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Probate Avoidance

Revocable Living Trust

For some people, a revocable living trust - a devise in which you hold property as a “trustee” - may also make sense.

A revocable living trust as an estate planning tool involves the creation of a trust while you are still alive to which you transfer virtually all of your probate assets.  The trust benefits you (and you stay in control as trustee) during your lifetime.  The trust is a support vehicle for you in the event of incapacity and disposes of your property to your beneficiaries when you die without the necessity of probate.  There is a great deal of misinformation regarding the advantages of these planning vehicles.

Some of the advantages to a Revocable Living Trust are

• Potentially avoids "probate"

• Protection against incapacity

• Better provides for assets in multiple states or for clients who may move residences and don't wish to change their estate planning documents each time

• May be some protection against will contests

• More private than testamentary disposition

Some of the Disadvantages to a Revocable Living Trust are

• Very seldom actually avoids probate because of the realities of how clients use them

• Usually more expensive to create and properly fund than a Will

• Inconvenient to maintain assets in name of trustee

• Commingling of community property and separate property in trust may expose more assets to creditor claims

• Sometimes harder to administer immediately after death

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Revocable Living trusts are not just for the wealthy.  Unless you expect to owe federal estate tax at your death or your spouse’s (fewer than 2% of estates - those worth more than $5 million per individual - are subject to estate tax), a basic revocable living trust is probably all the trust you need.  A basic revocable living trust allows real and personal property to quickly and efficiently pass to the beneficiaries you name, without the hassles and expense of probate court proceedings.  A married couple can use one basic living trust to handle both co-owned property and the separate property of either spouse.  Because you are the trustee, you don’t give up any control over the property you put in trust.  It’s important to note that even if you have a revocable living trust, you still need a Will to take care of any holdings outside of that trust when you die, and to make certain elections that can only be made via a Will (Examples: election of a personal representative (executor) to administer your estate and election of guardians/conservators for minors and incapacitated/protected persons).

Revocable Living trusts are not for everyone.  There are alternative methods of holding title to assets, including real estate, whereby probate court proceedings can be avoided even without a living trust. 

One size does not fit all.  An inventory of your assets, including values and how they are titled, combined with your estate planning goals, is important in deciding which estate planning method to choose.

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Payable-on-Death Bank Accounts

Payable-on-death (POD) bank accounts offer one of the easiest ways to keep money -- even large sums of it -- out of probate. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death.

As long as you are alive, the person you named to inherit the money in a POD account has no rights to it. If you need the money -- or just change your mind about leaving it to the beneficiary you named -- you can spend the money, name a different beneficiary, or close the account.

At your death, the beneficiary just goes to the bank, provides proof of your death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.

You can turn almost any account, whether it's yours alone or you own it jointly with your spouse or someone else, into a POD account. Most joint accounts come with what's called the " right of survivorship," meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So if you and your spouse have a joint account, when the first spouse dies, the funds in the account will become the property of the survivor -- without probate. If you add a POD designation, it will take effect only when the second spouse dies. Then, whatever is in the account will go to the POD beneficiary you named.

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Retirement Accounts

Funds in retirement accounts such as IRAs and 401(k)s do not have to go through probate after your death. The beneficiary you've named can claim the money directly from the account custodian.

When you open an IRA or 401(k) account, the forms you fill out will ask you to name a beneficiary. You will probably also be given the opportunity to name an alternate (sometimes called " secondary") beneficiary, who will inherit the money if your first choice dies before you do or at the same time.

If you're single, you're free to choose whomever you want as the beneficiary.

If you're married, your spouse may have certain rights to some or all of the money.  Since Arizona is a community property state, if any of the money you contributed was earned while you were married, that money remains community property and your spouse owns half.

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Joint Tenancy with Right of Survivorship

Property owned in joint tenancy automatically passes, without probate, to the surviving owner(s) when one owner dies. Joint tenancy often works well when couples (married or not) acquire real estate, vehicles, bank accounts, securities or other valuable property together.

After one joint owner dies, generally all the new owner has to do is fill out a straightforward form and present it, with a death certificate, to the keeper of ownership records: a bank, state motor vehicle department, or county real estate records office.

Be aware of these common problems causing joint tenancy to fail:

• acceptance by tenants

• spouses as tenants

• children as tenants

• revocability

• failure of designations

Joint tenancy is usually a poor estate planning choice when an older person, seeking only to avoid probate, is tempted to put solely owned property into joint tenancy with someone else. Adding another owner this way creates several potential headaches:

• You're giving away property. If you make someone else a joint tenant of property that you now own yourself, you give up half ownership of the property. The new owner has rights that you can't take back. For example, the new owner can sell or mortgage his or her share -- or lose it to creditors.

• It may spawn disputes after your death. Many older people make the mistake of adding someone as a joint tenant to a bank account just for "convenience." They want someone to help them out by depositing checks and paying bills. But after the original owner dies, the co-owner may claim that he or she is entitled, as a surviving joint tenant, to keep the funds remaining in the account. In some instances, maybe that's what the deceased person really intended -- it's too late to ask. Sadly, this sort of confusion often leads to bitter family rifts, some of which are fought out in court.

For estate tax and capital gains purposes, only the deceased owner’s one-half of the jointly owned asset takes a step-up in basis (if the asset has appreciated).  The surviving owner’s one-half of the jointly owned asset retains its original basis.

Community Property with Right of Survivorship

This form of ownership is available only to married couples acquiring real estate together.  Real estate owned in community property with right of survivorship automatically passes, without probate, to the surviving spouse upon the death of the other spouse. 

After one spouse dies, generally all the surviving spouse has to do is fill out a straightforward form and present it, with a death certificate, to the county real estate records office.

For estate tax and capital gains purposes, the entire real estate asset (deceased spouse’s one-half and surviving spouse’s one-half) takes a full step up in basis (if the real estate has appreciated).  While this may be an advantage for capital gains purposes, and even to a non-taxable estate, it may be a disadvantage to a taxable estate. 

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Beneficiary Deed

This unique probate avoidance technique allows real property to quickly and efficiently pass to the beneficiaries you name, without the hassles and expense of probate court proceedings and without the expense of a living trust.  Because the transfer is effective only upon death, you can change or remove beneficiaries at any time(s) during your lifetime and you don’t give up any control over the property.

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Some of the Disadvantages of Nonprobate Assets are:

• Lack of integration with overall estate plan can defeat your objectives.

• Unintended disinheritance can occur if your testamentary beneficiaries differ from the beneficiaries succeeding to your nonprobate assets.

• Probate not avoided if beneficiary designations fail.

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