Probate Courts supervise the transfer of inherited property and protect estates and heirs against fraud through their direct oversight. Unfortunately, the process can be lengthy and confusing. So, many of my clients ask me if they can structure their property and assets so that their estates can avoid Probate Court. Many have seen advertisements for services aimed at avoiding Probate Court. These ads make it seem like avoiding probate is essential to save money.
But frankly, it’s not that simple. You have to go through Probate Court for at least part of the process. There are state and federal estate tax forms that have to be filled out and filed for everyone who dies – rich and poor alike. Estate tax filings are overseen by the Probate Court in connection with the Department of Revenue and the IRS. Assets and property that you manage to transfer outside of the formal probate process must be listed and claimed on these estate tax forms. So, no matter whether you had just a little or a lot, your estate has to pass through Probate Court.
If you are preparing your legal documents, such as your Will, consider if you want to use a full Probate Court review or not in this process. Alternatively, if you are helping an elderly loved one prepare their documents, keep this information in mind.
Why Avoid a Full Probate Court Review?
There may be ways to avoid a full Probate Court review of an estate. Four reasons to do this are:
(1) Probate Court can take a long time. Most simple estates take six months to one year to completely finish and close. More complex estates can take several years to close out. Charles Dickens based one of his classic novels around a lengthy probate contest. Until the probate process ends, your heirs don’t get to enjoy the benefits that you left them. On the other hand, any property or assets that you can pass along outside of the formal probate process can be enjoyed immediately by your heirs.
(2) Probate Court is public. Courts, including Probate Court, are open and accessible to the general public. Although certain limited information is kept confidential, much of your probate estate documents are made public. Some clients want to keep their confidentiality as much as possible.
(3) Probate Court can be costly. Legal fees, court costs, and court fees. These are small amounts here and there, but they do add up and take money out of your estate. This necessarily means there is less to inherit by your beneficiaries.
(4) Probate Court opens your estate up to challenges. When an estate is probated in Probate Court, all possible heirs and creditors are given fair notice of all court hearings. Unhappy family members who expected an inheritance might challenge the decisions you made. If you can structure your assets to avoid Probate Court, you largely take away the ability to contest your Will.
How to Avoid Probate Court
If you do want to structure your estate to avoid direct Probate Court oversight, here a few things that you could try:
(1) Property having joint tenancy with right of survivorship. If your property is jointly owned (for example, spouses have a joint checking account), if one owner dies, the other owner takes the property without having to go through Probate Court. For instance, if brother and sister are listed as joint tenants with right of survivorship on the Deed to their parents’ former home, if the brother dies, the sister is the full owner of the home. Bank accounts, cars, and real estate can all be set up this way. However, understand that the other owner has equal legal right to use the property at any time in any way they want. In the example of the brother and the sister, the surviving sister does not need to share the home with the brother’s widow and children, and the brother’s estate does not have a valid claim. The sister survived and is now the sole owner of the family house. So be careful when you select your joint tenant.
(2) Assets having designated beneficiaries. Things such as life insurance policies, retirement accounts, bank accounts with “payable upon death” designations, and certain assets that have “transfer upon death” designations, can all be set up to avoid probate. For example, a life insurance policy can designate certain beneficiaries, and upon proof of death, the policy money will be paid immediately to those beneficiaries. However, you have to keep your beneficiaries up to date as life’s little incidents take place because whoever is listed will be paid. For example, if you fail to update your life insurance after your divorce, and your ex-spouse remains the designated beneficiary, the money will be paid to your ex-spouse if you die. Yikes!
(3) Gifts made while still alive. While you are alive, your property and assets are yours to use as you see fit. You have every right to gift away money, and everything else you own. No one has an entitlement to receive your property after you die. Gifting money is a recognized strategy to reduce the size of your probate estate and it has the added benefit that you get to see your heirs enjoy it while you are still alive. However, once you gift it, it’s no longer yours to control. For example, grandfather gifts grandson $10,000 for Christmas. This will reduce the size of the grandfather’s taxable probate estate. But, the grandfather no longer owns the money and cannot stop his grandson from gambling it away, from spending it on his new girlfriend, or from using it to buy a sports car.
(4) Set up a living trust. Trusts are one means of sheltering large assets from probate review. A living trust is a legal entity that can own property or assets as its own. The living trust can be managed by a trustee. Property and assets must be formally transferred to the trust, but once transferred, the trust owns the property and assets outright instead of the person. So, when the person dies, any property and assets in the trust are exempt from full Probate Court review, and these can be distributed immediately. But be careful. Trusts may help you to avoid probate, but they are complicated legal matters. Also, if the trustee mismanages the assets, valuable property can be lost or spent before it is distributed to the intended beneficiaries.
None of these options are fool-proof. In my experience, you should consult with a probate and elder care attorney before going down any of these paths. Unless you receive legal advice to the contrary, most estates should be probated.
Why Use Probate Court?
Despite possible negatives, there are three very sound reasons to fully probate your estate:
(1) Judicial Oversight. Probate Court review ensures that your assets are properly accounted for, and disposed of, according to your specific wishes. Review of your estate by the Probate Court Judge should give you peace of mind that no unscrupulous relative or person can steal your property and assets. Your property will get to the people you intended. There are many reported criminal cases where individuals tried to steal property out of probate estates, were caught, and were prosecuted. The formal process is set up to catch frauds and remedy the situation. You don’t enjoy the same protections outside of Probate Court.
(2) Small Estates Procedure. Connecticut has a process where smaller estates (those valued under $40,000) can be settled efficiently and with only minimal paperwork. You will get judicial oversight to protect against fraud, but the streamlined process gets your money and property distributed to your heirs quickly. A creative probate attorney might even be able to structure the assets of a large estate in such a way that the probate assets are valued under the small estate threshold.
(3) Careful Review. It is a basic fact of life that when we rush, we make mistakes. Probate Court oversight provides a benefit that the judge and the court’s officials will engage in a careful, cautious review of your estate, and they will make sure that things are done properly. For example, imagine what could happen if money is distributed, and then taxes are unpaid? Your heirs that wrongfully received money could be on the line to pay the taxes. These kinds of mistakes do not happen when your estate is fully probated according to the rules.
As you can see, although many clients seek advice about avoiding probate, your options to do so are very limited, and could result in more problems. You want to talk to a probate attorney before you make decisions that could have real impact. If you are planning your estate, or assisting your parent in planning theirs, please contact us for legal advice. I am here to help!