Often, when meeting with a client to discuss their estate planning, one of the first questions is, “How can I avoid probate?” Probate can be a source of anxiety for clients who want to avoid imposing on their loved ones what they envision as a long list of cumbersome tasks after their death.
Probate is the process by which a decedent’s will is carried out and, depending on the nature of the assets involved, requires varying levels of court involvement. Typically, probate assets are those assets a decedent owned in his or her sole name that do not go to a designated beneficiary. The probate court appoints the personal representative of the decedent’s estate, and monitors payment of the decedent’s debts, compliance with mandatory notification procedures, and distribution of assets in accordance with the decedent’s will.
Probate can be a relatively painless and straightforward process. Nevertheless, for the client whose priorities include avoiding probate, the tools discussed below, together with careful planning with estate planning counsel, can provide an effective means to that end.
Revocable Trust. A revocable trust is a highly effective method to avoid probate. The creator of the trust (the “grantor”) titles his or her assets, such as real estate, cash and securities accounts, and business interests, in the name of the trust. The grantor decides who will serve as the trustee of the trust. The grantor typically will be the initial trustee during his or her life and will choose who will serve as successor trustee if the grantor is unable to serve due to incapacity, and after his or her death.
During the grantor’s lifetime, the grantor can revoke the trust or otherwise make changes to its provisions. The appointed trustee manages and administers the trust for the benefit of the grantor (and, in many cases, the grantor’s spouse) during the grantor’s lifetime, and distributes the remaining assets in the trust after the grantor’s death in accordance with the provisions of the trust.
Assets held by a revocable trust are not probate assets after the death of the grantor. For example, when a decedent dies owning real estate in a state other than that of his or her legal residence, a supplemental probate proceeding must be initiated in that state. However, real estate held by a revocable trust, wherever located, is not subject to probate. A revocable trust can be particularly useful for people who own real estate in multiple states, as it makes supplemental probate proceedings unnecessary.
Another benefit of the revocable trust is privacy. Probate court proceedings and documents, such as the decedent’s will, are open to the public. However, a revocable trust, including the identity of beneficiaries, the terms of distribution, and the value of assets in the trust, do not become a part of the public record.
A revocable trust is also useful for incapacity planning. In the event of the grantor’s incapacity, the assets in the trust will be managed by the designated successor trustee without the need for a court proceeding to appoint a guardian or conservator.
Despite the many benefits, a revocable trust is not for everyone. Some may not want to do the legwork or incur the additional expense of putting assets in trust. Many couples own their home in survivorship form so that it will automatically pass to the surviving spouse without the need for probate. In addition, many clients already hold major assets, such as life insurance and retirement
accounts, with a beneficiary designation; these assets, too, pass outside of probate. A revocable trust may be unnecessary for these individuals.
Beneficiary Designation. The owner of an IRA, an annuity contract, or a life insurance policy can name a beneficiary to receive the asset upon the owner’s death by filing a designation of beneficiary with the financial institution. The owner may designate one or more primary beneficiaries, determine the percentage to go to each beneficiary, and may designate a contingent
beneficiary in the event the primary beneficiary predeceases the owner. The owner may opt to designate a revocable trust or a trust created under his or her will as the beneficiary. Such a beneficiary designation removes the asset from the owner’s probate estate. The owner should plan for the possible death of one or more of the designated beneficiaries; if no beneficiary survives
the owner, the asset will pass in accordance with the financial institution’s own terms, which may not be what the owner wants. This highlights the importance of the owner routinely reviewing and updating beneficiary designations to ensure that they coordinate with the owner’s estate plan.
Joint Title. Titling assets in the joint names of one or more owners in a survivorship form of title is another means to exclude an asset from probate. An asset, such as real estate or a cash account, held as joint tenants with rights of survivorship (JTWROS), for example, will automatically go to the surviving owner, outside of probate and not under the will of the predeceasing owner.
There is no limit on the number of owners, and they need not be related to each other. In addition, Maryland, D.C., and Virginia have a form of ownership called tenancy by the entirety (T/E), available to married couples (and in DC registered domestic partners). Like JTWROS, T/E ownership creates a right of survivorship.
When considering retitling inherited assets in joint names with a spouse, the owner should think about the effect of adding his or her spouse as a joint owner of their nonmarital asset. Doing so will avoid probate but could cause the asset to become subject to division if the parties divorce. The owner may want to consider a postmarital agreement to address this contingency.
It is important to note the distinction between joint ownership and simply adding an authorized signer to an account. An older person may add an adult child to a bank account to help with bill-paying. Whether the bank considers the additional signer to be a joint account-owner, thereby removing the asset from the account-owner’s probate estate, however, depends on the institution’s contract terms.
Pay-on-Death or Transfer-on-Death Designation. A pay-on-death (POD) account, typically a cash account, provides for a beneficiary to receive the account upon the account-owner’s death. A transfer-on-death (TOD) account does the same for a securities account. POD and TOD designations are a simple way to remove an asset from the account-owner’s probate estate. A POD or
TOD designation can also be useful in coordination with revocable trust planning, as the owner can designate the revocable trust as the beneficiary of the account at death, while avoiding the potential inconvenience associated with retitling an account in trust during lifetime.
As with all planning tools, a POD or TOD designation is not appropriate for all estate plans. A decedent’s estate will need enough liquid assets to pay debts, taxes, and administration expenses. A TOD designation over a securities account that comprises the majority of the decedent’s assets could result in insufficient liquid assets in the decedent’s probate estate. Likewise, if the decedent’s will provides for a cash gift, but there are insufficient assets in the probate estate to satisfy the gift, the gift will lapse while the TOD account goes to the named beneficiary, a result that may not be what the decedent intended. A POD or TOD designation will supersede any contrary provision in a will or trust regarding the same account. Therefore, it is important that the use of POD or TOD
designations be coordinated with the account-owner’s overall estate planning objectives.
Transfer-on-Death Vehicle Registration. In Maryland and Virginia, the owner of a motor vehicle may designate a beneficiary to receive title to the vehicle at the owner’s death. In that event, the vehicle will not be a probate asset and will pass automatically to the beneficiary. Only one beneficiary may be added to a vehicle title. If an initial designated beneficiary predeceases the vehicle owner, the owner must update the designation to name a living beneficiary; otherwise, the vehicle will be a probate asset at the owner’s later death. The owner may cancel or change the beneficiary designation at any time prior to the owner’s death.
While the planning tools discussed above can provide an effective means of probate avoidance, ultimately, whether it is appropriate to make use of one or more of these tools should be based on consideration of your goals and objectives in consultation with your estate planning attorney.