One of the common sources of misunderstanding in the estate planning arena is the topic of probate. Simply put, probate is a legal proceeding that takes place after a person dies, to wrap up the financial affairs of that deceased person. Typically, the process involves a number of steps:
- establishing whether the person had a valid will;
- taking an inventory of the person’s assets at death;
- paying any debts and taxes owed; and
- distributing the remaining property under the will or following state law.
The problem with probate is that it can be slow, time-consuming, and expensive. (A common estimate is that probate costs 5% of the value of the property left at death.) It is also public, which leaves the contents of the will and the identities of the beneficiaries open to scrutiny by the media, or by con artists who might want to use that information to the detriment of the beneficiaries. And if you own property in more than one state, you could need a probate process in each state!
Idaho has taken steps to streamline the process, primarily by adopting the Uniform Probate Code. For example, we have a “summary probate” procedure for “small estates.” So the prospect of a probate proceeding in Idaho is perhaps not as scary as in some states. But undertaking planning steps to avoid probate is almost always worth your while in terms of costs and is always worth your while in terms of avoiding headaches for your beneficiaries following your death.
Probate avoidance techniques including the following:
- Using payable-on-death (P.O.D.) designations on bank accounts;
- Naming beneficiaries for retirement and brokerage accounts, and life insurance policies;
- Using joint tenancy for property ownership;
- Making gifts during your lifetime; and
- Using a properly-funded revocable living trust or other trust arrangement.
Each of these techniques has associated pros and cons, and should not be undertaken without a full understanding of the consequences of the approach. I’ve heard many horror stories of people using these methods, not thinking through the ramifications, and ending up doing more harm than good. You can run into tax issues or inadvertently create conflicts between beneficiaries. And lots of folks set up beneficiary designations when they first open an account, but fail to update those designations to reflect changes in their lives or the lives of their loved ones. This can result in very unintended consequences (such as inheritance by a former relative, like an ex-spouse) or can result in the asset passing through probate after all.
Horror stories abound, both regarding the probate process itself and also regarding failed efforts to avoid probate. So, yes, you should take steps to avoid probate, but you should be cautious about taking those steps without professional guidance. Talk to a qualified estate planning attorney (hint: the Learned Lawyer!) to consider all your planning options, to create the best estate plan for you and your loved ones. The unfortunate souls who are left to deal with your affairs after your death will thank you for your time and energy spent to get your estate plan done the right way!