Avoiding Probate is Worthy, But ...How?

There are a variety of ways to avoid unnecessary probate:

(1) Assets owned as joint tenants with right of survivorship pass to survivor automatically by operation of law,

(2) Transfer on death (T.O.D) or payable on death (P.O.D.) or beneficiary designated assets do not go through probate,

(3) Assets owned in “a trust” do not go through probate.

Now, if your objective is to avoid probate, then what is the best method for you? The answer depends on whether or not you want to protect some of your assets when you are gone or direct that assets stay in your family. If you do want to protect your assets when you are gone and you do want your assets to be kept in your family, then creating a revocable trust and properly funding it is likely the best alternative. In your trust, we can direct that loved ones (a spouse, children, and a lover) will get assets “in trust”.

A properly drawn trust with a spendthrift clause will protect your assets from a myriad of threats. What threats will a properly drawn trust avoid? Lawsuits, court involvement, family disputes, estate taxes, and creditors’ claims. Please note, however, there are two exception creditors that can pierce a non-self-settled trust. Those exception creditors are: (1) the IRS, and (2) a minor claiming child support payments are delinquent.

For example, let’s say Mom has survived Dad and she has one son, Freddie. Mom owns the house free and clear and she has a retirement plan and a brokerage account. In an effort to avoid probate, Mom re-titles the house and the brokerage account so it is owned by her and Freddie as joint tenants with right of survivorship. This worked well when Dad passed. Mom thinks she should do the same for Freddie. However, if Freddie is sued during his life, his creditors can come after his half interest in Mom’s house and the brokerage account. Mom should know that putting Freddie on the house and accounts opens her up to losing those assets when she may need them most in her later years. Also, let’s say Freddie inherits these assets via his survivorship interest, and then later becomes divorced.

Do you think Freddie can lose any of what he inherited from Mom when he gets divorced? Yes, he can. The better alternative for Mom’s planning would be to create a revocable living trust where she is the initial trustee and the initial beneficiary. She keeps total control and benefit. Freddie can be the successor trustee to assume control if Mom becomes disabled. He can also be the remainder beneficiary because Mom can direct he will inherit assets “in trust” that he controls for his benefit. Result: Probate is avoided but Mom will not lose any assets if Freddie is sued during her life. Also, Freddie will not lose any assets he inherited from Mom if he later becomes divorced as is the case about half the time. Now, that’s good planning.

Contributed by:

Mark F. Winn, J.D., Master of Laws, LL.M. in Estate Planning, is a local tax, asset protection and estate planning attorney.