Probate is not always something to be avoided at all costs. In some cases, the court-supervised process of distributing assets can even be a good thing. If the testator (person who makes a will) anticipates a dispute between heirs, it may be good to have a judge already involved in the process. Similarly, judicial supervision also can increase the likelihood that the testator’s wishes are followed. There may be financial benefits as well; for example, creditors must often follow strict rules or they lose their claims against the estate.
But for the most part, probate means added time and expense that loved ones do not want or need. This issue is even more pronounced if heirs will rely on the estate for income, because the probate process must be wrapped up before heirs can receive income that the estate generates, if the estate contains more than a house and a few other assets, or if there are complex issues. Probate is also a public process, a drawback that, in many cases, is the most significant one of all.
Many people spend most of their lives trying to make things easier for their loved ones, and there are basically three ways to continue this process after death.
If the decedent (person who dies) has a co-owner, such as a spouse, in most cases, the property passes directly to the other tenant without going through probate. Homes are a good example, because typically, a husband and wife are jointly responsible on the note. If they are co-tenants on the deed as well, the decedent’s half automatically transfers to the surviving spouse.
The same is true of any property that can be titled, whether it be houses, cars, deposit accounts, retirement accounts, brokerage accounts, and so on.
Joint tenancy is not always a good idea in life. If the co-owner is dealing with outstanding liens or judgements, creditors could attach half the property. Joint tenancy also complicates divorces and makes routine decision-making more of a chore.
There may be problems in death as well. If the decedent dies intestate (without a will), the decedent’s share passes through the laws of intestacy, so the surviving spouse could end up sharing the property with children from another marriage. Some people name non-spouses, like a child, as a joint tenant, and this move often leads to disaster, because the other children may be wholly excluded from the property.
In the same way, these instruments pass directly to the heirs without going through probate. Life insurance is a good way to give heirs an instant income stream while still allowing the probate process to distribute other assets, including real property.
If the beneficiary is a close family member or the estate, the proceeds can be used for funeral and burial expenses. In some cases, life insurance proceeds do not add to the estate’s taxable value, so there may be advantages here as well.
There are two types of life insurance, and both are useful for estate planning purposes. They are:
- Term: These policies are valid for a period of years, perhaps five or ten, and the companies pay death benefits if the policyholders die within that term. If it is the named beneficiary, the estate will have immediate cash to pay immediate expenses.
- Whole: Universal policies are valid as long as the premiums are paid. Once there is equity, the policyholders can borrow against the policy or tap into the equity, and this income does not pass through probate.
Life insurance is generally not available for non-monetary property, like real estate and durable goods.
A trust transfers legal title from the current owner to a trustee who holds the property for a beneficiary, so the decedent does not legally own the property. This probate bypass is effective even if the settlor (person who sets up the trust) and the trustee are the same person. Some of the different kinds of trusts include:
- Inter Vivos: Living trusts allow the settlors to add to, or subtract from, the corpus during their lifetimes.
- Bypass: These vehicles allow one spouse to leave property to a surviving spouse, and the surviving spouse may be exempt from federal estate taxes.
- Crummey: The trustees may distribute income to the beneficiaries, and the beneficiaries may make withdrawals, up to a certain annual limit. Crummey trusts are often used to protect minor beneficiaries.
- Discretionary: Instead of strict rules for beneficiaries, discretionary trusts give guidelines and allow trustees to use their judgement when distributing the corpus.
- Testamentary: These trusts only take effect when the settlors die, and are commonly included in wills.
In addition to tax consequences, federal laws also dictate whether or not a person can transfer assets to a trust and therefore qualify for Medicaid.
To make the right choice about whether and how to avoid probate, contact an experienced estate planning attorney in Greenville. We routinely handle matters in Greenville County and surrounding jurisdictions.