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It is common practice today for people to create legal wills to ensure relatives and loved ones receive the full benefit of their estate when they die. However, the process of executing that will (known as “probate”), and the taxes levied against estates after death have caused people to move away from using a will as the only means to transfer their property when they pass away.
Probate can quickly put a strain on a family after the death of a “testator” (owner of a legal will). Since formal probate requires court hearings and appraisal of estate property, the cost for processing a will can easily be more than 5 percent of the value of the estate. Additionally, probate is not a quick process. Months or years can pass before property is distributed to the proper recipients.
Many people have found that the best way to reduce the pains of probate is simply to keep property out of their will. The challenge for many modern estate plans is not how to create a solid will, but how to move as much property away from one before probate goes into effect.
Joint-tenancies and Life Estates
Joint-tenancy is the splitting of ownership of property and assets between two individuals. Usually done between spouses, this arrangement means property of the deceased is immediately owned in entirety by the surviving individual. Since it is not part of the estate, it does not go through probate.
Life estates are legal arrangement that are similar to joint-tenancy, but differ slightly in the how they divide the control of property. A life estate is split between two individuals: a “life tenant” and a “remainderperson.” Life-tenants manage an estate until their death. They are responsible for regular upkeep and repair of property as well as paying the interest on the property mortgage (if there is one). The remainderperson is responsible for extraordinary repairs on the property and paying off its principle cost. When the life-tenant dies, the remainderperson gains sole ownership of the property. Much like joint-tenancy, this method ensures that property is owned at death and not subject to probate.
Probate vs. Trust
The major drawback to both joint-tenancy and life-estates is the possibility for a dispute of ownership. Since both the active and succeeding parties have interest in the property or estate, a single owner is unable to make decisions for it by himself or herself. Attempts to sell property can be a legal nightmare because both sides need to agree to take any action. Additionally, there may be a further dispute over how money obtained from a sale should be split.
A testator can designate beneficiaries of specific assets without using a will. Retirement plans and IRA’s are among the most popular assets to be passed directly to individuals without a will. Such benefits are transferred privately and cannot be influenced by a probate. Additionally, many states also allow individuals to declare a payable on death (POD) specification to their banking accounts. These POD conditions essentially transfer the account to a named beneficiary when the original owner dies. Again, this method routes money privately, away from a will and probate.
Beneficiary plans are a good method to avoid some parts of probate but cannot handle many types of assets. POD accounts generally only deal with assets that are essential liquid in some form (able to be paid out in cash.) Though POD transactions might be more secure than a joint-account (a joint owner could take all the money out before death), their specification of “on death” can restrict their intention. If an owner falls into a coma or develops dementia, the account still remains theirs and cannot be used by anyone else.
The most popular method for avoiding probate, a living trust creates a separate legal entity that holds legal ownership of the property that an individual wishes to pass on. There are three different roles connected to a living trust: the grantor, the trustee and the beneficiary.
The grantor is the party who created the trust and, most likely, funded it with the majority of its assets. The grantor is the party attempting to avoid probate of his or her estate.
The trustee is the individual responsible for managing the assets of the trust. Usually, the grantor of a new trust acts as the first trustee. This allows for the person who created the trust to manage it as they desire until his or her death, whereupon trust control passes to a new trustee named by the grantor.
The beneficiary is the individual or the parties who receive the money or property (the benefits) given out by the trust. This role is also often initially fulfilled by the grantor. Grantors will rely on their trust to provide for them until they pass away, at which point, the new beneficiaries receive the profits of the trust. Many times, the beneficiary, if he or she is an adult, will also be made the trustee. This allows for beneficiaries to control how the property is best used to benefit them until it is distributed completely or becomes their private property.
Living trusts can be extremely effective at dodging probate because they allow the grantor to maintain full control of his or her property while alive, and pass its benefits to a surviving spouse and then children without having to ever undergo probate. Since all property belongs to the trust, the grantor technically owns nothing when he or she dies. If nothing is owned, there is no reason for probate.
Living trusts also allow for the control to be passed to a new trustee given certain qualifications. If the grantor and current trustee becomes incapacitated from mental or physical illness, the trust can be passed to the new trustee with the grantor still remaining a beneficiary. This kind of flexibility in the details and planning of a living trust has led to the growth of its popularity.
The Necessity of a Will
In many cases, a will is needed no matter what scenario a person has devised. What happens to the property acquired just before death? What about land that was never added to a trust? If an individual dies without a will (referred to as dying “intestate”) the unclaimed property is divided by probate court acting according to state intestate statues. Though typical intestate guidelines are prudent in dividing property among family, this is not necessarily what the deceased individual would have wanted.
Because many methods of avoiding probate ultimately end up only reducing it, creating a will is the safest method to ensure all assets go to where they are needed. As with every aspect of your estate, contact an experienced lawyer or financial advisor to discuss probate in your state and whether you should consider trying to defer or avoid it.