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Cat & Mouse: Probate Avoidance as Asset Protection

Probate is a court-supervised process through which the provisions of a person’s will are carried out. Many people choose to avoid probate by employing various estate planning tools that transfer their assets outside of their will. As a recent article explains, an additional benefit of creating non-probate transfers is that they provide a level of asset protection.

Cat & Mouse
(Photo credit: Mark Sardella)

If a person’s estate goes through probate, his or her executor will begin the process by collecting the decedent’s assets and giving notice of the death to any potential creditors. After this notice is given, the decedent’s creditors will have a specified amount of time to make any claims against the estate. The executor will have to pay these claims through the estate before distribution to the heirs.

Alternatively, certain non-probate assets such as life insurance policies, beneficiary accounts, and items held in joint tenancy pass immediately to the beneficiary or joint tenant upon the decedent’s death. Therefore, creditors are often unable to reach these assets.

Although non-probate transfers are a great way to incorporate asset protection planning into your estate plan, it is important not to use non-probate transfers specifically to avoid a particular creditor. These transfers can be undone if a court finds that the transfer was made for the sole purpose of avoiding an existing obligation to a creditor.

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“Mom, Can You Co-sign?”: Did a Family Member Participate in Your Loan?

Often, young adults ask other family members to participate in a loan to assist the young adult in purchasing his or her first home. As a recent article explains, this can become extraordinarily problematic at the family member’s death.

Even though the family member pays little or nothing towards the home, his or her name will usually be added to the title. This gives him or her an ownership interest in the home. If the family member’s estate leaves the home to those who actually paid for it, no problems will arise.

However, if the family member’s estate does not deal with the title, the homeowners may have a legal battle on their hands. In this situation, the decedent’s beneficiaries may fight to have the decedent’s portion of the home included in the estate. These battles especially arise if there is already animosity or distrust within the family.

To avoid this outcome, be sure to discuss it with the person who participated in your home loan. Ask them how their ownership interest is disposed of in their will. If this never happens and you are worried that you may become the target of such a lawsuit, be sure to keep documentation proving that the third party never paid anything towards the loan.

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Watch That Step!: Estate Planning Oversights to Avoid

In order to have a solid estate plan, it is important to not only carefully put the plan together but to revise it regularly as well. With all the work involved, it is not surprising that estate planning oversights are common. A recent article discusses several estate planning oversights that can lead to unintended consequences.

  1.       Failing to Plan: The largest estate planning mistake a person can make is failing to create an estate plan. If a person dies without an estate plan, his or her assets are distributed to his or her heirs in accordance with state law. This might provide the outcome the decedent had wanted, but often it does not.
  2.       Failure to Understand the Difference Between Probate and Non-Probate Assets: A probate asset is any asset that is transferred through a will. These assets go through the process of probate. A non-probate asset is transferred by contract, outside of the will. In order to create the most efficient and cost-effective estate plan, it is important to understand the differences between these two types of assets.
  3.       Failing to Pay Attention to Tax Apportionment Clauses: State and federal taxes may be assessed to various assets according to different rules. While some assets may be taxed, others may not. This becomes problematic when two children receive two inheritances of equal value but one has to pay taxes while the other does not.
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Choosing Your Executor

One of the most important estate planning decisions a person can make is deciding who will serve as the executor of the estate. This is a vital decision, because the executor will be in charge of overseeing the distribution of the estate in accordance with the decedent’s stated wishes. A recent article discusses several frequently asked questions when it comes to selecting an executor.

Does My Executor Need a Financial or Legal Background?
State law does not require individuals to have any sort of specialized background in order to serve as the executor of an estate. However, these skill sets are clearly beneficial when settling an estate. Although the executor can hire an attorney to assist with the estate administration, it is the executor who must make all final decisions.

Should I Select More Than One Executor?
Most commonly, people select a single executor. However, in some situations, it may be beneficial to select two executors. For example, where the deceased left behind an elderly spouse who is being assisted by an adult child, it may be beneficial if he or she named the spouse and child as joint executors, rather than the spouse alone.  Note that this may increase complexities in settling the estate.

Can My Named Executor Refuse to Serve?
The selection of an executor is not legally binding. Although the chosen executor will be given the opportunity to serve as such, he or she may renounce the appointment. If the decedent named a contingent executor, he or she will take over, if not, the court will appoint one.

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Why Everyone Needs An Estate Plan

With the current estate tax exemption over $5 million – $5.25 million to be exact – many people wonder if estate planning is necessary for them. As a recent article points out, the answer is yes.

