In Part One, I discussed the process of probate. In Part Two, I will talk about avoiding probate and why it is a dirty word.

When a person dies, he or she usually owns a variety of different types of assets. Real estate, life insurance, bank accounts, etc. The family needs to figure out who will inherit these various assets now that the original owner is dead. The original owner can tell us whom he or she intended to inherit these assets in a number of ways: 1) by naming a joint owner on the asset, 2) by naming a beneficiary of the asset, 3) by placing the assets into a trust, or 4) by leaving a will naming his or her beneficiaries.

If we know from the asset itself who inherits that asset, then that asset avoids probate. So, for example, if an asset is jointly owned by John Smith and Mary Smith, we know that when John dies the asset goes to Mary and we do not need a will or a judge to tell us so. Mary becomes the owner of the joint asset automatically.

Here are more examples of assets which avoid probate:

  1. John has a life insurance policy. He filed a form with the life insurance company which names Mary as the beneficiary. Mary inherits the life insurance without probate.
  2. John has an IRA which names Mary as the beneficiary. Mary inherits the IRA without probate.
  3. John set up a trust before he died. During John’s lifetime, he changed the name on his bank account so that the owner is “The John Smith Trust.” When John dies, we read the trust document and it names Mary as the beneficiary of the trust. The bank will release the funds in the bank account to the Trustee of the John Smith Trust without probate and the Trustee will give the funds to Mary.

Assets which require probate

So now you understand that when a person dies owning assets which do not tell us who inherits them, we need to look to the decedent’s will (if the decedent has a will) to determine who inherits the assets. Such assets are those owned by the decedent in his or her individual name and which do not name a beneficiary. For those assets we need probate.

Probate as a Dirty Word

Two reasons: money and time. Probate involves lawyers and lawyers charge fees. Probate also takes time. It takes time to get death certificates, time to fill out the paperwork for the court, time waiting for the notice period, time waiting for a busy court to process the paperwork and send out the Letters of Authority, time to file the tax returns… In addition, creditors of the decedent or his or her estate have a year from the date of death to file a claim. Therefore, the Personal Representative must wait a year from the death of the decendent before distributing all the money.

You can save legal fees and maybe some time by doing some of the “legwork” yourself such as filing claim forms, notifying creditors, or calling Dad’s former workplace to stop his pension. If you hire a lawyer to do the work for you, it is going to cost money and you will need to wait for the lawyer to do the work. But even if you do some of the work yourself, I find that it takes most Personal Representatives a long time to do the work they need to do. Finding time to take mom to the bank and switch all the accounts to her name, filling out the forms to claim life insurance, meeting with the investment advisor to roll over mom’s IRA to Dad’s name, standing in line to transfer the car to mom’s name……these things will happen whether or not you have probate. I see lots of families who take well over six months to do all the paperwork and errands required when a spouse or parent dies.

Avoiding Probate With Jointly-Owned Assets

Just so you know, lawyers hate joint bank accounts. Yes, they avoid probate. But most people do not realize that when they name their child on the bank account they are making a gift of that bank account to the child. The child has access to all of the money in the account but what is worse, the child’s creditors and a divorcing spouse also have access to some of the money. Even if you have a verbal agreement with the child to divide up the money in the account with your other children, that child is under no obligation to share the money. In fact, I have seen numerous situations in which the money is not shared, and not always for bad reasons.

Lawyers prefer using a simple, revocable or “living” trust to avoid probate. A trustee has access to the trust bank accounts to pay bills, etc, but trusts do not cause confusion over who will inherit the money when the decedent passes away. Please think carefully before using joint accounts to avoid probate!

What Difference Does a Will Make?

If a decedent does not have a Will, the decedent has died intestate (remember Part I?). If the decedent has assets in his or her name alone, we need to file what is called an Administration in the probate court. The court process is basically the same as Probate. Without a Will, state law determines who will inherit the decedent’s assets. The state intestacy law is very complicated and maybe I will discuss it in a future blog post. Probate is definitely less expensive than Administration. With Administration, the Personal Representative needs to file an expensive bond, and get court permission to sell certain assets. Those extra legal procedures are very expensive.

The lesson here? Probate is not a dirty word….. in some cases it’s more efficient than avoiding probate, and less expensive!