Here's the #1 reason people do estate planning: to avoid lengthy and expensive court proceedings, like probate and guardianship. There are many other reasons, of course, but avoiding the time and cost of courts is foundational for the vast majority of our clients. In this post, we want to describe the two primary ways of doing just that, and why you might prefer one over the other.
But first, the BIG PICTURE.
To know how to avoid probate, it's best to get a basic understanding of its purpose. While probate accomplishes several important things, its main function is to establish the identity of new property owners after someone dies. Why does the State care about this? (Hint: taxes. The State needs to know where to send the bill.)
It does a few other things, too - like allow someone to identify and inventory all assets, and provide for creditors and potential heirs to make a claim against the estate - but even this is ultimately about establishing ownership.
With that big picture in mind, let's look at the two most common ways of avoiding the whole mess, while still allowing the State to know who owns what.
One option: TITLE
The most basic way to avoid probate is to ensure that all assets have either: 1) a joint owner, or 2) a pay-on-death beneficiary.
If, when you die, all of your assets have a joint owner or a designated beneficiary, then there is no reason for a probate. Why? Because there is no question about who owns the assets. There's nothing for the State to figure out. Joint owners and beneficiaries are the owners. No need for courts or wills or anything else. Pretty straightforward.
This strategy has the added benefit of being very cheap. No traditional estate planning documents are required because control and ownership are established exclusively by title and beneficiary designation.
To avoid probate this way, you need to ensure that all real estate has either a joint owner with rights of survivorship or a special type of deed called a "transfer on death deed" on file with the county clerk where the property is located. You also need to ensure that all cash assets - checking accounts, savings accounts, brokerage accounts, insurance policies, retirement accounts - have either a pay-on-death or transfer-on-death beneficiary.
While this is certainly the cheapest and easiest way to avoid probate, it comes with several risks you may need to consider.
Risk #1: When you have a joint owner of your assets, their financial bad choices and bad luck are yours. In other words, the assets are exposed to the liabilities of all of the joint owners. When would that matter? (Hint: Adult son getting a divorce? Adult daughter just had a car accident? ALL of "their" assets are exposed.)
Risk #2: After you die, you can do nothing to protect the assets for your beneficiaries or surviving owners. When would this be an issue? (Hint: That $1 million life insurance policy that just paid out to your beneficiaries? Their divorcing spouse and judgment creditors can access that too.)
Each of these risks, and many others, can be dealt with in the other strategy for avoiding probate.
Another option: TRUST
A more comprehensive approach to avoiding probate is to create a living trust (also called an "inter vivos trust").
During your life time, you transfer ownership of certain assets to your trust and designate the trust as the beneficiary of other assets. In this way, you've established the trust as the rightful owner of assets, which means the State has nothing to determine at your death. You may have died, but the owner of your assets - your trust - is still "alive" or continues to function.
While a trust avoids probate just as well as the title strategy described above, it also allows you to provide asset protection for yourself and your beneficiaries. This can take a few different forms, but below are two common types of asset protection provided by a living trust.
Protection #1: If you are married and die before your spouse, you can use a trust to protect assets for the benefit of your surviving spouse and children. For instance, if your surviving spouse eventually remarries, you can ensure that certain assets are not available to be co-mingled with the new spouse, protecting the assets from a divorce decree or accidentally disinheriting your children.
Protection #2: If you have children, you can ensure that they inherit your assets in a way that is protected from creditors, divorcing spouses, and financial predators. If your child has a special need, you can ensure they receive the full benefit of your assets while protecting their benefits (such as Medicaid, SSI, or government housing). If your children are minors or relatively young adults, you can ensure they receive the benefit of your assets for their education and health while protecting them from loss through quick or unwise spending. If your child has a substance abuse problem, you can ensure they receive the full benefit of your assets without the ability to use them to support their addiction. And on, and on, and on.
The BOTTOM LINE
Each of these probate avoidance strategies works well, but neither is right for everyone. The difference is not necessarily about your net worth, as many mistakenly believe. Which strategy is right for you is a matter of your priorities, your people, and the types of assets you have.
In order to know which will work best for you and your loved ones, you need to speak with an experienced estate planning attorney.
If you want to know more, we would love to talk with you about it. Best part, the conversation about how it could benefit you doesn't cost anything. Contact us at (918) 770-8940 or firstname.lastname@example.org to set up a free consultation, either in person, video chat, or phone call.
Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. Your best bet, always, is to speak with an attorney about your questions, assets, concerns, and needs.