One of the best ideas of any award-winning movie or gripping novel is to keep your audience in suspense awaiting the resolution of a dilemma. With that being said, I clearly must have been looking to create the greatest drama for my reading audience by not producing part two of this article for several years! What can I say, life gets too busy and good intentions do not always come through. So, if you read the first part of my “Live or Let Probate” article, you can now breathe a deep sigh of relief, as I am now posting part two of this important article. If you did not read part 1, please feel free to do so now. If you did read part 1 before, it is probably a good idea to refresh your recollection by reviewing it now, before diving in to the points that I will be making here in part 2.
Most people who call my office or attend one of my speaking presentations about estate planning immediately advise me of the fact that they would not like to have their estate be probated upon their death. If you are unsure why people focus so diligently on this goal, again please review my points in part 1. When you really get down to the basic levels of avoiding the probate process, there are essentially two ways to accomplish this important goal, and I will be discussing the first option in this article.
So, without further ado, option 1 of avoiding the probate process is….Beneficiaries. When you appoint a beneficiary on your assets, you have essentially created a contractual agreement whereby you have advised the world of who will receive your assets when you die. There are several ways to name beneficiaries on your estate but, as with everything, they have positives and negatives. Here are some points to each:
- Adding a Payment on Death (POD), a Transfer on Death (TOD) indication, or a Beneficiary indication on your accounts. Do not confuse this with a POA, which is a Power of Attorney, which helps with the administration of your assets while you are alive, but you are incapable of making your own decisions. The POD or TOD, depending on what your financial institution calls it, simply indicates the person or people who will receive your assets upon your death. The Beneficiary designation is self-explanatory, as you are simply indicating the person or entity that will receive the asset when you die. You can name one person, multiple people or an organization to the designation and you can indicate what percentage they receive.
- Positives The obvious is the fact that, as mentioned above, when you indicate a POD, TOD, or Beneficiary, that recipient will receive the asset upon your death and it should NOT see the inside of the probate courtroom. It also allows you to name the specific beneficiary, rather than the laws of the state that you reside in when you die.
- Negatives There are sadly quite a few, here are some to be aware of:
- It is crucial that you name back-up beneficiaries on the accounts, in the event one of your named beneficiaries dies before you. If you do not, then there is a very real possibility that your asset will be back in the probate courtroom to decide who will receive it, due to the death of the initial beneficiary. I am going to take some time to give you a quick lesson in the Latin language, which is dead, but the legal profession keeps it going, probably for masochistic purposes; here it is: Per Stirpes (pay attention to the spelling here, it is Stirpes, NOT Stripes) or Per Capita. Per Stirpes means that if your named beneficiary dies before they receive the asset, it will pass down to their heirs. Per Capita means that it will NOT pass down to the heirs of the deceased beneficiary, but will go back to the other named beneficiaries. Thus, if you named 4 beneficiaries, Per Capita and one dies, the other three will divide the ¼ share of the deceased equally. Most people do not check these points and it has the potential of being very problematic.
- A HUGE problem with naming beneficiaries is the fact that when you die, there are likely to be expenses that will have to be paid, such as funeral expenses, final medical bills, etc. When you name a beneficiary, the financial institution will legally distribute the asset to the named beneficiary. Those named individuals may take the funds and keep them for themselves, thus leaving your Executor, Trustee, or Administrator without the necessary funds to be able to pay your final expenses. This can lead to the potential of litigation being filed against your estate for these final bills. This situation can be avoided by the use of a Revocable Living Trust and I will explain that in Part 3.
- Naming a Co-owner on your asset If you purchase a property or open an account with another person as the co-owner, upon your death, the asset immediately transfers to the other owner, if you properly establish the ownership terms. This can be complicated in real estate matters, thus it is crucial that you have the assistance of an attorney when purchasing property.
- Positives The only real positive is already mentioned and that is the fact that the asset will avoid the probate process for the initial surviving co-owner. Many married couples come to me and advise that they are not worried about their assets, as they know it will transfer to their spouse upon their death. This is true, but when I ask where the asset will go when they BOTH are deceased, I usually get the response of stunned silence. When the initial co-owners are deceased, there must be an indication of who receives it after them.
- Negatives When you name a co-owner on an asset, you are exposing yourself to their legal liabilities. THIS IS HUGE! I have literally had clients in my office who named their children or grandchildren as co-owners on their assets and found out that when their child or grandchild was in the process of divorce, bankruptcy, or some other type of legal action, their asset became part of the lawsuit. Make no mistake on this, if you name someone as a co-owner on an asset and they are being sued, the asset that you own with them can become part of their legal liability. Except for a married couple, I NEVER recommend that you name someone else as a co-owner, just to avoid the future potential of probate. In my opinion, the risk far outweighs the benefits. If your attorney advises that you name a co-owner for probate avoidance, I recommend that you seek another attorney.
- Naming a Transfer on Death Beneficiary to your Real Estate Much like the points indicated in Number 1 above, in most states, you can add a beneficiary to your real estate by completing a Transfer on Death Deed (or a Ladybird Deed) and filing it with the appropriate office of the Recorder or the Register of Deeds.
- Positives As with my comments in point Number 1, the main positive is that this will avoid the potential of having your real estate being probated and, unlike the points I made regarding the liabilities of naming a co-owner, the Transfer on Death beneficiary is not an owner at the same time as you, thus you do not assume their legal liabilities.
- Negatives As stated with the points in Number 1, there are very few times, if any at all, where you can name a back-up beneficiary on these deeds. Thus, if you name a Transfer on Death beneficiary on your real estate and the named beneficiary dies before you, you need to update the Transfer on Death Deed as quickly as possible. Also, when you die, the transfer is not automatic. The named beneficiary will have to accept the transfer via Affidavit and a deed will have to be created and filed to officially accomplish the transfer. This will most likely require legal assistance and fees, but it should be significantly less than the potential probate fees.
Whew! That is a lot to take in for what is essentially a rather simple process. I always try to keep my articles short and easy to comprehend, but this one might have pushed the limits on those concepts. It is essential to make sure that you have an attorney who clearly understands these important points and can direct you in the proper way to proceed. It can literally mean the difference of an easy transition for your loved ones, or a legal nightmare. My next article will address the second way to avoid the probate process, which is Revocable Living Trusts. Hopefully I will be a little bit quicker on getting that article to you, but in the meantime, the suspense is killing me!