BY ADAM ANDERSONThis article originally appeared in the December 7, 2016, edition of the cascade business news
An important aspect of estate planning is proactively managing the costs and complexity of asset transfer to the next generation by probate or alternate means. Probate, broadly speaking, is the judicially supervised process of transferring a decedent’s assets to new owners. Generally, this transfer occurs pursuant to a decedent’s will, which if accepted as valid by the probate court, governs the distribution of assets. In the absence of a valid will, state intestacy law instead controls who will get what. Probate also serves to protect beneficiaries by effectively cutting off future creditor claims, resolving property disputes among heirs or devisees, and establishing clear title to the transferred assets in the hands of the new owners.
While probate confers these and other benefits, probate has a not entirely undeserved reputation for being a lengthy, complex, and costly process. The costs of probate are generally borne by an estate’s assets, reducing amounts ultimately distributed to beneficiaries. Probate is also a public process, where a will becomes public record, and private family disputes may be disclosed for all to see.
Depending on the assets and other attributes of an estate, probate may not always be desirable, or even necessary. Certain Oregon or Washington estates may be eligible for streamlined “small estate” or “non-intervention” probate procedures. The following strategies can be utilized to further minimize—or even eliminate—the cost or time needed for probate.
Non-Probate PropertyMany common assets–for example, life insurance, retirement accounts, and annuities–will pass by operation of law outside of probate. These “non-probate assets” are distributed without court involvement pursuant to beneficiary designations on record with insurers or account custodians. Crucially, whatever your will might say about the disposition of non-probate assets, it is the beneficiary designations on record that will generally control who receives them, so ensure they are consistent with your wishes.
Non-Probate Transfers of Probate PropertyProbate assets do not pass by beneficiary designation, contract, or other operation of law, but through the court process. This may include real property, bank accounts, and vehicles. Nevertheless, transfers of property can be set up during life to occur without court involvement. Real estate can be titled in the name of joint owners (such as spouses) with rights of survivorship. Upon one joint owner’s death, the intended beneficiary is deemed to already own the property, and the decedent’s joint interest simply extinguishes. Bank accounts can similarly be held jointly or, if held singly, can pass through “payable-on-death” (POD) or “transfer-on-death” (TOD) designations available at your bank. The DMV can also assist with retitling of vehicles to pass on death to named beneficiaries listed on a car title.
Revocable Living TrustA revocable living trust (“RLT”) is a comprehensive probate avoidance device that can dispose of all your assets without need of a will or probate. All assets are transferred into and retitled in the name of a trust. The former owner(s) become trustees and, typically, lifetime beneficiaries of the trust assets, and retain the ability to freely utilize and enjoy trust assets and income during life. Because the trust is revocable at any time, the IRS does not consider the trust a separately taxable entity, and all income remains reported on personal tax returns. At death, because all assets are already owned by the trust, probate is unnecessary. The terms of the trust instrument (which unlike a will is not a public document) then control how and to whom trust assets are to be distributed. While an RLT can be more expensive initially to create and manage than a will, probate savings can be achieved if the trust is properly funded and administered.
Poor planning for the costs and complexity of probate can result in an unnecessary or unintended process, causing headache and expense. Consultation with estate planning counsel can help you weigh the benefits of probate for your estate, and determine if any of these, or other, probate-avoidance strategies are right for you.