CALL US: 651-631-0616
CALL US: 651-631-0616
When a loved one passes away, settling his or her financial affairs can be an emotional and complex task. One legal process that often comes into play is probate. Understanding how probate works — and implementing strategies to minimize or avoid it — can help you protect your assets and simplify matters for your family after your death.
Downsides (and upsides) of probate
Probate is a legal procedure in which a court establishes the validity of your Will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs. Depending on applicable state laws, the probate process can be expensive and time consuming. Not only can probate reduce the value of your estate due to executor and attorney fees, but it can also force your family to wait through months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.
However, there are instances where the probate process can work in your favor. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.
Simple strategies to avoid probate
The simplest ways to avoid probate involve designating beneficiaries or titling assets in a Revocable Trust so they can be transferred directly to beneficiaries outside of your Will. So, for example, have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities, IRAs and other retirement plans.
For assets such as bank and brokerage accounts, consider the availability of pay on death (POD) or transfer on death (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind that while the POD or TOD designation is permitted in most states, not all financial institutions offer this option.
Strategies for homes and other real estate
Some people avoid probate on their homes or other real estate (as well as bank and brokerage accounts and other assets) by holding title with a spouse or child as “joint tenants with right of survivorship” (or if you’re in a community property state like California, as “community property with right of survivorship”). But joint ownership has several significant drawbacks.
First, unlike with beneficiary designations, once you retitle property you can’t change your mind. Second, holding title jointly gives your spouse or child some control over the asset and exposes it to his or her creditors. Finally, adding someone to the title may be considered a taxable gift of half the asset’s value.
A handful of states permit TOD deeds, which allow you to designate a beneficiary who’ll succeed to ownership of your real estate after you die. TOD deeds allow you to avoid probate without making an irrevocable gift or exposing the property to your beneficiary’s creditors. However, TOD deeds can be problematic if you have multiple beneficiaries (and potentially their spouses) owning your real estate after your death and having to agree on managing and disposing of such real estate. Also, if a beneficiary named in a TOD deed predeceases you, a probate may be required for that beneficiary’s interest in your real estate.
Strategies using trusts
A common strategy to avoid probate of real estate where you have multiple beneficiaries, minor beneficiaries or beneficiaries with special needs, or if you simply want to make sure one person is in charge of settling your real estate, is to retitle your real estate into a Revocable Trust with one trustee in charge after your death.
In addition, for larger or more complicated estates, a Revocable Trust is generally the most effective tool for avoiding probate. It involves setup costs but allows you to manage the disposition of your wealth in a single document while retaining control and reserving the right to modify the trust’s terms. Assets in the trust will be distributed to your heirs according to the trust’s provisions, without having to go through probate.
Other types of trusts can be beneficial for specific situations. For example, placing life insurance policies in an irrevocable life insurance trust (ILIT) can provide significant tax benefits.
Making it easy for your family
Avoiding probate isn’t appropriate for every situation, but thoughtful estate planning can reduce costs, delays and administrative burdens for your surviving family members. We can help you develop strategies to minimize probate costs, reduce taxes and achieve your other estate planning goals. Contact us today at virginia@virgielaw.com or 651-631-0616.
Virginia Ryan provides trust, will, probate, and business law services to clients in the Greater Twin Cities Area of Minnesota, including the surrounding areas of Brooklyn Park, Brooklyn Center, Cottage Grove, Dellwood, Grant, Hugo, Lake Elmo, Lino Lakes, Little Canada, Mahtomedi, Maplewood, Minneapolis, North Oaks, Oakdale, Roseville, Saint Paul, Shoreview, Stillwater, Vadnais Heights, White Bear Lake, Woodbury.
