Minimizing Probate Costs and Delays

Probate.

Utter the word to almost anyone and be prepared for exclamations of hostility and disgust. But, what is probate? Can it — and should it — be avoided?

For all the condemnations that they frequently receive, state probate courts have vital and necessary duties to perform: collect a deceased person's assets, see to it that his or her legal obligations are paid out from these assets, and distribute the remaining assets to those people who are entitled to receive them. The system is meant to protect the decedent's creditors, the decedent's heirs, and the interests of the taxing authorities. But these protections, even if they are necessary, create significant costs (mostly attorney and executor fees) and may also delay and complicate distributions of the assets to the heirs.

Many states have created expedited systems for dealing with smaller estates (for example, estates under $100,000), or those that contain no real estate. But even if you believe that the value of your estate will far exceed the amount that would qualify for these provisions, there are things that you can do to reduce some of the costs and delays associated with probate. Some of the major strategies for doing so are discussed below, along with possible drawbacks that may be associated with each.

Wills. Having a will not only will help ensure that the people whom you want to have your property will in fact get it, but will also help reduce expenses and delays. When you have a will, you name an executor. Although an executor has basically the same duties as an administrator (which you would have in the absence of a will), the law gives much wider powers and authority to the executor. One effect of this is that an executor often will not need to get prior court approval for the same kinds of actions that an administrator would. This usually means less delay, and smaller court and attorneys' fees.

Broad executor powers. For the basic reasons mentioned above, it's usually a good idea to give your executor the widest possible powers that you feel comfortable with him having. This can minimize the number of trips to the court house, and may allow you to dispense with, or at least cut back, on bonding fees (a bond is basically an insurance policy that must be taken out to cover the possibility of the executor's negligence or willful misuse of the estate, unless your will waives the need for it).

Joint tenancy. It seems that everyone has heard about joint tenancies as the magical probate-avoiding device. And while it's true that probate will be avoided on the death of the first joint tenant, this doesn't apply at the survivor's death. Further, although many types of assets may be held in joint tenancy (homes, cars, bank accounts, investments), some items, such as furniture, collectibles, and other personal effects, do not lend themselves to ownership by way of a joint tenancy. Also, there are situations where a joint tenancy may lead to higher federal estate tax.

Life insurance. Under the laws of most states, life insurance proceeds that are paid to a named beneficiary (rather than paid to the estate) are not subject to probate. This means that the proceeds are normally quickly paid out to the beneficiaries of the insurance policy. This is often the best source of liquidity when other assets are held in probate. If you are concerned that there won't be enough liquid assets in your estate unless you name your estate as beneficiary, consider this instead: name a trusted family member or the trustee of a testamentary trust as beneficiary of the policy (if the trustee is also the executor, make sure this person is designated in the insurance policy in his capacity as trustee, rather than as executor). Provide directions outside of your will that you would like the recipient of the proceeds to make them available as loans, to the executor, as needed.

Living trusts. Property contained in trusts created during your lifetime (living) trusts are not subject to probate. In contrast, trusts created at death, by means of your will, must go through probate. This certainly is a fact in favor of the living trust, but is it a reason, in and of itself, to rush out and try to put all your worldly possessions into a living trust? Not usually.

But before we go into this issue, let's back up a bit. There are two general kinds of lifetime trusts that will avoid probate: irrevocable trusts (trusts in which you give up the right to change the terms of the trust or get the property back) and revocable trusts.

Although an irrevocable trust can successfully be used for reducing both federal and state income and death taxes, as well as avoiding probate, it's not a device that should be entered into without a lot of thought, planning, and competent professional advice. "Irrevocable" is a long time. Circumstances and needs change. The assets that you placed in the trust that you were certain you would never need may in fact be vital if you suffer a serious business reversal. Although it's true that you may be able to get a court to set aside your irrevocable trust because of changed circumstances, this requires a court action, legal fees, and the results are not certain.

When you read an article or hear an interview with someone talking about the use of a living trust to avoid probate, the discussion is probably referring to revocable living trusts. So what's the problem? If a revocable trust avoids probate (it does) and doesn't lock you into something that you can't get out of (it doesn't), why not have it? "Never say 'never'" to such trust arrangements, since they do have the benefit of avoiding probate, but there are some negative factors about revocable trusts that you should keep in mind:

• They won't save income or estate taxes (since you haven't parted with the property).
• They require fees to set up, and yearly fees to administer.
• It's often not practical to retitle all assets in the trust. And if you don't go through the required formalities with respect to a particular property, at least for that property, your estate may be into probate after all.