Why Probate Is a Problem and How to Help Your Family Avoid It
Unless you’ve created an estate plan that works to keep your family out of court, when you die or become incapacitated, many of your assets must go through probate before they can be distributed to your heirs. Like most court proceedings, probate can be time-consuming, costly, and open to the public. Because of this, avoiding probate and keeping your family out of court is often a central goal of estate planning.
To spare your loved ones the time, cost, and stress that come with probate, last week in part one of this series, we explained how the probate process works and what it would require of your family. Here in part two, we’ll cover the major drawbacks of probate and outline the different ways you can help your loved ones avoid it with proper planning.
What’s at Stake for Your Family
Probate court proceedings can take months, and sometimes even years, to complete. In the immediate aftermath of your death, that’s the last thing your loved ones need to deal with. And the time and emotional strain are just the beginning of the consequences your family could face if you don’t plan ahead.
Without easy and immediate access to your assets, your family could face serious financial hardship at a time when they need the most support. On top of that, navigating probate almost always requires hiring an attorney, which comes with hefty legal fees and the added stress of working through a formal court process. Add in court costs, executor compensation, and other administrative expenses, and your estate could be seriously depleted by the time it reaches your beneficiaries.
Another significant drawback of probate is that it’s public. Whether you have a will or not, all of the proceedings become part of the public record. That means anyone who’s interested can find out what you owned, who your beneficiaries are, and what they’ll inherit, which can make them targets for scammers and fraud.
Probate can also create conflict within your family, particularly if someone has been disinherited or if assets are distributed unevenly. A family member may choose to contest your will, and even unsuccessful contests add time, cost, and stress to an already difficult situation.
How to Avoid Probate
Before we get into the more advanced planning strategies, it’s worth pointing out that not all of your assets will go through probate, even if you have no estate plan at all.
Assets That Bypass Probate
Certain assets pass directly to your named beneficiaries without any court involvement. These include retirement accounts, IRAs, 401(k)s, and pensions; life insurance and annuity proceeds; payable-on-death (POD) bank accounts; and transfer-on-death (TOD) property such as bonds, stocks, vehicles, and real estate.
Outside of assets with beneficiary designations, property held with a right of survivorship, such as joint tenancy, tenancy by the entirety, and community property with right of survivorship, also bypasses probate. These assets pass automatically to the surviving co-owner when you die.
There are a few important caveats. If you name your “estate” as the beneficiary of any of these assets, they will go through probate. The same is true if you overlook a beneficiary designation entirely or if you and a joint owner die simultaneously.
It’s also worth noting that we generally do not recommend relying solely on beneficiary designations to handle your estate. These designations give you little control over how assets are ultimately distributed, and they can produce unintended outcomes, particularly for blended families or those without children.
Avoiding Probate with a Revocable Living Trust
For assets that don’t automatically bypass probate, the most effective planning tool is a trust, and specifically, a revocable living trust.
A trust is a legal arrangement between the grantor (the person who transfers assets into the trust) and the trustee (the person who manages those assets) for the benefit of named beneficiaries. With a revocable living trust, you typically serve as your own trustee during your lifetime and name a successor trustee to step in when you die or become incapacitated.
By transferring legal title to your assets into the trust, you remove those assets from the court’s jurisdiction. When you die or become incapacitated, your successor trustee can take over management and distribution of the trust assets immediately, without any court involvement.
Key Benefits of a Living Trust
A properly funded trust allows your loved ones to avoid court entirely. Your successor trustee can transfer assets to your beneficiaries promptly, according to the terms you’ve set in the trust agreement.
A trust also gives you more control over how and when assets are distributed. You can require that distributions happen only upon certain life events, such as completing a college degree, getting married, or reaching a specific age. This can help protect a beneficiary from spending through an inheritance too quickly and can offer reasonable incentives tied to responsible behavior.
As long as assets are held in trust, they’re also generally protected from your beneficiaries’ creditors, lawsuits, and divorce, something a will simply cannot provide.
Finally, trusts are private. Unlike probate, the terms of your trust and the details of your assets are not part of the public record. The entire transfer process can happen through our office rather than a courtroom, and on your family’s timeline.
Funding Your Trust
Creating a trust is only part of the work. For the trust to function as intended, you must actually transfer legal title to your assets from your name into the name of the trust. This process is called “funding” the trust.
If assets are not properly funded into the trust, the trust won’t protect them, and your family will still have to go through probate to take ownership, even if you have a trust document in place.
This is one of the most common and most avoidable mistakes we see. Many attorneys will draft a trust but stop there. At Cochran Law Firm, we make sure your assets are properly inventoried and transferred into the trust when we create it. We also work with you over time to ensure that new assets you acquire are properly funded into the trust as your life changes.
What a Living Trust Does Not Do
Because you retain control over the assets in a revocable living trust during your lifetime, those assets are still considered part of your taxable estate for estate tax purposes. A revocable living trust also does not protect assets from your own creditors or lawsuits during your lifetime. This is a point that often gets misunderstood.
If asset protection from creditors or lawsuits is a priority for you, other planning tools, including irrevocable trusts and Medicaid Asset Protection Trusts, may be worth discussing depending on your situation.
Working with Cochran Law Firm
Every family’s circumstances are different. We won’t recommend a particular planning approach until we understand your assets, your family dynamics, and your goals. During an initial planning consultation, we’ll walk through what you own, what matters most to you, and what would happen to your family if you died or became incapacitated today without a plan.
From there, we’ll help you build a plan that keeps your family out of court, protects what you’ve worked for, and puts the right people in control when it matters most. Contact Cochran Law Firm, P.L. to get started.
Book a free consultation call here to learn more and get started today: