Probate is one of the most misunderstood processes that one will go through in life (or should we say, death)! Most people believe that if they have a will or even instructions written down dictating their wishes– that it will be easy for their beneficiaries to act upon it. On the contrary!

Our country’s laws mandate that if you don’t go through the process of planning for the re-titling of your assets upon your death (title-able assets) in specific ways—then you are subject to probate, whether it be formal or informal. Both methods require a legal process to unwind.

So, what exactly is probate? It’s the court’s involvement in the re-registration of assets from one person to the next.

THE PROBATE PROCESS IS SOMETHING THAT, IN our PROFESSIONAL OPINION, IS TOTALLY UNNECESSARY.

The toll of probate can be a beneficiary’s nightmare. It can be quite costly, it can take many years to settle, there’s no privacy surrounding your estate since it becomes public record, and the personal representative of your will (if you have one) is subject to all the rules and restrictions of the courts.

Is probate easy to avoid by doing a trust? A trust can avoid probate if, in fact, the (non-qualified) assets are titled in the name of your trust at the institution in which they are held (or officially registered at the government agency in which they are recorded). Simply listing the assets within your trust document will not suffice.

For example, instead of a property being recorded in Jack Frost’s name– for a simple nominal fee, Jack can create a beneficiary deed on the property.  That beneficiary deed says that Jack is still one hundred percent owner on his property, but the moment Jack dies the property goes to his beneficiary… Jermaine Frost, his son. When Jack passes away Jermaine can go straight to the title company and can activate that beneficiary deed and the title company will put the property into Jermaine’s name, no probate involved.

What about Jack’s bank accounts? How does he avoid probate there? It’s simple. All banks have “Payable On Death” (POD) forms. That means since Jack has a checking or savings account, he can still have it titled in his name, but he can do a POD registration with his bank that states that when Jack dies the account goes to the beneficiary named on that form… again, Jermaine.

Brokerage firms, such as LPL Financial, have the same form, but instead of “Payable On Death” forms they’re called “Transfer On Death” forms. Both accomplish the same purpose: passing assets without having to go through the probate process.

WHAT ELSE AVOIDS PROBATE?

IRA’s, 401k’s, and other qualified* plan assets avoid probate!  Why?  Because they have beneficiary designations– just like the POD and the TOD registrations.  What else avoids probate? Annuities avoid probate. Life insurance avoids probate. You can even (in the state of Arizona), have a “Payable On Death” registration on your automobile. There are so many ways of avoiding probate without having to go through the court process that it just makes no sense at all to NOT circumvent it!

On a side note:  It’s a common misconception that in order to pass along assets probate-free at death, one needs to include their child or beneficiary’s name on the instrument with them as a co-owner. The thought process behind this is that this method will avoid the bank or financial institution locking down the account and/or safe deposit boxes once they receive notification of the account holder’s death. If you don’t want your assets endangered, please do not do this!

If a property owner simply added their beneficiary’s name to their property deed, the ramifications would be subjecting the property to possible gift tax exposure as well as the liabilities of the newly named person. Those liabilities could include medical expenses, divorces, you name it!  Putting someone else’s name on an asset can be extremely dangerous.

In addition, even IF the beneficiary’s name is on the deed, or the bank / brokerage accounts as co-owner, it doesn’t guarantee that it will be easy for the beneficiary to obtain access to the property and accounts when the original owner passes away. As a matter of fact, the institutions will more than likely lock these accounts anyway and the estate may still end up having to go through probate.

The only assets that succeed at avoiding probate without being titled in the name of a trust are the ones that are properly registered with POD / TOD registrations or the qualified assets that have beneficiary designations to them.

 

 

* Qualified investments are accounts that are most commonly known as retirement accounts and they receive certain tax advantages when the money is deposited into the account. Non-qualified investments are accounts that do not receive preferential tax treatment. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.