There is an expression about a little bit of information being a dangerous thing, and this definitely applies to certain estate planning approaches. Some people hear bits and pieces, and they pass along ideas that sound good on the surface, but there are hidden dangers.
These notions often revolve around the concept of probate avoidance. Probate is a legal process that takes place under the supervision of a court.
If you use a simple will to direct asset transfers after you are gone, you would name an executor to act as the administrator. The executor would admit the will to probate, and the court would preside while the estate is being administered.
Creditors are given time to come forward seeking payment during probate, and the executor will establish an estate bank account and obtain an Employer Identification Number from the IRS.
The assets will be identified, secured, and prepared for distribution, and final debts will be paid by the executor. If anyone wants to contest the validity of the will, they could make a case while the estate is being probated by the court.
When everything is in order, the court will close the estate and the assets will be distributed to the heirs. This sounds simple enough, the probate will typically take eight to 18 months to run its course, and no inheritances are distributed during this interim.
Probate expenses eat away at the value of the estate before it is transferred to the inheritors, and it is a public proceeding, so anyone that is interested can access the records.
A lot of people that recognize the drawbacks of probate look for ways to avoid it, and joint tenancy is one of the simple solutions that can go awry. Simply put, joint tenancy is the condition of coownership of property.
For example, if you own your home, you can file the appropriate paperwork to make someone else a co-owner of the property. This would create a joint tenancy, and it comes with right of survivorship.
After the death of one joint tenant, the survivor would assume the deceased tenant’s interest in the property. The transfer would not be subject to the probate process, so the pitfalls would be avoided.
The problem with joint tenancy is the fact that the person that is added to the title would become co-owner of the property immediately. If they are targeted by the IRS or another litigant seeking redress, their portion of the property would be in play.
Another disadvantage is the fact that the original property owner would need the complete cooperation of the other joint tenant if they want to sell or mortgage the entire property.
Payable on Death Accounts
When you open an account at a bank or a brokerage, you can add a beneficiary. After your death, the beneficiary would present the death certificate to the institution, and they would assume ownership of the account. The probate court would not be involved in the transfer.
Some people will establish one of these accounts and name a beneficiary that they view as an executor of sorts. They tell the beneficiary to distribute the assets among multiple people in a certain manner.
While that may seem like a solid plan, the beneficiary would not be legally compelled to follow these verbal instructions. Someone could violate the decedent’s trust out of greed, and there are those that think they “know better” than the original account holder for one reason or another.
A More Effective Probate Avoidance Solution
There is no reason to take chances with these risky, incomplete, and limiting ideas. If you establish and fund a revocable living trust, you would act as the trustee while you are living, so you would maintain control of the assets.
In the trust declaration, you would name a trustee to succeed you, and your heirs would be the beneficiaries. After your passing, the resources would be distributed to the beneficiaries in accordance with your wishes, and probate would not be a factor.
This is a major advantage, and you can also include spendthrift protections. The principal would be protected from the beneficiaries’ creditors, you could instruct the trustee to provide measured distributions over an extended period of time.
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