Avoiding Probate

Avoiding probate is a subject that gets everyone’s attention. What are the benefits, any downsides, and how do you do it?

The benefits include immediate access to the funds owned by the deceased, greater privacy, and often less work to get the assets into the names of your spouse or children. The immediate access results when a bank account or car or home or stocks and bonds are owned in joint survivorship or in a trust. The survivor, or the trustee can handle those assets both before and after death without any probate approval. The greater privacy comes about because the assets are not listed in the probate court public records which anyone can see.

There are many methods to avoid probate. Joint survivor ownership is one. Naming a
beneficiary on an account is another. Banks often call that a POD, or payable on death account, or a TOD, which stands for Transfer on death. IRA’s and 401k’s or 403b’s are examples of assets that do not go through probate. They become the property of the beneficiaries named on the beneficiary designation form. Those are easy to set up. But if you want certain assets to go to some people, and other assets to go to others, or if you have children who cannot handle money due to age or personal problems, then joint accounts or beneficiary designations may not work. For that a revocable trust may be the answer.

A revocable trust, often called a living trust, means what it says. It is revocable and can be changed at any time. If you say your kids get everything equally, but ten years down the road one of them has health problems, or a difficult marriage, you can change where the money goes, or change the percentage to each child. A further benefit is that you can have your trustee handle those assets if your child is not really capable if wisely using money. That is certainly true if money is going to minor children or grandchildren. For example, if you want to set aside money for grandchildren, the parent of those grandchildren could be trustee of the trust to use that money for tuition, living expenses or whatever is needed.

The administration of a living trust after death often means lower costs handling the estate and does give immediate access to the assets inside the trust and it is not listed in the public records in probate court. However, it does not avoid the probate fee, because in Connecticut the probate fee is based on the values shown on the inheritance tax return, which is required to be filed, even though the vast majority of Connecticut residents do not owe one penny of inheritance tax. That is because the Connecticut inheritance tax exemption is currently $3.6 million per person, and the federal exemption is $11.2 million per person. In short, revocable trusts can be a very good way to simplify transferring your life savings to your family.

But there is a giant potential problem with revocable trusts for elderly people, because they do nothing to protect assets if someone needs to get Medicaid to pay for home care or long-term home care. That is because a revocable trust means just what it says. It is revocable and the State of Connecticut says, quite logically, if it is revocable, it is still yours and counts against you if you were to apply for Medicaid. For that, you need carefully prepared irrevocable trusts that meet Connecticut’s rules. Irrevocable trusts also avoid probate, are quicker to pass on property than through probate, and are not public records.

Avoiding probate is desired by many people, and the important thing to keep in mind is that depending on your family’s situation, one or another of the various methods to avoid probate may make sense depending on your situation, and your goals. There is no such thing as one size fits all, so get advice from someone who can tell you the pros and cons of the various methods to avoid probate, and the different kinds of trusts and best accomplish your purpose.