How Probate Works and Why It Matters
A common misconception is that probate only involves the transfer of assets from one individual to another one. Although a significant part of the process involves such transfers, it can be much more complex than that. Probate is a court procedure for distributing decedent’s property to heirs or beneficiaries. It is the process that occurs after someone dies, as the distribution of the estate assets must be conducted through the Probate Court, unless they own property in joint names concern or have accounts with pay on death provisions. Distribution of the decedent’s assets includes payment of any debts owed by the decedent. The nature of the distribution is dictated by the state law where the decedent was domiciled at the time of his/her death. Several factors can dictate if an asset will have to go through the probate process. Those include the nature of the asset, whether there is any debt that needs to be paid off, whether there is a will, and whether the decedent owned property alone. Although many consumers believe a will avoids the decedent’s having to go through the probate process, it does not. Essentially, a will is a list of instructions for said probate court procedure. The will indicates how the distribution will take place , but will still need to go through the court process. A will also has no effect upon jointly owned property. Therefore, jointly owned property passes outside the probate process. Contrary to people’s beliefs, the probate process can be time-consuming. In order to commence the proceeding, a petition needs to be filed in the appropriate probate court. Only once a court appoints an executor or personal administrator of the decedent estate can a creditor’s claim then be presented, which a six month period for making such a claim follows. If real property is part of the estate, it then must go through the entire foreclosure proceeding. Costs are commonly associated with a probate process. These include executor fees and court filing fees. These costs can consume a surprisingly large portion of the estate, which detracts attention from the actual beneficiaries and heirs to the decedent’s estate. Privacy is another negative to a probate process. A probate proceeding will be a matter of public record. Certain information will have to be published in a local newspaper alerting interested parties that the estate and probate proceeding exist. Anyone who seeks such information can freely do so and view what is in the public record. This lack of privacy can be disturbing to the family of the deceased person.
The Magic of Estate Planning
One of the main problems with probate court is that it is difficult to navigate and, therefore, expensive, but just having a plan to help avoid probate court for your family can be a good defensive strategy. If the above statistics are not motivation enough, consider what could happen if you do not have a plan. As seen in the story of Joan Rivers, when she died, most of her money went to a foundation and nowhere near to her daughter Melissa. Would it interest you to know that the money she left to her daughter could have been kept away from them in a trust, and estate taxes would not apply until the daughter died? What if an executor of your estate took the bulk of the estate when the family did not agree on how much the deceased was worth? Or how much about the deceased’s business information was on the computer and no one had the password? This record keeping could all have been easily avoided with a Trust Plan.
Whether you want to leave assets for your children or a charity, you should make a will or a trust plan. Trust plans can avoid probate court. Many professionals may encourage you to bequeath assets to a charity instead of selling them and paying taxes, or they may suggest putting appreciated stock into a Trust where the money can grow and then be bequeathed to charity or a lower tax person to minimize the tax benefit. If you pass away and leave the stock to your children they may agree to let the money grow at first, but eventually the children may need the money and sell the stock to pay the bills. Perhaps an ill family member may need the funds and ask for it, or what if his marriage fails and the spouse/partner asks for money to financially separate the relationship? Even if you have a will, your personal representative may still be subject to probate court time and costs; many times more than what it would have cost to set up a Trust Plan for that stock.
In a basic Trust Plan you appoint a Trustee, who will be the fiduciary of the Trust and must try to comply with the client’s purpose of the Trust. For example, the Grantor may want the money to grow until her youngest children are 21, then be distributed to her children. The Trustee will ensure the Trust is not taxed until the end of the terms. When the terms expire, the Trustee will distribute the funds to the children without the parents’ creditors or addiction or marriage pressure. A Will just takes effect after you die; a Trust ensures the continuity of your wishes.
