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Money June 2017

Legal Ease

Avoiding Probate: You’re Both Wrong; Here’s What You Can Do Right

By Jonathan J. David

The other method used to avoid probate is to name a beneficiary to receive an asset upon the owner’s death.

Dear Jonathan: I am having a friendly argument with a friend of mine. He claims that if I want my estate to avoid being probated when I die that all of my assets have to be put into a trust that is established before I die. He claims that any assets that are not in my trust when I die will have to go through probate. I told him that I thought he was wrong and that if I set up a will that I don’t have to worry about probate. Which one of us is right because a dinner is riding on this?

Jonathan Says: Actually, you are both wrong. Let’s first talk about your misunderstanding that having a will causes your assets to avoid probate. Many people have this same idea, but having a will does not cause your estate to avoid probate. Regardless of whether you have a will, probate will be required if you have assets that are titled just in your name alone at death and do not pass contractually to a named beneficiary.

The benefit of having a will is that it allows you to name the beneficiaries who you want to receive your assets upon the completion of probate. If you fail to prepare a will, you forfeit your right to determine who is to receive your assets when probate is completed; instead your assets will be distributed to your heirs in the manner prescribed under state law without any input from you.

As for your friend’s argument, he is also incorrect in his belief that in order for assets to avoid probate, they have to be in your trust at the time of your death. Creating a living trust and retitling assets to that trust is one way for assets to avoid probate, but it is not the only way. Other methods for avoiding probate include, titling assets in joint tenancy with full rights of survivorship and naming the trust as a beneficiary of certain qualifying assets. Let’s review both of these probate avoidance techniques: 

  • Jointly Titled Assets. If an asset, such as a bank account for example, is titled in two or more names as a joint tenancy with full rights of survivorship, no probate will be required when one of the owners dies because the surviving owner legally becomes the owner of that deceased owner’s interest.

    If, on the other hand, that bank account was established as a joint account without any survivorship rights attached to it, this is known as a tenancy in common and the surviving owner will not succeed to the deceased owner’s interest in the account. Instead, each owner owns an undivided interest in the bank account and upon death an owner’s interest will pass to his or her heirs or beneficiaries just like any other asset; the surviving owner does not have any ownership rights in the decedent owner’s interest in the bank account. And the decedent owner’s interest in the bank account will be required to be probated unless the owner (i) retitled that interest in the name of his or her trust prior to death or (ii) contractually named a beneficiary to receive that interest upon his or her death. The latter probate avoidance technique is further discussed below.

  • Trust as Beneficiary. The other method used to avoid probate is to name a beneficiary to receive an asset upon the owner’s death. Depending on the nature of the asset, there are a couple of different ways this can be accomplished. First of all, with an investment such as a life insurance policy, the owner’s trust can be named as the beneficiary of the death benefits, and upon the owner’s death those proceeds will be paid directly to the owner’s trust without having to go through probate. An individual, rather than the owner’s trust, can also be named as the beneficiary of the death benefits, and if that beneficiary survives the owner, those proceeds will be paid directly to him or her without having to go through probate.

  • Bank accounts, brokerage accounts, and certain other securities can also be transferred to the owner’s trust, or an individual beneficiary, upon the owner’s death pursuant to a transfer on death (TOD) designation. For example, the owner of a bank or brokerage account can complete a TOD designation which names a beneficiary to receive that account upon the owner’s death without the necessity of probate.

Since you are both wrong, I suggest that when you go out to dinner that each of you pay for your own meals.

 

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, PC, 1700 East Beltline, N.E., Grand Rapids, Michigan 49525.

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