This is a common urban legend. Everyone has a story like this about a friend or family member who did not go to probate when their parents died and they “got away with it” and had no problems. The problems are still there; they just have not surfaced yet.
There is no “probate police” or agency that tracts what happens when you die, so many of the problems will not be obvious right away, and many “problems” go unrecognized because you did not know there was an easier or better way. For example, if you or the grandchildren just move in to your parents’ home without probate, the problems may come much later when: (i) you try to sell it but don’t have legal title, (ii) you get caught using your parents’ homestead exemption and have tax penalties, (iii) you have to pay income tax on 100% of the value of the home when you sell it, instead of only on the gain since your parents died, or (iv) you find out the home owners insurance is void after the home is damaged.
Another common example – The children’s names were on the deed to the home and all the bank and investment accounts and the children just “took care of everything” after their parents died and kept the rest without probate. In many cases the children have spent their inheritance paying obligations of their parents that they were not legally obligated to pay. They also take on the tax obligations of all the assets at their tax rate instead of their parents’ lower tax rate. Since the children did not legally inherit the assets, when the assets or investments are sold years later the children or grandchildren may be responsible for 100% of the capital gains tax calculated from the date their parents purchased the home or made the investment, instead of only the tax on the increase in value since their parents died. If only one child is on the parents’ account with the understanding that he will distribute it to his siblings, then this will cause gift tax problems. These are just a few examples of the hidden problems lurking in an estate that transfers to the next generation using any system, other than a trust, to avoid probate. When the kids get stuck paying higher taxes, or the estate is used up paying their parents’ bills, they just assume that is the way it works, because they did not know there was a better way.
Some problems can even arise before your parents die. Are you on their deed to their home and on their bank and investment accounts as an owner so you can avoid probate? Did you wonder why your child did not qualify for college financial aid? The value of all your parents’ assets count as yours, which means they count as your child’s available assets for college, reducing your child’s available financial aid. Did you not include all of your parents’ assets on your child’s federal financial aid application? Now you have committed fraud on a federal document! You can’t have it both ways, if you own your parents’ assets or accounts in order to avoid probate, then you own them in all other circumstances, including when your children apply for college and financial aid. This would also apply if you are applying for Medicaid for your spouse while you are listed on your 92 year old parents’ home and bank accounts. Your parents’ assets could prevent you from qualifying for Medicaid and at that point it is too late to take your name off the accounts. Medicaid has a five year look back. So even if you deed your parents’ home back to them, you will have to wait five years to apply for your spouse’s Medicaid.
There are many other legal, financial, and tax problems that can arise if you just ignore the probate process, and many of them will be felt by the grandchildren, not the children of the deceased.