Using a Revocable Living Trust
One of the best ways to avoid probate is by titling your assets in such a way that they are not subject to probate. One of the tools you can use to do this is a revocable living trust. While many of the same assets are avoided from probate as with a will, there are a couple of downsides to a trust that should be addressed first. Setting up a trust takes more time and more money than a traditional will. However, the money spent "upfront" may ultimately save the cost of your heirs having to "undo" your trust to access the funds after your death.
Client "A" has a $500,000 investment account (jointly titled with spouse) and a cottage (in her sole name.) She opts to create a revocable living trust to hold these assets. She transfers the investment account into the trust, but forgets to transfer the cottage. When she dies, $500,000 passes to the husband without the need for probate court. However, the cottage worth $200,000 now has to go through the probate process. Had client "A" set up either a will or done the title transfer to her spouse (or both), no cottage would have to go through the probate process.
In order to set up the trust, the client must draft a Declaration of Trust, which states who the beneficiaries to the trust are, the names of the trustees and who takes over when the initial trustees are unable to serve. The key to setting up a revocable trust is to then retitle the assets, how you want them to be held at death. Client "A" could choose to have her cottage held in the name of the trust with the name of the trustee of her trust (i.e., "Jane Doe, Trustee of the Jane Doe Trust"). Once the client dies, the trustees named in the trust can transfer the assets without going through probate. Alternatively, client "A" could retitle the trust as "Jane Doe, as trustee of the Jane Doe Trust dated (the date she signed the trust)". It is important to note that while clients worry about whether to choose option one or option two, the choice is often really moot. This is because once the client dies, both titles say "Trustee of the Jane Doe Trust." It is only the language leading up to the "Trustee of" that changes based on title choice. In this example, either choice would have avoided the cottage from going to probate.
Holding Assets in Joint Tenancy with Right of Survivorship
Many people own property with someone else. For land, a common form of ownership is a joint tenancy with rights of survivorship or, more simply, a deed for community property. A joint tenancy with rights of survivorship means that each party owns an undivided one-half interest in the land, and if one of them dies, the other becomes the sole owner of the entire parcel. Likewise, community property allows spouses to own community property jointly with rights of survivorship. However, once a spouse dies, his/her half interest will pass to the surviving spouse. Whether joint tenants or community property, as long as the decedent’s interest in the land was a tenancy by the entirety, the land will pass to the surviving joint tenant. This, clearly, is a probate avoidance technique because there is no probate administration for the decedent’s interest.
A typical example of joint ownership with survivorship is a married couple. Husband and wife decide to buy a home and they take title together (as husband and wife) and each holds an undivided 100% interest in the land. Thus, it’s husband and wife as joint tenants with a right of survivorship. If either spouse dies, house passes to the surviving spouse (assuming no mortgage foreclosure). This avoids probate, as there is nothing to probate, and title automatically passes as a matter of law when a spouse dies.
Another common example is for a parent to retitle his or her real estate in both his name and the name of a child or other person. A joint tenancy with right of survivorship states that title in the property will pass as a matter of law to the surviving owner.
While these joint ownership interests are attractive probate avoidance devices, they can have unexpected consequences and risks. For example, creditors of joint owners may make claims against their interests in the property. So, exposing one joint tenant to creditors can expose property Title to the same risk. In addition, joint tenancy carries the risk of presumptive gift as to the joint tenant. For instance, if a parent owns land outright and then adds a child as a tenant, parent has made a presumptive gift of an undivided half interest in the property to the child. This could be a problem, for instance, if the parent has other children who may feel slighted when the time comes for them to inherit their share since the child named as joint owner takes all the property.
Joint tenancy not only applies to real property, but also to bank accounts, insurance, investments, and other intangible assets.
Beneficiary Designations and Payable on Death Accounts
A common method for sidestepping probate court is designating beneficiaries on bank accounts, retirement funds, life insurance policies and other assets. You can even have "payable on death" or "transfer on death" designations on an investment account, if allowed by the issuing entity.
