March 7, 2018
Studies on estate planning routinely show that avoiding probate is one of the top goals for people. Probate, that court process that historically provides for the transfer of a decedent’s property to heirs, is regularly seen as costly and time consuming. The costliness often comes about because filing with a probate court often involves an attorney’s assistance, and of course, the attorney rarely works for free, and usually works for fees that can be significant. The idea of the probate process being time consuming arises because the court, or a probate registrar, often must review documents and make a ruling, then issue its order.
Sometimes probate is necessary. It’s a topic we will discuss next time. Today, we will address the four basic ways to avoid the probate process in passing property to heirs. In summary, the four ways to avoid probate are: 1) beneficiary designation, 2) joint tenancy, 3) trust ownership, and 4) affidavit of collection of property for small estates. Let’s look at each of these briefly.
Naming a beneficiary for property allows for the property to transfer automatically to the beneficiary. Commonly, the property with a named beneficiary would include life insurance, qualified retirement plans (e.g., 401k plans), bank accounts, and investment accounts. In recent years, Minnesota law has been changed to allow for a transfer on death deed for a primary residence, which follows a similar concept as naming a beneficiary.
The major drawback to naming a beneficiary is that the beneficiary may not out live the decedent owner. If the beneficiary predeceases the owner, and no successor beneficiary is named, the property may still need to be probated as it goes back to being simply part of the decedent’s estate, and the court now governs as to who controls such property.
A second drawback involves the idea that a named beneficiary may be outdated at the time of the owner’s death. For example, if a person is divorced but the ex-spouse is named as the beneficiary of a life insurance policy, the beneficiary designation might not be what the decedent intended. While it may be subject to challenge in the court, often the named beneficiary will prevail. Court cases have been ruled on either side of this issue and usually come down to an analysis of the individual facts of the case.
Overall, a beneficiary designation can be a quick, simple way to transfer property. Registration must be made with the sponsoring organization. For example, the insurance company will require its beneficiary form be completed to name a beneficiary. And upon death of the insured, the insurance company will generally provide the insurance proceeds to the beneficiary.
Joint tenancy is the concept that involves property ownership by more than one individual. The common example of joint tenancy is a husband and wife jointly owning a bank account. Upon the death of one of the parties, the surviving party becomes the owner of the account.
Joint tenancy is not restricted to spousal situations. Business accounts or family accounts often are held in joint tenancy, too. Therefore, if siblings jointly own property, there may be several individuals who continue to own the property even after the death of one of them.
The major drawback to a joint tenancy arrangement is the dissatisfaction with the co-tenants by the individual prior to his death, and the desire not to leave such property to such co-tenants. But this situation is one that involves further planning and regular monitoring of the estate plan.
Upon the death of one of the tenants, account titling should be updated with the sponsoring organization (e.g., the bank) to keep a listing of co-tenants updated.
Overall, joint tenancy is, again, a relatively easy, quick and cost efficient way to transfer property from a decedent’s estate to survivors and heirs.
Trusts have been discussed in previous editions of these blogs, so I won’t go into specific details about trusts. But a trust is recognized as a separate legal entity that owns property and is managed by a trustee. If an individual dies, the trust continues to survive and to own the property subject to the terms of the trust. While the decedent may have been the trustee, and a new trustee will need to be named, the trust itself continues to exist after the individual’s death.
A drawback of a trust might depend on the type of trust and its ultimate purpose. If a trust is irrevocable and the grantor, i.e., the person establishing the trust, does not favor the terms of the trust, it may be too late to fetch the property upon its transfer to the trust. In addition, a named trustee, or successor trustee, might fall out of favor after being named to the trustee position and not act as the grantor might want the trustee to act. Still, those are issues that can be addressed by thorough drafting and diligent addressing of the necessary concerns.
A trust, while perhaps more costly on the front end of the estate planning process while the property owner is alive, offers great flexibility and can be a significant tool in long term planning when transferring property to heirs.
Affidavit for Collection of Property
The final method to avoid probate is the utilization of an affidavit for collection of property. This affidavit may only be used for estates with less than $75,000 of total probateable worth. So if an individual owns minimal property, defined under Minnesota statute as less than $75,000, no will would need to be probated. An affidavit could be used instead.
The drawback to the affidavit is that if an heir should contest how the property is to be transferred (usually to another heir), a contest would not be easily addressed with an affidavit. A will would still be the best way to clarify who is to receive property from an estate. For example, if three children survive their deceased parent and a bank account with $50,000 remains for the estate, one child might be able to present an affidavit to the bank and collect the property before the other children act. Dividing the account evenly three ways, if that’s what the parent probably wanted, might get difficult.
Overall, the affidavit is intended as a final, simple solution to transferring minimal property to heirs, and has been viewed to be effective over the years.
These four methods can all be used in varying degrees with larger estates to serve the property owner and to meet the goals of the planning process. Each of them has its attributes and negatives. But used properly, an individual can design an efficient, cost-effective estate plan.
This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.