Posted by Martin Heller Potempa & Sheppard, PLLC on March 21, 2022
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Many people want to avoid the probate process after they die. One of the more common ways to avoid probate is to (1) create a trust, usually a revocable trust, which is sometimes referred to as a “Living Trust,” and (2) then transfer assets into the trust before death or pointed to pass to the trust at death.
There are many other reasons to have a trust as part of an estate plan. Avoiding probate at death is not the only reason. Many people use a trust to keep assets in the family and prevent “outsiders” from taking the family wealth away from the children and grandchildren. Trusts can also provide some types of tax benefits, especially in helping to reduce a couple’s estate tax.
For those people who want to avoid probate but do not want a trust, there are ways to make that happen.
Married Couples – First Death
For many couples, no probate is needed at the first death by the nature of how the assets are titled and directed. Some people think that, by state law, the survivor of the couple automatically receives everything from the deceased spouse. In most cases, that is the result. This is because a specific law makes it happen.
Many couples avoid probate at the first death because of the way their assets are titled and through beneficiary designations. When a married couple owns assets in both their names – a house, a bank account, etc. – then the survivor is seen as having a right of survivorship in the item. For example, a married couple owns a house and one of them dies, then the right of survivorship automatically transfers the deceased spouse’s portion to the survivor. If the house was only owned by one of the pair and not in both of their names, the survivor’s right of survivorship does not exist.
Some assets pass by beneficiary designation, like life insurance and retirement accounts. With most couples, they have named each other as the primary beneficiary. Unless a business is involved, most couples’ assets will either be jointly owned or have a beneficiary designation. Thus, the survivor automatically receives the assets at death, but not because a specific law makes it happen.
Single people do not have an automatic right of survivorship in assets. Still, there are ways to avoid probate and pass assets to directed beneficiaries.
1. Transfer on Death (TOD)/Pay on Death (POD)
Many accounts are allowed to have a TOD or POD designation. This is like having a beneficiary designation, similar to a life insurance policy or a retirement account. This causes the asset to pass outside of probate. This also means that the Last Will and Testament have no direction on who receives the asset.
2. Real Property – Deed Designation
You cannot have a beneficiary designation attached to a deed, but you can have the deed direct who receives the property at your death. This is sort of a survivorship clause in the deed itself that directs the inheritance of the real property.
3. Beneficiary Designations
As mentioned above, certain types of assets have beneficiary designations attached to them. You need to make sure that a primary beneficiary and alternate beneficiary are identified. The lack of listing a beneficiary could cause the insurance policy or retirement account to go through the probate process.
4. What is Difficult to Avoid Probate?
It is difficult to avoid probate for ownership in a closely held business. Generally, business ownerships do not have a right of survivorship nor a beneficiary designation. Even if the business owners have a Buy-Sell Agreement directing who receives the ownership shares, the probate process still must be done to appoint a Personal Representative to implement the Agreement’s buy-sell provisions. Also, closely-held business interests do not have designated beneficiaries to receive the interest at death. To avoid probate with a closely-held business interest, you almost certainly need a trust to hold the ownership.
Other Benefits of Utilizing a Trust
Even though the methods above can avoid probate, a trust is still probably the best way to avoid probate. Two of the most important features of using a trust, in addition to avoiding probate are:
Direct where the asset goes after the primary beneficiary dies. If I pass assets to my sister through a TOD, I cannot direct that I want it to later go to her children when my sister dies and not to her husband. A trust can do that.
Divide the assets proportionally. In a trust, you can identify a group of people and have the total assets proportionally directed among them. If you identify a certain person to receive the account through a TOD/POD, then that person gets the account, regardless of how much or how little may be in the account. On the other hand, the trust can direct that all assets be divided among people, regardless of what account holds a certain amount.
Find Out How You Can Avoid Probate
In summary, there are ways to avoid probate without using a trust, but before you set your assets up that way, make sure you understand the implications of what you might be missing. At Martin Heller Potempa & Sheppard, PLLC, our estate planning attorneys can help assess what your options are for avoiding probate and what would work best for you.