I recently met with a client for estate planning. During our discussions about the various ways that assets pass after death, she said, "I heard at an estate planning seminar that a trust is the only way to avoid probate. Isn't that true?" The simple answer to the question is, a trust is not the only way to avoid probate. This answer also highlights the different approach we take in advising our clients on their estate plans.
There are a number of ways assets pass after death. Generally they would fall into 3-4 categories, including:
- Joint Ownership with Right of Survivorship. This would be common for the ownership of a house or joint checking account. When one owner dies, the other owner assumes ownership. This does not require probate. However, it is important to plan for what happens when the last owner dies and there is no more joint ownership.
- Beneficiary Designations. For many people the majority of their assets will likely pass via beneficiary designations. This is most commonly used for retirement accounts and life insurance, but you can also use beneficiary designations for bank accounts, real estate, and even vehicles. In fact, more and more, many estate plans are largely driven by beneficiary designations. It is important to remember that beneficiary designations will always control the disposition of the asset at death. Beneficiary designations alone are also not a great fit for clients with estate tax concerns or where outright distribution to the beneficiary would not be appropriate. Read more here: Using a Transfer on Death Deed and Transfer on Death for Vehicles.
- Probate. Only assets that do not have joint ownership or do not have beneficiary designations would be subject to probate. Probate is the process by which the person's heirs are identified and the will is proven up. If there is no will, the laws of intestacy will apply. Probate can be avoided by planning properly with beneficiary designations. Where beneficiary designations alone are not appropriate, or there are assets for which beneficiary designations are not available, a trust is needed. Read more here: PROBATE TRUTHS (and "Truthiness").
- Trust. A trust is an entity into which you can transfer assets before death or as a result of your death. Once the assets are in the trust, the trustee has control of the assets and will manage or distribute them according to your wishes. One of the biggest benefits is that the trust assets do not need to go through probate for the trustee to start managing your trust estate. Read more here: What is a Living Trust and Do I Need One?
Although there are many benefits to a trust, a trust is not needed for every situation and is not the only way to avoid probate. For many of our clients, a transfer on death deed and proper beneficiary designations is more appropriate. In those situations, it is still vitally important that we have a will, power of attorney, and health care directive, but we can avoid the additional cost and burden of a trust.
Our approach is to work with our clients in recommending an estate plan that is most appropriate for their particular situation. Our mission is to advise and guide our clients through the most crucial decisions they will make in their lives. We believe that educating our clients on the law and factors above is critical to this process.
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