Last year on our blog, we explored the ways in which financial planning and estate planning work together. The reality is that financial planning doesn’t work without estate planning, and estate planning doesn’t work without financial planning. That’s why we are very grateful to have Kathy Rus as a resource. As a lawyer and member of the Maryland State Bar Association, Kathy has provided legal advice to businesses and individuals for over 25 years. She established The Law Office of D. Kathleen Rus, Esq. specifically to focus on estate planning and law. We wanted her expertise to explore the ways in which you can help your heirs and beneficiaries prepare for what happens when you pass.
Here’s our conversation with Kathy about avoiding probate and helping make sure your estate can be settled easily.
What is Probate?
“Probate is a legal process that deals with a person’s estate when they die. Whether you have a Will or not, some of your assets may still have to go through probate. During a typical probate process, the probate court makes sure that the Will (if it exists) is valid. Then they catalog and assess the estate of the deceased to determine which assets are subject to probate. These assets are then used to pay off debts and taxes. Whatever remains gets distributed according to the Will, or state law if there is no Will,” says Kathy. While many parts of estate law are the same, state laws govern the distribution of wills and estates. Make sure you communicate with a lawyer in your local jurisdiction.
Why would you want to avoid probate?
“Although probate is probably not as terrible as some articles paint it, it can become a big pain. Even a relatively simple estate usually takes between 6 months to a year to probate. In the case of a large estate with assets in different states, probate may take a long time and can get very expensive. If someone decides to sue the estate or other heirs, this can further complicate and drag out a probate, sometimes for years. Furthermore, probate is a public affair, meaning that all estate documents and actions can be viewed by anyone, including your relatives or neighbors. Whether you have a large or small estate, there are strategies to avoid probate.”
We tell our clients all the time to name beneficiaries on their investment accounts. How do named beneficiaries help avoid probate?
“As you all know, certain types of assets, such as life insurance policies and retirement savings accounts, are typically designed to pass onto the named beneficiary. When there is a named beneficiary, this asset usually passes outside the probate process. Everyone should make sure they know who the beneficiaries of their accounts are and update them as necessary, so that your funds transfer to the heirs of your choosing. Too many people have accounts or policies that still name an ex-spouse or deceased person as beneficiary.”
Can you name beneficiaries on other types of financial accounts?
“Yes–you can also do this with stock and bank accounts. Bank accounts can be designated ‘payable on death’ or ‘POD’ and have a beneficiary who can take control of this account after presenting your death certificate and their ID. Often stock and securities can be made ‘transferable on death’ or ‘TOD.’ In Maryland where I practice, real estate deeds and vehicle titles can’t be transferred on death, without other legal documents.”
However, as of September 2019, the following states and DC allowed some form of TOD deed: Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Illinois, Indiana, Kansas, Maine, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming. Check with an attorney in your state to learn more.
How does the Right of Survivorship help you avoid probate?
“The right of survivorship typically applies to married couples when they have jointly owned assets. These assets may include real estate, stocks, vehicles, etc. If one of the owners dies, such property will automatically pass to the surviving spouse. However, if you jointly own assets with someone other than your spouse, you may need to make certain arrangements if you want them to inherit these assets under the right of survivorship. For example, if you bought a house together with your partner, you may want to make sure that the deed describes you as ‘joint tenants with the right of survivorship.’ If that co-owner is not a spouse or relative, in Maryland the house may be subject to a 10% inheritance tax, unless you have a properly executed Domestic Relationship Agreement.”
If you own real estate by yourself in a state without TOD, is there a way to avoid probate?
“If you own real estate by yourself, there are ways to ensure that the property can pass to another person without going through probate. It is usually not a good idea to just “put someone’s name” on your deed—what you are doing is giving them ½ your property, and they can refuse to let you sell the property or may be able to force a sale themselves. Also, there may be unexpected tax consequences, as well as legal issues if that person is sued, goes into bankruptcy or gets divorced. An attorney well versed in estate planning can advise you as to types of Life Estate Deeds that allow the property to pass directly to someone without probate, while still protecting that property for you during your life.”
How does a “living” or revocable trust help you avoid probate?
“A revocable living trust is a common method many people use to avoid probate. The ‘living’ part means that it needs to be established while you are alive and that you have control over your assets during your life. However, by transferring your assets to the living trust and then naming a successor trustee, these assets usually pass outside of probate. A trust is not for everyone—they do cost more than a Will, and for someone with few assets setting up the trust may actually cost more than your family would pay for probate. However, for some people—people owning property in more than one state for example, or people with children by a prior relationship—a Revocable Trust can be an excellent estate planning tool.”
What other advice do you have for people looking to avoid probate?
“You may wish to consult with an estate attorney before you make any moves to avoid probate. Keep in mind that setting up a trust or naming beneficiaries for your policies doesn’t mean that you no longer need a Will! There are sometimes assets that you obtain afterwards or that are payable to your estate. An estate planning attorney can also make sure that all of your estate planning documents agree with each other—inconsistency may lead to confusion and cause your heirs to sue each other, or your estate, over inheritance they think they deserve. Sometimes people who try to do complicated estate planning by themselves cause a bigger problem than probate would have. The cost of hiring an attorney can save a lot of money in the long run.”
Thank you for sharing your wisdom with us, Kathy! If you have any questions about your beneficiaries or how your financial planning and estate planning work together, don’t hesitate to contact our office.
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