September 13, 2022—Most people prefer to avoid probate because it could be a lengthy court process of transferring a decedent’s estate to his or her beneficiaries. Not only does the process have the potential to take a very long time, it may also be expensive. And once your will is deposited in probate court, your private affairs may become a matter of public record. In this podcast, Director of Wealth Strategies Kerry Reeves of Wilmington Trust Emerald Family Office & Advisory® explains what probate is, and how you may take steps to bypass the process.

How to Potentially Avoid Probate

Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Kerry Reeves, Director of Wealth Strategies for Wilmington Trust Emerald Family Office & Advisory® and your host for today’s podcast. In today’s GEM, I’m going to answer the question:  How might I avoid probate?

First, let me answer, what is probate?  Well, it is the court process of transferring a decedent’s estate to his or her heirs or beneficiaries.  

When a person passes away having assets in his or her individual name, those assets may become frozen until there is an executor appointed by the court to administer the decedent’s estate. The person nominated in the decedent’s will, or perhaps a family member if there is no will, will go to the court and petition for the “probate” of the estate. Generally, the court will then appoint an executor, also known as a personal representative, who will be charged with administering the estate. 

Let’s talk about what types of assets will be subject to the probate process.

There are several different ways you can own assets: i) In your individual name; ii) Joint with one or more other owners, and iii) Assets with a beneficiary designation.

Assets owned in your individual name at the time of death must pass through the probate process.  So, if you have a will, your property will pass through probate and to the beneficiaries named under your will. If you do not have a will, your property will pass through the probate process and to your heirs-at-law as determined by your state of domicile. 

Joint property typically passes to the surviving joint owner.

And assets with a beneficiary designation typically pass to the named beneficiary.

So, why would you want to avoid probate?  Well, there are certain disadvantages to the probate process which are:  time, expense, and publicity.  

Often, the probate court process is slow. It is not uncommon for it to take several months for the court to appoint an executor. And, with events such as the COVID pandemic, in many jurisdictions, the process can become even slower. Some states are better than others, but, in any event, there will be some sort of delay. In addition, the probate estate must remain open for a certain period of time to allow for any creditors to bring claim.

The probate process can be expensive. Many people feel the need to hire an attorney to guide them through the court process. Further, there are court costs which vary by state. 

Finally, publicity. Generally, probate court documents are open for public inspection.  So, you can walk into a courthouse and pull almost any probate court file and see the details. This includes information such as the will, the assets in the estate, and beneficiary information.  

Ok, so, how can we avoid the probate process? The answer is simple—you may avoid probate by titling your assets in a way that allows them to pass outside of probate. For instance, avoid having assets titled in your individual name at the time of death.  

Let’s talk about some different types of non-probate transfers. 

First, joint property. This is property owned together with one or more persons. You might see this as “joint tenants with rights of survivorship” or “tenants by the entirety.” It is common to find real estate with this ownership, but bank accounts, investment accounts, and other types of personal property can also be titled in joint names. Again, on the death of one of the owners, the property automatically transfers to the surviving joint owner by operation of law and without the need for probate. 

The other advantages to this type of ownership are that it is applicable to most assets, and it is generally easy and inexpensive to establish. 

There may also be some disadvantages to joint ownership. Any joint owner may unilaterally withdraw the property, there may be gift tax issues, estate tax reporting requirements, and a reduced step-up in basis upon death.

It is important to note, that not all co-ownership arrangements are considered joint property.  For instance, real estate can be held by multiple owners as “tenants in common,” meaning each owner owns a separate share of the real estate and there is no “right of survivorship.” Each owner controls the disposition of his or her own share. Similarly, co-ownership of a business does not necessarily mean it is held jointly. It is important to understand the effects of any co-ownership structure. 

Next, a transfer-on-death account. This is simply an account (such as a bank or investment account) that automatically transfers to a named beneficiary when the account owner dies.

The advantages of this type of ownership are, again, it is inexpensive to establish, it is easily modified, and there is an ease of transfer upon death. Typically, when the account owner dies, the beneficiary just presents a death certificate and identification to the financial institution holding the assets. This ownership structure should avoid the probate process. 

Similarly, life insurance and retirement accounts pass in accordance with a beneficiary designation.

If you have an asset that passes in accordance with a beneficiary designation, such as life insurance or a retirement account, but for some reason or another, no beneficiary is named, generally, it will default to the decedent’s estate, subjecting it to probate. Or, even worse, it could pass to default beneficiaries designated under the plan. For this reason, it is very important to make sure beneficiary designations are accurate, up to date, and when filed, accepted by the appropriate financial institution.  

Another way to avoid probate, is the creation and funding of a trust during life. Generally, property held in trust will pass in accordance with the terms of the trust and, therefore, avoid probate.  

One of the most basic types of trusts, and very commonly used, is a revocable trust. This is simply a trust created during life that can be revoked or amended by the grantor at any time, so long as he or she is living and competent. The grantor is the person who creates and funds the trust. The grantor may retain complete control during life and can manage the assets held in the trust in any way he or she sees fit. I like to tell clients that funding their revocable trust during life is like taking a $100 bill from one pocket and placing it in the other. A benefit being that the assets held in trust will, generally, avoid the probate process at death. To fund your revocable trust during life, you may simply retitle assets in the name of your trust. 

A revocable trust is often complemented by a “pour-over” will, which is a will that just says, upon my death all of my assets will be transferred to my revocable trust. The idea being that you may fund your trust during life and the pour-over will acts as a catch-all to direct any assets that were not so transferred.

Some advantages of using a revocable trust include: 

  • They can be flexible and easily modified
  • You can retain control
  • They may ensure continuity of asset management upon death or disability
  • They may provide for optimal use of estate tax exemptions
  • You may have an opportunity for lifetime funding for probate avoidance

There are not many disadvantages of revocable trusts, but I will say, there will be an initial expense to have an attorney prepare the trust. That said, this expense is very often far less than that of the probate process. 

In any event, it is very hard to avoid the probate process completely. There are often forgotten assets or assets which, for one reason or another, cannot be transferred during life. So even if you are planning for probate avoidance, it may still be very important to have a will.

As always, before transferring assets for probate avoidance, it would be prudent to speak with your advisors.   
   
Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions about potential probate avoidance. We would be glad to help you. See you next time!

Wilmington Trust Emerald Family Office & Advisory® is a registered trademark and refers to wealth planning, family office and advisory services provided by Wilmington Trust, N.A., a member of the M&T family. Wilmington Family Office is a service mark for an offering of family office and advisory services provided by Wilmington Trust, N.A.

The information provided herein is for informational purposes only and is not intended as a recommendation or determination that any tax, estate planning, or investment strategy is suitable for a specific investor. Note that tax, estate planning, investing, and financial strategies require consideration for suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful.

Wilmington Trust is not authorized to and does not provide legal or accounting advice. Wilmington Trust does not provide tax advice, except where we have agreed to provide tax preparation services to you. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor.
The information in this podcast has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice.