“Probate.”  For many people who already are familiar with the process, the word often conjures feelings of helplessness and dread.  In the simplest terms, probate is a common legal process that commonly results after a person has passed away.  It is not, however, a guarantee in every scenario.  After all, not every death requires a probate, even for decedents of substantial net worth. Confusing?  No question, it is!  Nonetheless, there is an inherent logic to the question of whether and why probate could be on the horizon at each of our deaths, and correspondingly there is an array of strategies that can be undertaken to avoid or manage this expectation of probate.  Let us start simply with an overview of the basic probate process.

What is Probate?

            To begin, probate is the legal public court process to administer the assets left in the name of the decedent.  There are (at least) three important questions to answer almost immediately: (1) “Who is in charge of the probate?”; (2) “Who benefits from the assets?”; and (3) “How is this benefit provided?”;  All of these questions should be answered either within a person’s will or, if none, under state law dealing with the succession of assets owned by folks who die with no wills at all, called “intestacy.”  Please pay special attention here:  whether a decedent had a will or did not have a will has no bearing whatsoever on whether probate needs to take place.  One of the most pernicious myths in estate planning is the idea that taking the time to make a will means a person avoids probate as a consequence.  That is seldom ever true.  Having a will does not generally avoid the probate, it simply answers the three questions above about the probate process in the way the decedent wanted, rather than letting the state’s law of intestate succession answer these questions.

            Whether the decedent uses a will or dies intestate, a probate is most usually required at this point if there are still assets owned by the decedent.  If the decedent had a will, their designated executor (now called a “Personal Representative” in most states, abbreviated here as “PR”) petitions the court to be appointed as the estate’s fiduciary to do the labor required in this probate.  If there was no will, this person is ostensibly the person highest up on the state’s priority list for who would have the strongest right to serve as the estate’s “administrator.”  A Personal Representative and an estate’s Administrator are functionally the same thing, except that a PR is appointed by the court with the guidance of the decedent through the decedent’s will, while an Administrator is appointed by the court in the absence of any guidance from the decedent.

            Assuming the petition is accepted, the PR or Administrator will be given proof of their appointment through a court-issued instrument called “Letters Testamentary” (or “Letters of Administration” for intestate estates) which is used by the PR or Administrator to prove their authority to third parties such as banks, investment companies, revenue agencies, recorders offices, and many more.  The PR or Administrator works with the institutions at which the decedent has assets and uses the Letters to marshal the assets, value them, and then ultimately distribute the assets to the estate’s beneficiaries.  The PR or Administrator also works to pay off any creditor obligations of the decedent and winds down any ongoing obligations.

Why Does Probate Happen?

            Probate is, in many ways, expected of a person when they pass away.  It is considered in the laws of most states as a “natural” (insofar as legal estate administration could ever be “natural”) consequence of dying while still owning assets of value.  The law of Washington, for example, is deeply concerned with the possibility of fraud committed against an individual’s beneficiaries, and so the public court process of a probate helps keep the administration of the estate above ground and able to be monitored by both public and private actors. Correspondingly, most public offices such as county recorders’ and assessors’ officers, as well as most private offices like investment, banking, and some insurance firms, often expect that a probate will be necessary when the account or policyholder dies.  They will frequently request “Letters Testamentary” from a decedent’s successors-in-interest, which is a good indication that the institution will require a probate—it is not typically possible to get Letters Testamentary without a probate court issuing them first.

            It would be deceptively simple to assume that a state requires a probate every time a person passes away.  In most cases, this is not true.  As a result, figuring out whether a probate needs to happen can be staggeringly difficult, because the law does not generally as a reflex make people go through probate, even if it is a strong expectation among most public and private actors.  Rather, it is the decedent his- or herself who determines whether a probate is required simply due to the nature of how their assets are owned during life and consequently what happens to them at death.  At its core, the determination of probate looks not just at whether a death has taken place, but rather at the nature and quality of the assets that are left in the decedent’s name.

Can Probate be Avoided?

            The simple answer, which requires some fine-tuning, is YES, probate in most cases can be avoided in most states.  But this question has a question buried within it: what, exactly, does it mean to avoid probate?  As the reader will see, it is relatively easy to avoid probate for a specific asset or class or assets.  If, however, the goal is to avoid probate for all of a person’s assets, more sophistication is generally required.

            The easiest tool to use to avoid a probate is a beneficiary designation.  In the modern world, most assets that a person could own can typically have a beneficiary designated on the asset.  This is often governed by the contract between the account owner and the account custodian.  Beneficiary designations are often expected on certain assets, like qualified retirement accounts (IRAs, 401(k)s, 403(b)s, etc.) which receive tax benefits, or assets like life insurance policies which receive creditor protection benefits.  Many assets, however, do not receive any benefit except for probate avoidance but are still able to utilize a beneficiary designation.  Bank accounts, non-qualified stock accounts, and even parcels of real property (at least in some states) can have a beneficiary designation ready and waiting to go in the event of the account owner’s death.  So long as the designated beneficiary survives the account owner and does not disclaim (declines receipt), the contract itself will move the asset to the designated beneficiary and typically avoids probate.  This asset moves to its beneficiary at the exact moment of the decedent’s death, because of the decedent’s death, and in most states is not considered to be an asset of the probate estate.

