Are You Probate-Proof?

Proactive Estate Planning with Your Attorney Is the Smartest Way to Avoid Probate

Important Questions:

1. When was the last time you had an estate planning attorney perform a full review of your long-term plans for your financial affairs, your family, and your legacy?
2. For that matter, have you ever sought out such a review?
3. Have you taken the necessary steps to keep your estate out of probate court when you pass and conservatorship court if you become mentally incapacitated?

Lack of Awareness:

Probate court and conservator court, and the legal fees, costs and delays that go along with them, can be a burden. Do you really want to leave your spouse or family with a financial and emotional mess? This lack of awareness can have negative consequences for the next generation and any charities and causes you support. If you fail to identify these issues, your family may discover them at the most difficult time – incapacity or death.

What Can You Do?

So, what can you do to stay current and complete? The answer is simple: conduct periodic strategic reviews of your estate plan to ensure that it’s probate proof and otherwise up to date.

Understanding The Probate Process

Technically speaking, probate is not a bad thing. The court process is simply the government’s way of making sure your property is distributed to the right heirs when you pass away after your creditors are paid. This process includes proving the validity of your will (if you left one), evaluating your property, paying off your taxes and debts, and disbursing whatever is left to your heirs.

Most people understand that if someone dies without a will (or “intestate,” in legal circles), that at least some of the deceased person’s property probably will go through probate. Perhaps fewer people realize that creating a last will and testament does not protect their property from probate. The process can move more smoothly when you have left a will, or better yet, in many cases, having a revocable living trust stating your intentions for your property because property in a trust avoids probate. However, any part of your property (“estate”) that is titled solely in your name at the point of your death (for which you do not have a beneficiary designation in place) is subject to probate, regardless of the existence of a will.

Why Probate Is Generally Something To Avoid

 Probate costs money. The total cost of probate court on death varies. For many people in Colorado, depending on what assets are probated, the legal fees and costs can vary anywhere from $1,500 to $3,500 or more. These costs are deducted from the estate, which means your beneficiaries will never see that money. If you become mentally incapacitated and a conservator court action is required because you didn’t have the right documents in place, then the legal fees and costs can be $2,500 or more. If you leave more than $15,000 to any minor child in one year, then a guardianship/conservator court proceeding will have to occur to figure out who will manage the minor’s money or assets, which costs more money in legal fees and court costs.

• Probate can be time-consuming. In Colorado, even for a modest-size estate, probate can last between 6 months to 9 months, assuming it’s not contested and providing there are no complications. Your heirs generally won’t receive their inheritance until probate is complete. Some places do have “independent” or “summary” administration rules that speed probate up, but they still cost money and are a public process.
• Probate is public. One of the biggest drawbacks to probate is that it makes private matters public. When your estate is probated, your financial information, identities of your heirs and other personal information all become a matter of public record, accessible to anyone who wants to look it up, possibly even online depending on the court system where your estate is probated.

 Strategies For Probate-Proofing Your Estate

The good news is that probate is quite easily avoidable, and there are a number of effective planning tools that can help you. Since probate only applies to assets listed solely in your name, the primary goal of your estate-planning strategy might simply be to make sure you’re not the sole owner of those assets when you pass away (not always the best choice), or that you have the proper beneficiary designations in place. The safest way to create a probate-proof estate plan is to work with an estate planning attorney to devise a customized solution. Then update that plan regularly to reflect any changes that occur in the future.

Strategy 1: The “Piecemeal” Approach

This strategy involves going through all your assets one by one and structuring them so that they are joint-owned with one or more of your heirs.  However, be careful before doing this and get advice first. If you add someone to the title or ownership of your property, then he or she will be an owner, and you will expose your equity to his or her creditors and spouse. You also are making a gift, and depending on the amount, a gift tax return may need to be filed. Finally, for property such as real estate, you can create some capital gains problems down the road.

Another method is to transfer property to someone upon your death. For example, for any Colorado real estate, Colorado has a Beneficiary Deed form that would immediately transfer ownership to you designated heir when you pass away. You also can establish Payable on Death (POD) provisions.  For insurance policies and certain other assets, designating a beneficiary may be sufficient to protect them from probate.

Pros and Cons:

For simpler or smaller estates, the piecemeal approach can be an effective and affordable strategy to bypass probate, at least for your largest and most important assets. On the other hand, this approach requires constant, vigilant updating, and in many cases these updates can be overlooked.

To illustrate, let’s assume you have an estate valued at $400,000, which includes a home worth $200,000, a life insurance policy for $100,000, and $100,000 in savings. You decide to divide your estate equally among your four children, so you list two children as transfer on death recipients on the deed to the house, one child as the sole beneficiary on the insurance policy, and you create joint ownership on your savings account for the fourth child.

A few years pass, during which time you sell the house and reinvest the proceeds into some stocks listed in your own name. You also cancel the life insurance policy due to rising premiums, but you haven’t yet opened a new one. If you pass away suddenly under these circumstances without updating your estate plan, what happens?

The child on the life insurance policy now has no inheritance; neither do the two children who were going to inherit the house because you sold the house and forgot to create a TOD for them on the stocks you purchased. The only child with a secure inheritance is the one co-listed with you on the savings account. The stocks go into probate, where the other three children might eventually get a cut of them once the fees, debts and taxes are paid.

Strategy 2: Creating A Trust

For many people, a more thorough and highly effective strategy to protect assets against probate is to create a revocable living trust that encompasses most of your holdings and property. A trust is a legal structure in which your property is held on behalf of you and then eventually your beneficiaries, to be managed by an appointed trustee.  In a living trust, you can name yourself the trustee until you pass away or become unable to manage the trust, at which point an appointed successor takes over. Under this arrangement, you have the same access to your property as you did before, with the exception that it is no longer exclusively in your individual name and is therefore exempt from probate. When you pass away, the holdings in the trust pass to your beneficiaries per your instructions with no interruption or interference from the probate courts.

Pros and Cons: 

This arrangement requires some cost to set up the trust and some time and effort to initiate and fully “fund” (correct titles and beneficiaries) your trust so that it covers all or nearly all of your property.  Once the trust is established, it’s easily adaptable to changes in your family and financial situation and equally easy to keep updated. A trust also can handle almost any asset and easily accommodates advanced tax planning, unlike the piecemeal approach. This approach provides the potential for greater asset protection in the case of disputes, and you can even continue to grow your wealth on behalf of your beneficiaries after you die. Perhaps most importantly, a trust that is properly constructed and managed is your best protection against probate court and conservator court by avoiding them.

 We Can Help You Probate-Proof Your Estate.

The advantage of hiring an experienced will, trust, or estate planning attorney to help with your estate plan is that such attorney knows the “rules of the game” and has a holistic understanding of applicable estate and tax laws. The attorney can educate you about your various options and the consequences of each so that you can make intelligent decisions about your estate planning to achieve all the results you want. If you don’t have a current estate plan, or if you haven’t reviewed your estate plan in a while, now is the best time to make sure your estate is probate proof. Call our offices today to schedule your initial “Estate Planning Education & Analysis Consultation.” We will be happy to help you. 303-775-1112.