Probate Avoidance

People attempt to avoid probate for a variety of reasons.  Some of these reasons include the perceived high costs of probate and the delay in transferring estate property.  It is important to note that the probate process applies equally to testate and intestate estates.  The simple act of failing to make a will does not avoid probate.

Although probate avoidance can be accomplished with a number of different methods, none of them are foolproof and should always be used in conjunction with a will.

Trusts

Trusts are most commonly associated with probate avoidance.  Trusts designed to avoid probate are typically established in conjunction with a 'pour-over' will that transfers all estate assets to the trust at the time of death.

The pour-over will names the trust as its sole beneficiary, which ensures that any property that is not in trust at the time of death will be subject to trust's terms.  Although this technique effectively transfers all assets to the trust at the time of death, it doesn't avoid probate and can actually create an unnecessary burden by subjecting the estate to the rules of probate and the rules of the trust. 

Although this technique is intended to avoid probate, it relies upon the owner's ability to maintain his or her personal assets with respect to the trust.  In order to function properly, the trust owner must transfer all or substantially all of his or her assets to the trust prior to death.  Even when the estate is properly transferred to the trust during the owner's life, the will is an essential part of this plan that must always be used.

Transfer on Death

Certain assets, such as bank accounts, can be legally titled to transfer to another person at the time of the current owner's death.  Similar to trusts, this technique is only as effective as the owner's ability to continually maintain all of his or her assets in this manner.  This method is also subject to the legal inability to title all types of property in this manner.  Even where most of a person's assets are titled in a manner that automatically transfers ownership at death, a will must be used to account for those items that cannot be titled in this manner. 

Gifts

Another method of probate avoidance is the outright transfer of property prior to death.  Of all the methods used to avoid probate, it may seem that this method has the least vulnerability to error.  However, as with all other aspects of life, simply giving property away can also lead to unanticipated complications.

For instance, I recently met with a woman named Janet who was selling three-fourths of her house. Unfortunately, Janet had been hoping to sell the entire property. In fact, she had recently entered a contract with some potential buyers who were just as anxious to own a complete house.

Although the clearest source of her predicament was an erroneous deed that now laid on the table between us, it became more clear as we discussed the possible solutions that much of Janet’s situation was actually based upon a misunderstanding of the intestate laws combined with an unjustified fear of probate. (Which is equally discouraging, but more appropriate for another article.)

Backing-up to the beginning, the basis of Janet’s current three-fourths interest started about twenty-five years earlier when an unmarried, dating couple named Jack and Chrissy decided to buy their first house together. Thinking of the future, Jack and Chrissy took title to this property equally as joint tenants with the right of survivorship.

For unknown reasons, the couple decided to part ways a few years later and as part of the process, Chrissy transferred her undivided, one-half interest to Jack by deed. To accomplish this goal, they used a deed naming Chrissy as the sole grantor and Jack as the sole grantee.

Chrissy’s deed properly conveyed “all that undivided, one-half interest in” the property that she and Jack had purchased together a few years earlier. This deed also correctly recited the source of Chrissy’s ownership in the conveyance as being “the same undivided, one-half interest” she had acquired by the most recent deed into both her and Jack.

Being the present owner of an undivided one-half interest at the time of this conveyance, Jack’s acquisition of Chrissy’s undivided one-half interest gave him individual ownership of the entire property they had previously purchased together.

A few more years passed, Jack had some children with another woman, and then eventually met and married Janet, who moved into her new husband’s existing house. Although the couple lived in this house throughout the duration of their marriage, they never took any formal action to transfer ownership to Janet.

Finally, after quite a few years had passed Jack became ill and decided to put his affairs in order. For Jack this meant preparing a deed that transferred full ownership of the house to Janet.

Although all the parties’ names were appropriately modified to name Jack as the sole grantor with Janet as the sole grantee, Jack’s deed was otherwise an exact mirror image of the most recent deed from Chrissy. In many circumstances, this would not have made a difference, but Chrissy’s deed only served to convey her one-half interest to Jack.

Being a duplicate of Chrissy’s deed, Jack’s new deed also conveyed “all that undivided, one-half interest in” the property where he and Janet lived. This fact was further solidified the deed’s incorrect recital of Jack’s source of ownership and identification of the conveyed interests as being “the same undivided, one-half interest” he had acquired by the most recent deed from Chrissy. Without any mention of the Jack’s remaining interests and with the specific limitations identifying just that one-half interest acquired from Chrissy, Jack and Janet became equal owners of the entire property as tenants in common.

Jack died intestate shortly afterward, leaving his one-half interest to be divided equally between his surviving spouse, Janet, and his three children from a prior relationship. Believing that all of Jack’s property belonged to his wife, the family never opened an estate.

Now, as we sat in my office four years after Jack’s death, Janet was interested in moving on and had found a buyer for the entire property of which she was not the sole owner. Having lived in, cared for, and paid for all of the associated expenses alone for more than four years, Janet was not easily convinced that someone else was the co-owner of this property with her.

As we reviewed the intestate laws relative to a surviving spouse who is not the parent of all the deceased’s living children, Janet began to understand that she was not the sole owner, but assured me that Jack’s kids wouldn’t have any problem giving everything to her. She even called me later in the day to confirm that all the kids would be agreeable, but would have a few questions first. As should have been expected, it turned out that one of these questions related to exactly how much money they giving away.

By the time it was all said and done, Jack’s estate ended up with the costs of opening an estate, paying inheritance tax on roughly one-quarter of the sale price, and attorney’s fees. Although I don’t know for sure, I would guess that a relationship was also changed by the realization that money can be just a little more important than a father’s widow.

Summary

Although it was not a bad idea to transfer the home from Jack to Janet prior to death, a will should have been used as part of the plan.  If a will had been used along with the deed Jack's remaining one-half interest would have been subject to its terms.  That one-half would have been subject to the same probate process that was necessary without a will, but would have been transferred directly to Janet at the completion.

With so much room for error in every day life, a will remains the most reliable and cost-effective method for ensuring that all of your property is distributed according to your wishes.