficiaries(s). As beneficiaries, the property reverts to the estate of the original owners after their deaths.

In many states the probate process has been greatly simplified and the cost is minimal. In these states, the cost and bother of setting up a trust to avoid probate may be more than simply going through the simplified probate process after death.

For Medicaid qualification, living trusts are subject to inclusion of assets and the property must therefore be listed as resource. For Medicaid planning purposes and for obtaining VA aid and attendance, a living trust may not be useful at all. However, a living trust can be established prior to applying for Medicaid in order to disqualify the personal residence as exempt. Thus the personal residence will count as a resource for dividing up the resources between spouses. This strategy will result in the community spouse retaining his or her maximum share of the resources. After a "snapshot" of resources has been made by Medicaid, the property is removed from the trust and placed in the community spouse's name or the trust is converted into an irrevocable trust for purposes of starting the five-year look back or applying for the VA aid and attendance benefit.