Avoiding Probate in Estate Planning

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A person signing a document

As we have discussed in other articles, probate is the process of an opening of an estate and transferring ownership of assets from a deceased individual to that person’s beneficiaries. Probate can be an expensive and time-consuming process, and naturally, many families are eager to find ways to avoid probate in advance.

In this article we are going to talk about some of the common ways that people avoid probate by planning ahead so that their loved ones do not have to incur the time and expense of probate. Please be aware that there are specific pros and cons to each of these approaches depending on a number of factors. It is important for you to speak to an experienced estate planning attorney about your options. This article is meant to help you, but it is not formal legal advice.

Revocable Living Trusts

One common mechanism to avoid probate is to create a revocable living trust rather than a will. While a will goes to probate, a trust can continue “living” even after you have passed away. The trust document controls who takes over responsibility for the assets of the trust, and who they benefit.

There are a few steps to this approach. First, you would place all of your assets, including your house, your cars and your bank accounts into the living trust. You will essentially live your life out of the living trust. Think of it as carrying around a basket that holds all your assets. A trust document lays out who will pick up the basket when you die. Your heirs, whom you designate to “pick up the basket,” then have the option of either administering the trust and living out of it themselves, or of “decanting the trust” and taking those assets for themselves.

The advantages to a trust include that you can avoid probate, including the costs and attorneys’ fees necessary to navigate the estate administration process. Furthermore, trusts give your loved ones access to your assets faster after your death. Finally, a trust can keep your estate private so that people cannot see it as a matter of public record when you pass away. For some people, the privacy is an important consideration.

But there are drawbacks to this approach, as well. For one thing, trusts won’t avoid inheritance taxes due to the Commonwealth of Pennsylvania upon your death. Second, a trust does not protect you from Medicare forcing repayment for the medical care that they paid for at the end of your life. In other words, this is not the way to avoid losing what you owe to nursing homes nor is it a way to avoid any taxes.

Furthermore, setting up and administering a living trust day to day is more expensive than simply drafting a will. You have to be sure that you carefully keep up with all the formalities of the trust and put new assets into this trust; otherwise, your beneficiaries may have to go through probate anyway because you forgot to include an asset. There are more robust trust options, including an irrevocable living trust, which can also save you some of the taxes and other costs that you might typically associate with starting a trust in the first place. To learn more about these, you should speak with an experienced estate planning attorney.

Gifting Assets

A second way to avoid probate is to begin gifting your assets early. This includes putting your cars in other peoples’ names, putting your children on bank accounts, not merely as trustees or agents, but as co-owners. It even includes deeding your house to your heirs.

The advantages to this approach are that these assets do not need to go through probate because they belong to your heirs before your passing. Better yet, depending on how long you live after the gifting event, there may be no inheritance tax or Medicare liability.

A blue suburban house on a sunny dayBut the obvious disadvantages to this should be apparent immediately. First, after gifting these assets, they legally belong to your children or other heirs. This means that, for example, if they get into a car accident and owe someone a lot of money, that someone can usually come collect against the assets that you’ve gifted over to them. This approach also secures your assets from Medicare or Medicaid, but only if done five years before any care or costs are incurred. Otherwise, the Department of Human Services will use the five year look back period to reclaim these assets. This would defeat the purpose of the gifting in the first place. Additionally, gifting your assets can affect your eligibility for credit or other financial planning tools.

Gifting a large amount of money and property to your heirs can also have significant tax implications for them. You can give away $14,000 a year as of 2022, without incurring any taxes. You can also use your lifetime gift taxing exemption to give some of these assets away. Nonetheless, if you are not careful and if you do not properly claim these, this will result in tax liability for your heirs. Remember also that if you gift a house to your children, they will need to pay the real estate tax every year.

One approach to this sort of gifting is known as the “half a loaf approach” in which you give your children a survivor interest in the house without giving them present possessory interest. This is more complicated than we can cover in this article here, but it is one approach that allows you to gift at least some of the value out of your estate before death to avoid some of the costs of probate.

However, it is important to remember that probate is not exactly an all or nothing affair. If you forget to gift anything out of your estate, your children will have to choose between abandoning that asset or probating the estate anyway. In such a case, this gifting may not have been helpful to your heirs.

Conclusion

There are certainly advantages to avoiding probate if you can do it. But sometimes, it is more trouble than it is worth. Whether to take one of the steps outlined above depends on the size of your estate, the nature of your family relationships and more. If you’re interested in learning more, speak with one of the experienced estate planning attorneys at Cornerstone Law Firm about your options so that we can help guide you through the process.