Estate taxes are only one of a myriad of reasons why a person should put together an estate plan. The main reason for which people create estate plans is so that they can be sure that their assets will be distributed according to their wishes. No matter if you are very wealthy, or have a modest estate, an estate plan is vital if you wish to direct the distribution of your assets. Moreover, by providing instructions for an orderly distribution of your assets, you can save your heirs from the infighting that often results.

It is also important to draft a valid will if you wish to avoid probate. Many people falsely believe that if their estate is not subject to estate taxes, it is not subject to probate. This, however, is not the case. If you would not like your estate to go through the process of probate, you must put together an estate plan that utilizes various estate planning tools that will transfer the bulk of your estate outside of probate.

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What is Probate?

Something I am asked regularly is “what is probate?”  Often, that question is followed up with “how do I avoid probate?”  I always find it interesting when someone asks me the second question first, as I’m not sure why someone would want to avoid something without knowing what it is.

When one has passed away with assets to their name, the survivors are left to go through the court process to have an appropriate person appointed to transfer these assets to the rightful people, commonly referred to as the “beneficiaries.”  The act of going to court to appoint to the appropriate person, notifying the next of kin, filing estate tax returns and overall winding-up the affairs for the deceased’s estate  is what is commonly referred to as Probate.

Is Probate something which should be avoided?  The answer to that, much like the answer to many questions that involve legal ramifications is: “it depends.”  The factors that go into deciding whether or not probate is something which should be avoided are usually:

    1)      What assets did one own at the time of his death?

    2)      What are the specific laws of probate in the state in which the deceased resided and/or owned property during her lifetime?;  and

    3)      Is privacy something which is important to the person doing the planning?

The assets one owned at the time of their death is an important factor because different assets are transferred differently.  For certain assets (real estate, for example), state laws may require the Executor or Administrator (the person winding up the affairs) to jump through more hoops than others.  Some assets may require complicated valuations as well.  Avoiding probate in such cases can simplify or bypass altogether the court process of transferring these assets to the beneficiaries.

Some states have stricter probate laws than others.  The more strict the probate laws in a particular jurisdiction, the more costs & hassle the Executors and Administrators may have to endure in order to wind up the affairs and get the assets to the beneficiaries.

Finally, much like most court actions, probate is generally a public process.  That means that anyone (nosy neighbors, business partners and disgruntled family members who may not have received anything by way of inheritance) all have the same access to the public record documents that are involved in probate.

If one has determined that probate avoidance is a goal after weighing all the factors, the planning process can continue to determine the best strategy to achieve the goal.

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What Happens If I Die Without a Will?

A Last Will & Testament (commonly referred to as simply a Will) is a document that disposes of your property at the time of your death.

A common misconception is that Wills and proper Estate Planning are only necessary for the wealthy. This is not true. Whether your estate is large or small, it is beneficial to have a properly drawn Will. Not having the Will properly drafted and executed can cause delays, great expense and possibly force the Will to be interpreted through the courts.
If an individual dies without a Will there are certain consequences that may occur. Consider the following:

  • If you have not named a guardian for you minor children (as you would in a Will) , if both parents die, the courts or a social worker may have the temporary & final decision as to who should act as guardian for your minor children, not you or your family.
  • Without a Will naming an Executor, the court will appoint an Administrator for your estate who may not know your intentions.
  • After the administrator of your estate has distributed your assets in accordance with state law, your spouse may not have enough funds to live comfortably.
  • Without a Will you cannot leave personal items such as a family heirloom, specific jewelry, artwork, etc. to a particular individual such as a nephew, cousin, or family friend.

When creating a Will, it is also important to execute a Living Willand Power of Attorney. These 2 documents are also essential to any basic Estate Plan.

A Living Will (also known as a Health Care Proxy or Advanced Health Care Directive) allows an individual to appoint someone to make all health care decisions on their behalf in the event they are unable to understand and appreciate the nature and consequences of the health care decisions. You may also provide specific instructions as to your intentions.

A Power of Attorney allows an individual to designate an agent to conduct all business and financial decisions such as purchasing, improving, maintaining any real or personal property, banking, or any lawful business transactions. It can be Springing (takes effect only upon disability or incapacity) or Durable (effective immediately & remains effective upon disability or incapacity). Not having one of these in place can result in required costly court proceedings.

A minor mistake in drafting and executing your estate plan may invalidate your good intentions & your lifetime of hard work & savings. A little advanced planning can ensure your family’s goals are accomplished.