Updated Sept 2016
Few estate planning subjects are as misunderstood as probate. People generally do not understand why it may be needed. I have come across many people who have heard horror stories about it and want to avoid it at all costs. In some circumstances, it is a very good idea to avoid probate and there is a way to do that. There are also ways to minimize what needs to be probated.
Let’s start with what Probate is. Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs.
Depending on applicable state law, probate can be expensive and time consuming. Not only can probate reduce the amount of your estate in the form of executor and attorney fees, but it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.
In Texas, the probate process, with a well-drafted last will and testament is fairly stream-lined and has regulated costs. Consequently, Texas probate attorneys charge less than in other states where probate is more difficult.
How do you avoid Probate?
There are several tools you can use to avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with disposition of personal property and certain other matters.)
The right strategies depend on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, you should be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and IRAs, and other retirement plans.
For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind, though, that while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.
Only a few states permit TODs, which allow you to designate a beneficiary who will succeed to ownership of real estate after you die. TOD deeds allow you to avoid probate without making an irrevocable gift or exposing the property to your beneficiary’s creditors. Texas has passed legislation, which makes a TOD available in this state.
What if your estate is more complicated?
For larger, more complicated estates, a revocable trust aka living trust is generally the most effective tool for avoiding probate. A revocable trust involves some setup costs, but it allows you to, in one document, control your property while you are alive and able, take care of yourself and your loved ones if you become disabled, give what you have to whom you want, the way you want, and when want, and provides a variety of tax-planning opportunities while retaining the right to modify your plan.
To avoid probate, it’s critical to transfer title to all of your assets, now and in the future, to the trust. For IRAs and retirement plans, you can avoid probate simply by naming a beneficiary other than your estate, though it may be desirable to name a trust as beneficiary to control how the assets are distributed. Also, placing life insurance policies in an irrevocable life insurance trust (ILIT) can provide significant tax benefits.
The big picture
If you fail to have a plan in place addressing the disposition of your assets upon your death, then your heirs should expect that a probate is likely in their future. Probate is not a process that should necessarily be feared. Avoiding probate can certainly be a part of estate planning. Your estate planning advisor can help you develop a strategy that minimizes probate while reducing taxes and achieving your other estate planning goals.
