Probate
If you don’t understand exactly what “probate” is, you are in good company. Most people don’t know much about it, other than that they wish to avoid it. In Georgia, many people have a horror story of a relative who’s assets went through an anguishing probate process. Confusion and delay only add to the suffering.
Time, Expense, and Publicity
In some states, especially for small estates, probate is not a big deal. In other states there is no significant relief for smaller estates. The process can take a long time and sometimes be quite expensive. The stress on dependent survivors of an estate owner can be compounded by long waiting periods and a confusing process.
The word, “probate”, evolved from Latin probatum, meaning something proved. In our current system, “probate” means to prove that the will before the court is a true statement of the last will and testament of a deceased estate owner. An estate in this context means all of the assets that person owns or owned at the time of their death.
The state has an interest in making sure that Wills are proven to be authentic. All honest people support legitimate distribution of a person’s assets to those they have chosen to leave their estate to.
However, there are problems with probate: 1) probate can take a long time, 2) probate can be expensive, and 3) probate is public.
First, when a loved one has died and family depend on their assets, the long wait for the probate process can be difficult. Financially there is uncertainty and delay in accessing assets, such as money to pay bills as they come due. The waiting can also prolong the stress of wrapping up loose ends. Some people grieve by completely ignoring business details that must be handled. Others obsess over making sure everything is resolved and completed. Waiting for months or even years exacerbates the suffering by delaying resolution. Often bills are due but unpaid, causing more trouble.
Secondly, the cost of probate includes hiring an attorney to represent the estate. For smaller estates there is a flat fee or hourly charges. For estates over a few hundred thousand dollars there is often a percentage of the total estate due for the attorney fee. This can result in fees of tens of thousands of dollars, or even hundreds of thousands in the case of very large estates.
Third, anything that happens in probate is public. This is an important consideration for those who do not want their families to become targets of unscrupulous predators. You do not want to leave a large sum to an underage child who gets the entire amount at 18 years of age – and has it published in the newspaper. Or to an elderly person who may be targeted by a scam.
How much cash is too much to leave an 18-year-old? $1 million? $200,000 in cash? No matter the amount, an inheritance should be used to improve the lives of those you leave behind, not lost by an immature heir.
Outside of the Probate Estate
Some assets are not included in a probate estate, including most life insurance proceeds, payable on death bank accounts, joint ownership of real estate with right of survivorship, and co-owned accounts with right of survivorship.
When a married couple does not plan for their joint estate, disaster is avoided where they are joint owners on all their assets. This only works for the first to die because most of the assets go to the surviving spouse outside of their probate estate as a function of law or joint title with a right of survivorship.
Unfortunately, the surviving spouse now must plan alone to avoid the trouble of probate for the heirs. It is unlikely that a lone surviving spouse owns most of her assets jointly with a right of survivorship together with each person she would name in her will.
Stuck in Probate
Dying without a will is known as dying “intestate”. If there is no will and no co-owners with right of survivorship, the default state statutes determine who inherits. States are not all identical. The statutes attempt to leave an intestate estate’s assets to those closest to the deceased in one way or another. Your assets may not go to the people you would choose if you had taken the time to complete a Will.
Intestate estates (estates without a Will) do go through the probate process. Unfortunately, estates that have Wills also go through the probate process.
Even with a Will, your estate must go through probate. Your heirs must still deal with the time delay of waiting for the assets. They will have to pay the attorney fees and court costs. And they will have everything they inherit published for everyone to see.
Trusts Avoid Probate
When assets are put into a Trust, the entire probate process is avoided for those assets. The time delay, the costs, and the publicity can all be avoided with a Trust. The Trust is a separate entity, similar to a corporation in that it can continue on after a person has died. In this way, the Trust is legally separate from a person’s estate. The assets in a trust need not be proven in probate because the owner is the Trust and the Trust has not died.
Only assets that are transferred into a Trust are included in the trust and so avoid probate. If you create a trust but fail to transfer the asset into the Trust, that asset is still part of your individual probate estate. So, a trust can avoid probate, but only if you fund it properly.
Leaving Assets to Young Children
When assets are left to underage children, whether by Will or Intestacy (died without a Will), the state will require a Trustee to manage the funds for the children until they are 18 years old. At 18 the children will receive the assets and cash all at once. The risk of a young heir losing an inheritance quickly is serious.
There are a few ways to be sure that the children get the assets later when they are more likely to be mature and experienced enough to handle finances.
One way to delay the children getting access to the assets is to have a Will with “Testamentary Trusts”. This is a Trust that will be created at the death of the person making the Will with instructions as to how the children will get the assets. The advantage of this approach is that if the parents survive until the children are older, the Trusts never have to be created. For instance, the maker of the Will may decide that if the children are over 30 they may have an outright distribution and avoid the need for a Trust.
Unfortunately, the Will with a Testamentary Trust does not avoid probate. Again, the heirs must deal with the difficulties of probate: time, cost, and publicity.
Revocable Living Trusts
Leaving assets through a Revocable Living Trust avoids the pitfalls of probate. For assets properly funded into a Trust there is little delay in access to assets, there are no probate fees for attorneys nor court costs, and the beneficiaries are not publicly exposed.
Unlike the Testamentary Trust, a Revocable Living Trust is properly funded during the life of the Trust Maker. When the individual Trust Maker dies, the assets are not in his probate estate and accordingly avoid the probate process.
TV Show “Friends” Actor, Matthew Perry
One of the actors made famous on the TV show “Friends” died in 2023. Matthew Perry’s estate was believed to be around $120 million. However, when his probate estate was published it only showed just over $1 million. Why? Because he funded his assets into a Living Trust. Of course, Perry was a famous and his net worth was not a complete secret. Those close to him, family and friends, are expected to be the beneficiaries of his Trust. But exactly who and exactly how much is not public. The Trust protects Perry’s beneficiaries from the complete exposure of publication of the details.