            Similarly, an asset can be owned by two or more people with a special ownership provision called “joint tenancy with rights of survivorship” (JTWROS).  This simply means that if one owner dies, the entire asset is generally owned by the surviving joint owner or owners without a need to administer this asset through probate. Be careful, however.  Although some institutions see “joint” on an account they administer as necessarily meaning JTWROS many institutions do not. A person should never assume that the word “joint” appearing on an account automatically means JTWROS.  Instead, it is always worth verifying with the institution by asking simply: “what will be required for the joint account owner to take this account when I die?”  Any answer containing the words “Letters Testamentary” should strongly suggest that the institution does not view this account as JTWROS, even if the word “joint” appears.  If a person wants their account to have this designation, it is important to be thorough.

            Another way to avoid a probate is to gift away the asset before death.  Although an extremely powerful planning tool, lifetime gifting comes with an array of negatives which many times suggests thinking about the problem differently.  Perhaps the most obvious is that the original owner can no longer benefit from the asset.  One of the other important hidden consequences is that gifts during life generally do not receive the tremendous income tax benefits that assets that are given during death do.  This is called the “step-up in basis” and it is only available for capital assets that move via death, never for those that move via a lifetime gift.  The step-up in basis is a middle-class-friendly tax planning tool that, in effect, erases all unrealized capital gains up to the decedent’s date of death so long as the asset moves by way of the decedent’s death and was otherwise includable in the decedent’s net worth as of the moment of the decedent’s death.  Choosing to gift an asset now might avoid a probate for that asset but at the potential cost of a tremendous loss in income tax efficiency.  All things equal, there are often other tools that planners typically utilize before counseling clients into making large gifts.  That said, gifting is still a tremendously powerful tool in the right contexts for many reasons, including probate avoidance.

            Each of the above methods—beneficiary designations, joint tenancy (JTWROS), and lifetime gifting—serve to move an asset to a beneficiary without probate.  In all three cases, however, there are significant pitfalls.  In the first two methods, the right people must survive us, and assets move one way—outright, no strings attached.  If a person wanted assets held for the a child until 30, for example, beneficiary designations alone will never be able to accomplish this.  Although gifts can be given with these stipulations (such as to a standalone trust rather than an individual outright), this is an advanced planning tool that often necessitates giving up income tax advantages.  In most cases, plans to avoid probate altogether (rather than avoiding probate for a specific asset or assets) that rely on the above methods often end up failing because one or more assets were not properly titled, and a probate is still necessary to remove those last assets from the name of the decedent.  Although it is certainly possible to try to use a beneficiary designation or JTWROS provision on most assets these days, the reality is that these tools on their own rarely ever work to avoid probate.  Perhaps just as damning, in many of the rare cases where probate was avoided this way, the cost of too much simplicity in the beneficiary designations or JTWROS provisions can lead to the wrong estate planning results.  All things equal, efficiency and speed in estate administration should not be more important than the ultimate beneficiary goals of a person’s estate plan.  It is akin to being the fastest running in a race, but running in the wrong direction.

            If a person’s goal is to completely avoid probate while still being able to have cohesive estate planning, the tool that is recommended by most professionals is called a “Revocable Living Trust” (“RLT”).  Without getting into the nuances of this distinction, please be aware that an RLT is a unique type of trust.  Even though it is exceedingly common (arguably the most common trust vehicle in the country), it also breaks most of the rules that have governed trusts for centuries.  In most cases, this is a good thing, as it historically has allowed the RLT to be much more accessible to most Americans, generally regardless of net worth.  The benefit of an RLT is that it allows a decedent to place their assets into their RLT (or beneficiary designate them to the RLT or another person) during their lifetime in such a way that they can (1) continue to benefit from the assets; (2) lose no tax advantages during life or death; (3) create an estate plan with proper beneficiary and contingency planning; and (4) have all the assets of the trust avoid probate.

            The way an RLT works is that the original owners create the trust and move their assets into or “alongside” it (certain assets like life insurance policies and qualified retirement accounts will typically still use beneficiary designations even in RLT planning).  The original owner(s) reserve in themselves all the powers of control as trustee(s) and retain all the enjoyment of the property to which they were accustomed by being the trust’s only beneficiary(ies) during the lifetime(s) of the trustmaker(s).  At death, the trustmaker(s) retained the maximum benefits during their lifetime(s), but were able to move those assets remaining to their beneficiaries under the RLT (1) without an income tax loss, like with a lifetime gift; and (2) with the proper restrictions and contingencies attached, rather than like a simple beneficiary or JTWROS provision.  Although beneficiary designations and JTWROS provisions are still commonly used alongside RLTs, it is the RLT that provides the most certainly of probate avoidance, while requiring the least sacrifice of people who want something other than all outright no-strings-attached to their beneficiaries.

Conclusion

            As we hope to convey, probate is a common consequence of dying while still owning assets of value.  Although avoiding probate is certainly possible, doing so entirely typically requires a certain level of sophistication.  If you have any questions about what probate is, why it happens, or how it can be avoided, the attorneys at Holmquist and Gardiner would be happy to speak with you for a no-charge initial consultation.