How to Avoid Probate

The Concept of Title

The key to avoiding a probate estate after death lies in the proper understanding and utilization of the concept of title. Without the concept of title, there would be no probate courts, as we know them. The primary function of probate administration is to provide legal authority to transfer the title of assets owned by a deceased person. If a person dies without property titled in his or her name, there is no need for a probate estate. This is one of the fundamental principles of estate planning. Title is significant in a non-probate setting, as well.

If you transfer title into joint names with another person, this action has several significant consequences. If the value of the property is over the amount of the annual gift tax exclusion (currently $12,000, for each individual), the transfer must be reported on a gift tax return. The amount of the transfer also reduces the unified tax credit, which is often necessary to prevent estate taxes upon death.

In addition, a joint tenant has a carryover basis in the property, for income tax purposes. This means that he or she must recognize potentially significant capital gains, upon the sale of the property. Someone who inherits property, on the other hand, qualifies for a step-up in basis to the fair market value of the property, as of the date of death. This effectively wipes out all accrued capital gains on the property. This can be a very significant reason to avoid joint tenancy.

Transferring property into joint ownership also has serious lifetime effects. As soon as title is transferred, joint owners acquire legal rights. Their signatures are required for any future transfers or liens made with respect to the property. Tenant's spouses also acquire legal rights in the property. This could be very unfortunate if one tenant is going through a divorce. Furthermore, the joint property owner's creditors may also be able to gain access to the property. The original property owner has not only given up control of the property, but also provided a property interest to someone other than he or she intended.

Given the significance of proper title, it is amazing how little attention is directed toward this issue. Once clients realize the effect that title can have on their estate planning objectives, steps can be taken to insure that title is held properly. No estate planning tool effects the distribution and control of your property as much as a proper understanding of the concept of title!

Avoiding "Living Probate"

Michigan law breaks down the custody of a person into two components: 1) care of their physical being; and 2) care of their financial resources. A Guardian makes decisions about the care and treatment of the person, frequently referred to as the ward. A Conservator manages the wards financial resources.

A Guardian and/or Conservator can be named by the probate court either at the request of the prospective ward, or the court can act on the petition of an interested party. When a petition is made, the court calls for a hearing before a judge to determine whether the person needs legal protection. The court will appoint a Guardian ad litem to interview the proposed ward and to make a report on his or her condition, at the hearing. The guardian ad litem also makes a recommendation to the judge. The judge then decides, based on the best interests of the proposed ward, whether he or she needs legal protection, and who is the best party to provide that protection. After appointment, the guardian or conservator must report back to the court, at least annually, on the condition of the ward, and his or her estate.

Costs of guardianship and conservatorships vary somewhat, but $1,500-2,000 is average. The process typically takes from 1-2 months, from start to finish. While costs of $1,500-2,000 may not seem staggering, a more important consideration is the potential need for more immediate care, and the emotional toll that a probate proceeding of this kind can take on family members. When a loved one is very ill and has special needs, the last thing a family member needs is to spend two months waiting for a judge to make a decision. If the ward is medicated or confused, this is not a good time for him or her to be faced with the question of whether or not he or she needs or wants someone else to render assistance. Planning can make this difficult time easier for everyone involved.

The General Durable Power of Attorney is the best estate planning tool to avoid Living Probate. A general power of attorney covers all aspects of the person's physical and financial well-being and provides an Agent to make decisions the client can no longer make for him or herself. A durable power of attorney remains effective after the person has been declared incompetent.

There are two types of forms, commonly used. A standing power of attorney takes effect immediately upon execution. This might be useful for someone who faces major surgery or anticipates a rapid decline in health. The springing power of attorney, which is used more often, takes effect only after a person has been determined to be incapacitated. This determination is usually made by the person's physician, and perhaps one other doctor.

Along with a General Durable Power of Attorney, clients should also strongly consider executing a Durable Power of Attorney for Health Care. This form provides authority solely to make medical treatment and care decisions, if a patient is unable to do so. While its powers are often included in a General Power of Attorney, many doctors and hospitals are more comfortable seeing the specific health form, as well. A Michigan Peace of Mind booklet including a fill in the blank form can be obtained from any state representative, and is also available at most libraries, doctors offices and at the Livonia Senior Citizens Activity Center.

With any Power of Attorney form, the document ceases to have any effect, after the death of the client.

Avoiding Probate after Death

There are four ways beneficiaries normally receive property, after death: 1) through probate; 2) through a contract or beneficiary designation; 3) through joint tenancy; or 4) through a trust. Methods 2, 3 and 4 provide for a rapid transfer of assets, generally achieved at little or no cost to the beneficiaries. Method 1 varies widely in terms of cost and in the time period required before the beneficiary receives the property. Under current law, beneficiary designations are widely used for life insurance and retirement benefits. To increase the likelihood of probate avoidance for these assets, you should name at least one contingent beneficiary to inherit these assets, if the primary beneficiary is pre-deceased.

Given the concerns associated with joint ownership, joint ownership is often a dangerous method of probate avoidance, and it is rarely the best alternative.

Living Trusts

Trusts have been used as an estate planning tool since the Middle Ages. They originated in England in response to laws regarding property reversion. Typically, kings would reward loyal subjects with grants of land. Upon the death of the land holder, the property would automatically revert back to the king. By transferring the property to a Trust before death, subjects were able to take the property out of their estates, and pass it on to their heirs.

A Revocable or Living Trust is a document that provides for the management of the trust Grantors property. The Trust can control management of the property while the grantor is alive, or after death. Typically, the Grantor is the initial Trustee and he or she retains total control during his or her lifetime. The Grantor can add or withdraw property from the Trust, change beneficiaries or otherwise amend or revoke the trust in its entirety.

Because the Grantor retains such substantial control over the trust property, the IRS continues to treat him or her as the owner of the property. Any income received is chargeable to the Grantor on his or her individual tax return, and deductions are taken, in the same manner.

In general, a Trust is an extremely flexible estate planning tool that can be designed to accommodate a wide range of objectives. But, it is important to remember that trusts do not avoid probate. You can use a trust to avoid probate, only if all of your property is titled in the trust. Merely having a trust is not enough. Title is the key.

Under current law, a revocable trust is a safe method for avoiding probate, since it enables the client to retain full control of the property, and has none of the other drawbacks associated with joint property arrangements. Trusts are a relatively costly alternative to probate avoidance, however. Most attorneys charge between $1,000 and $3,000 to prepare an estate plan, including a trust.

Beneficiary Designations

Beneficiary designations are an easy, inexpensive and effective way to avoid probate. The property owner fills out a form indicating who the death beneficiary should be. The beneficiary has no access to or control over the property until the death of the grantor, at which time, he or she receives the assets, outside of probate. While this opportunity can be enormously valuable to clients whose primary objective is probate avoidance, the law does not require companies to make this option available. It merely says that if they do, clients can take advantage of it. As this option becomes better publicized, it will likely become the cheapest and easiest probate avoidance mechanism for most assets.

Note: Beneficiary designations are not an option for real property owners, under current laws. In order to transfer real estate outside of probate, more traditional planning devices are required, such as quit claim deeds or trusts.

Please contact us if you have any questions on the best option for you to avoid the need for probate administration.