Trust Makers Retain Control of Assets
In a Revocable Living Trust the assets are protected from probate while the Makers of the Trust retain complete control of the assets while they are alive and still have mental capacity. The Trust Makers have several roles: they are the Trust Makers, the Trustees, and the Beneficiaries for the remainder of their lives.
If a Trust Maker of a Revocable Living Trust decides to take the assets out of the Trust for any reason, they are free to do so.
Trusts and Incapacity Protection
Another advantage of the Revocable Living Trust is Incapacity Protection. A Will contains the instructions of a Will Maker’s wishes which must be followed once he has died. A Will only becomes effective after the Will Maker has died. A Will can be changed up until the time of death and is not considered certain until the Maker has died. For instance, an heir is not certain until the Maker of the Will has died, so the would-be heirs are called, “heirs apparent”. They are merely apparent because we will not know for sure who will survive or who will be disinherited until the time of the Maker’s death.
By contrast, a Revocable Living Trust can be designed to become Irrevocable upon the Maker losing mental capacity. Once he is no longer capable of handling his own affairs, the rules laid out in the Revocable Living Trust become Irrevocable.
Wills Without Incapacity Protection
With a Will, if the Maker loses capacity and names a Power of Attorney, that Power of Attorney can change the disposition of his assets. Unlike a Revocable Living Trust with incapacity protection, the Will with a Power of Attorney does not have rules frozen in place as the Maker instructed when he last had the capacity to decide the disposition of his assets.
There have been cases where a child has waited decades to inherit land or other assets from a parent only to realize at the parent’s death that a step-parent had power of attorney and redirected the assets to another. Often, a family on a second marriage and two sets of children from previous marriages will have issues when a step-parent uses a power of attorney to redirect assets.
Pour-Over Wills
Some assets are intentionally left out of a Revocable Living Trust and some are left out inadvertently.
Many clients choose to leave automobiles out of their Trusts. They tend to depreciate quickly and not hold much value. Cars accidents also reveal who owns the vehicles involved and ownership by a Trust may give the appearance of “deep pockets” that invite law suits.
Other assets may have been overlooked. Or the Trust may be new and the Makers are still in the process of retitling assets into the Trust, with some still in the Maker’s probate estate. In some cases, the Maker never got around to retitling any of his assets into the trust.
In these cases where the assets are outside of the Trust, we need a safety net to capture all of the Maker’s assets and direct them to the beneficiaries that were named in the Trust plan.
This is where a Pour-Over Will comes in. The Pour-Over Will covers all of the assets a Maker has that are still in his probate estate for any reason, intentional or not. The Pour-Over avoids default intestacy statutes and pours them into the Trust so that the proper beneficiaries will enjoy the assets as the Maker intended.
Assets in the Trust are Ideal
Asset that are left out of the Trust will be directed to the Trust in a Pour-Over Will and the named beneficiaries will eventually benefit from these unfunded assets, but this is not ideal. The assets left out of the Trust must go through probate. They will be subject to the time delay, costs, and publicity of probate. They will not have the incapacity protection of assets that were properly funded into the Trust.
In a way, the end result is like a Will with a Testamentary Trust. The proper people will benefit eventually, but the unattractive features of probate are not avoided.
How do Children Eventually Get Assets?
One of the main reasons many clients create Revocable Living Trusts is to give their children their assets slowly, delaying full access until the children are older and better able to manage wealth.
A common approach is to give access in stages. Often, parents will put their assets into Trust so that if they were to die while the children are young, they will not get full access immediately.
For example, the assets would be fully managed by Trustees and slowly released to the children. At age 25 they may be given access to 1/3 of the assets, at age 30 another 1/3, and finally at age 35 they have full access.
Financial Education Preserves Wealth
Most clients hope their children will learn to manage money and preserve the principal, living on the interest if needed, but keeping a nest egg intact. A successful way to achieve this is to have the children learn what a Financial Advisor does with the assets and watch them grow. At the age of 30 we often give the children a role as a minority Trustee so they can work with their financial advisor and learn the value of keeping their money in the markets working for them. By the age of 35 clients often choose to give the children full access to the assets in the trust and can become their own Sole Trustee.
If they learn how their Financial Advisor grows their net worth in the market, the children are more likely to leave assets in the market to grow. This ultimately leads to a life of more choices and more likely to successfully endure difficult times.
Keeping the family fortune intact is more likely when the next generation understands financial management and has the discipline to leave assets in the market to work for them.
Divorce Protection
Assets earned by a married couple during their marriage are likely to be split between them in the event of a divorce. Assets that are held by one before the marriage and are not comingled in joint marital accounts are likely to be found to not be marital assets in a divorce. If the children have Trusts that they keep separate, those assets are not likely to be lost in a divorce settlement.
The time to create such Trusts is well before the children marry. Creating a Trust on the eve of a wedding can still work legally, but it isn’t a nice way to start off with a new in-law.
Prenuptial agreements have their own requirements to be enforceable, and each state can have different rules. Generally, a person signing away rights to the assets of another must have full disclosure of the assets they are foregoing. A person cannot fully relinquish rights to assets unless they know exactly what they are surrendering.
Trusts as Effective Estate Plans
A carefully drafted and properly funded Revocable Living Trust is an excellent Estate Planning tool. These Trusts avoid the pitfalls of probate: time, cost, and publicity. They can slow down access to the assets by children who are not mature or experienced with finances. Trusts can be used to help educate the children about finances and how to maintain the family fortune. Once they have access to the assets, the grown children can manage their assets for their children’s futures. And they can protect their assets from loss in divorce.