For example, you could designate that a checking account passes to your son after your death rather than paying out to your estate . Again, consult an attorney to determine whether a POD or transfer on death (TOD) designation makes sense for your situation, and to help you create the documentation necessary to institute these options. In general, POD and TOD accounts are considered non-probate property, meaning your heirs will not have to pay additional court costs and fees when collecting the amounts due to them.
Making Gifts While You’re Alive
Gifting assets while you are alive also acts to minimize the involvement of the probate court in your estate. If your gifts are during your lifetime and comply with the law, then when you pass those assets will not be included in your estate. However, this affects not only the settlement of your estate, but also your financial position during your lifetime and what will happen to those assets after your death.
A gift is a transfer of property without receiving anything in return from either the person to whom the gift is made (donee) or some other person. Gifts can be of any type of property, including money, real property, insurance policies, business interests, vehicles and personal property. For purposes of this discussion, they are limited to gifts made during your lifetime.
A gift is completed after rights and dominion over it have passed to the donee. As O.C.G.A. Section 13-3-4 provides, "A gift is perfected without delivery and acceptance, if imperatively required by the nature of the property, when effected either by an agreement, in writing or by will, to make it in the future."
Normally, such an agreement does not exist between the donor and donee. Therefore, absent delivery and acceptance, a transfer is not complete.
Note that between October 1, 2013 and September 30, 2018 the term "property" in Georgia law does not include "any interest represented by an instrument or book entry issued by a banking or financial institution," such as bank and brokerage/retirement accounts.
If you intend to give away property during your lifetime, ask at least two questions: 1) how do I actually effect that gift and 2) what are the legal ramifications of the gift? The first question relates to whether you have to deliver the property to the person to whom it is being given. For example, if this is real estate, then that property must be deeded; if tangible personal property, such as a car, that must be delivered; but if it’s a bank account, see above.
The second question also is important because depending upon how you make the gift, you may actually adversely affect your current financial condition or your later estate plan. There are specific exceptions from the IRS in the federal estate tax laws for both annual and lifetime gifts, but you need to make them carefully because not all gifts are treated equally.
Don’t forget to satisfy all appropriate state and local requirements in addition to any federal requirements, especially if the gift is real property. Most will be satisfied with a deed, but depending upon the type of real property, other requirements may not be satisfied.
If you are considering giving property away, whether real property or tangible personal property, the gifting strategy is more than just deciding who gets what; this is a complicated strategy with legal ramifications, so consult your attorney to determine how best to make the gifts you seek to accomplish.
Get Professional Legal Assistance
While it is possible to avoid probate court on your own, we do not recommend it. Most people are not familiar with the intricacies of probate and estate laws, and attempting to navigate them without professional guidance is a little risky. Especially since mistakes in an estate plan can be costly to your heirs.
If you intend to use one or more of the methods outlined above, consult with an experienced estate planning attorney to ensure proper implementation. An attorney knowledgeable in estate law can advise on the best strategies for your unique situation and goals. An attorney can also ensure that all beneficiary designations are correct, that joint ownership has been properly titled, and any other documentation is in place.
A good estate planning attorney will be happy to meet with clients during a free consultation. Find an attorney who is also an elder law attorney and a certified public accountant . While most attorneys do not charge for an initial consultation, some might. In which case, ask about the fee for the initial consultation in advance.
When meeting with the attorney, have all the necessary financial information available. This includes bank account statements, safe deposit box information, life insurance policies, and a complete inventory of assets, among other things. Be prepared to answer questions about family situations, business interests, and financial matters. Give as much information as possible. The more the attorney knows, the better he or she can help create a plan.
Ask how long the attorney has practiced in estate and probate law, and how many wills and probates he or she has handled. Ask for references and follow up with them. Ask what portion of the attorney’s practice includes estate planning, probate, and elder law work. Avoid attorneys who do not regularly handle these areas of law, and those who simply sell products.