Steps to Avoid Probate May Not Save Your Money

Smart people want to save money wherever they can and one way is through good estate planning and understanding the probate process.
When people die they have an estate. That simply means a sum of all their assets and liabilities; what they own and owe. Some examples of an estate asset are your interest in your home, retirement accounts, personal belongings, pensions if there is a survivor benefit and life insurance. Liabilities could be mortgages and credit card debt.

What is Probate?

If you have a will, leaving assets to other people then your will may need to be reviewed by the Probate Court. Each jurisdiction (where you live or have property) has their own sets of rules and thresholds. If you die without a will then you are known as “dying intestate’ which means that the rules of the State will decide who gets what. Most jurisdictions also levy a fee calculated on the amount of your Probate estate. In addition probate is public and can be drawn out depending on a number of issues that are not addressed here.

Not everything that you own is subject to probate. How property is titled, or owned will determine if it is subject to the probate court’s jurisdiction and hence fee. For example, through forming a revocable living trust in Wyoming.

There are three basic ways in which to transfer property upon death and they are:

Operation of Law – which refers to the way a deed or account is titled. If you are married you probably have seen a jointly owned account come in with the letters JTWROS after both names. That stands for Joint Tenants with Right of Survivorship which provides that upon the death of one holder the other receives their share. If you have an account worth $10,000 then $5,000 is in your estate and ZERO in your Probate estate.

The next method is known as Transfer to a Named Beneficiary. If you have an IRA or other qualified pension plan you will have a beneficiary. If your balance is $2,000,000 when you die then the two million is in your estate and ZERO in your Probate Estate.

Life insurance policies work the same way, they will be in your estate but not subject to probate.

Items that are held in a Trust are also not subject to probate and that is why Living Trusts are very popular in states that have high fees and or a long drawn out process.

The last process is known as a Will and that is where probate kicks in. Many people do not realize that much of what they leave others is in all likelihood transferred outside of the will.

In 1999 the law was passed that allowed for brokerage accounts and savings accounts to be established which would have a named beneficiary. In theory the person named in the account as a beneficiary could simply file a claim and present a death certificate and receive the assets or their share from the account. These are known as Payable on Death or Transfer on Death accounts and again vary by state.

Converting an ordinary brokerage or savings account into one that has a named beneficiary seems like a smart option since it will reduce the probate fees and the beneficiary can have quicker access to their money since they do not need judicial approval.

Talk about an academic exercise hitting the brick wall of reality!

An elderly client had a brokerage account and named her three children as beneficiaries with specific percentages. When she passed away we contacted the brokerage firm to begin the process of liquidation. We were told that we needed to provide a copy of the death certificate which was not an issue. However we were then given a slew of onerous paperwork that had to be jointly signed by each beneficiary which became a time consuming chore because of geography and they had to jointly agree as to how the assets were to be divided. It was as if the custodian was oblivious to the account holder’s wishes. Lastly the money had to be transferred to an account in the new owners name before it could be transferred away,

The unexpected charges from the custodian more gobbled up the potential savings.

You do need to understand the costs and process in your own jurisdiction to determine what a time/money saver is and what simply an academic exercise is.