Probate is a legal process that takes place after someone passes away. It involves proving the validity of a will, identifying the deceased’s assets, paying any outstanding debts or taxes, and distributing the remaining property to the rightful heirs.
While probate serves an important function in estate administration, it is often viewed as an undesirable process. Many people take steps to avoid probate altogether, and a living trust stands out as one of the most effective tools to achieve this goal.
Understanding the Probate Process
When an individual passes away, their estate enters probate unless their assets are structured to avoid it. The court oversees the process to ensure that debts are paid, and assets are distributed in accordance with the will. If no will exists, the estate is distributed according to state intestacy laws.
Probate involves several steps, including:
- Filing the will with the probate court
- Appointing an executor or administrator
- Inventorying and appraising assets
- Settling debts and taxes
- Distributing remaining assets to heirs
This process can take months or even years to complete, especially for larger or more complex estates, especially if real estate, minerals, or closely held businesses are involved. It is also public, meaning the details of the estate become part of the public record. That can be a problem when businesses are involved and confidential information could be exposed.
Additionally, probate comes with costs, including court fees, executor fees, and legal expenses, which can reduce the value of the estate.
Why Do People Avoid Probate?
The time, cost, lack of privacy, and the possibility of an ancillary (or second) probate if you own property in other states) associated with probate are the main reasons people seek to avoid it. Probate delays can create financial stress for heirs who may need access to funds.
The public nature of the process can expose sensitive financial details, and the associated fees can significantly deplete the estate.
For these reasons, many people use estate planning strategies to bypass probate. However, not all probate-avoidance tools are equally effective.
Limitations of Payable-on-Death Accounts and Joint Tenancy
Payable-on-death (POD) accounts and joint tenancy are often used to bypass probate. While these options can work in specific situations, they come with significant limitations.
A POD account allows the account holder to name a beneficiary who will receive the funds directly upon their death. This arrangement avoids probate because the funds transfer automatically.
However, using POD designations can be problematic. It is critical to read and understand the contract provided by the financial institution. If a beneficiary predeceases you, does their money go to their children or the other named beneficiaries? They also do not allow for complex distribution plans, such as staggered payments or trusts for minors.
Joint tenancy is another common tool for avoiding probate. With joint tenancy, two or more people share ownership of an asset, such as real estate. When one owner passes away, their share automatically transfers to the surviving joint owner.
While this avoids probate, it has significant drawbacks. Adding someone as a joint tenant exposes the asset to their creditors and legal issues. It also limits your ability to sell or refinance the property without the joint tenant’s consent. Plus, when a joint tenant dies, there is only one name remaining on the account and that automatically subjects the asset to probate.
The Superior Solution: A Living Trust
Unlike POD accounts or joint tenancy, a living trust provides a comprehensive solution for avoiding probate. A living trust holds your assets during your lifetime and transfers them to your chosen beneficiaries after your death, all without court intervention.
When you create a living trust, you transfer ownership of your assets to the trust while retaining full control of the management of those assets by serving as the trustee. Upon your incapacity or death, a successor trustee that you designate steps in to manage or distribute the assets according to your instructions. Of course, the ultimate control is that as the Trustor (the one setting up the trust) you can amend or revoke the trust at any time (until you are incapacitated).
Benefits of a Living Trust
- Probate Avoidance: Assets held in a living trust bypass probate entirely, saving time, money, and stress for your loved ones.
- Flexibility: A trust allows you to create detailed distribution plans, such as setting conditions for inheritances or providing for minor children.
- Privacy: Unlike probate, which is a public process, a living trust remains private. This keeps the details of your estate and beneficiaries confidential.
- Incapacity Planning: A trust includes provisions for your care if you become incapacitated thereby allowing your successor trustee to manage your assets without court involvement.
A living trust also avoids many of the risks associated with POD accounts and joint tenancy. It provides protection against creditors, allows for seamless management of complex estates, and ensures your wishes are followed with precision.
The Importance of Proper Funding
To be effective, a living trust must be properly funded. The trust can only control the disposition of assets it owns. This involves transferring ownership of your assets into the trust, including real estate, bank accounts, and investment accounts. There are three exceptions to transferring ownership of your assets into the name of the trust: your retirement accounts (IRAs, 401Ks, etc.), annuities, and life insurance. These assets are linked to your trust by the appropriate beneficiary designation.
Any asset left outside the trust may still be subject to probate. For this reason, it’s essential to review your estate plan regularly and ensure all new assets are included in the trust.
Summing It Up
Probate serves a necessary legal function, but its drawbacks make it a process many people prefer to avoid. While tools like POD accounts and joint tenancy offer partial solutions, they fall short in providing the comprehensive protection and flexibility of a living trust.
By creating and properly funding a living trust, you can avoid probate, protect your privacy, and ensure your estate is distributed according to your wishes.
Schedule a Consultation Today!
Our doors are open if you’re ready to work with an Oklahoma City estate planning lawyer to put a plan in place. You can call us at 405-843-6100 to schedule a consultation appointment, and you can alternately send us a message through our contact page.
We also have an office in Tulsa, and if that is more convenient for you, the number there is 918-615-2700.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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