Keeping Your Family Out of Probate Court (Published 08-2019)
Keeping your family out of probate court may be the best thing that you can do for them. The death of loved ones is emotionally devastating. It is even more stressful when families end up in probate court, potentially facing long and expensive legal battles, while waiting to close an estate. Fortunately, there are several ways to ensure that your family does not have to face a long legal process to wrap up your estate.
Probate is the legal process that takes place after someone passes away. If there is a will, then the will is submitted to the probate court to review and ensure that it is valid. Once the court approves of the will, the executor can begin paying off debts and distributing property. If there is no will, the court will order that property be distributed according to state law. In many states (including Michigan) your spouse does not automatically get everything that belonged to you if you don’t have an estate plan.
Probate can be time-consuming and costly for your family members, and beneficiaries, creditors, and potential heirs may challenge the will, which can lead to a lengthy battle. It is often preferable to take whatever steps you can to avoid probate when it comes to most of your property.
The following are common ways to do so:
When you create a living trust, you will transfer the ownership of certain (or preferably all) property to the trust, and that property will not have to go through probate. Instead, the property will need to be distributed in the manner you set out in the trust document. Many people hesitate to create a trust, as they do not like the idea of “no longer owning” their property. However, when you create a trust, you are the trustee, which means you have full access to your assets and property, as well as the ability to control and manage it. When you pass away, your designated successor trustee will take over, and distribute property in accordance with your wishes. Trusts are the only truly safe way to avoid probate.
Beneficiary accounts (also called “transfer on death” or “TOD” accounts) should only be used carefully and only with the counseling of an experienced estate planning attorney. Many financial accounts give you the option of naming the person or people who will receive the funds in your account or other benefits upon your death. This is done through beneficiary or payable on death provisions. When you have an account with such provisions, those assets will transfer directly to the beneficiary and will not have to go through probate. Such accounts may include:
- Checking and savings accounts
- Money market accounts
- Retirement and pension accounts
- Life insurance policies
There are many risks when using beneficiary accounts instead of a trust for avoiding probate. Here are just a few of the risks with a beneficiary or TOD account that a trust could be used to avoid:
- Beneficiary is not mentally prepared (grief) for managing assets (most beneficiaries, spend, lose, or give away their inheritance in 14 months);
- Beneficiary is not mature enough to manage the assets (in many states you only need to be 17 or 18 years old to be a beneficiary);
- Divorce Risk – If the account holder dies while the beneficiary is going through divorce proceedings, part of the account could be lost;
- Benefits Loss – If the beneficiary is receiving Medicaid or other government benefits, those benefits could be lost when the beneficiary becomes the owner of the account – children or grandchildren can also lose college financial aid;
- Loss to Creditors and Legal Actions – If the beneficiary is in bankruptcy, debt consolidation or settlement, or legal proceedings from a personal injury case, the beneficiary accounts can be lost.
Joint Ownership and Beneficiary Accounts
Joint ownership should only be used with a spouse. If you own property jointly with rights of survivorship with another person, such as your spouse, they will inherit your ownership stake automatically when you pass away, skipping the probate process. In some states, if you do not want a joint ownership, you can have a beneficiary deed, which is similar to a beneficiary account. If you own a home and name your adult child as the beneficiary on the deed, ownership will transfer to them automatically with no need to go through probate.
Joint ownership of property or accounts carries all of the risks of a beneficiary account or TOD discussed above, plus one very significant additional risk. The joint owner actually owns your assets while you are alive! Therefore, all the risks of a beneficiary account that occur after you die, actually occur while you are alive with joint ownership. With bank accounts and investment accounts you cannot be a joint owner of the account for probate avoidance only. If you own it, you own it. That means your assets would count as your children’s assets in a divorce, bankruptcy, or other legal proceeding while you are alive. They could also be forced to include them in any calculation for financial aid or Medicaid. Your child could also be personally liable for any accident on your property or with your car if they are listed as a co-owner. To make matters worse, your homeowner’s insurance may protect you from a personal injury claim on your property, but it may not protect the co-owner if they are not named on the policy. If your child dies before you, the entire plan falls apart, especially if you are not competent to create a new estate plan at that time.
Planning for distribution of your assets, after your death, can be a complicated process, and each state may have different laws on what specific options are allowed. Avoiding probate may include one or many of the options listed, as well as other options. It is important to consult with an estate planning professional before deciding which options are best for you and your family.
Matthew V. Piwowar is a Grand Rapids estate planning attorney. Mr. Piwowar is a member of the State Bar of Michigan, and the State Bar Probate & Estate Planning Section, the National Network of Estate Planning Attorneys, and the Michigan Forum of Estate Planners.