By Robert J. Lord
In the absence of any planning, your assets must be “probated” upon your death. That is, a probate case must be opened with the superior court, the court must thus determine who is entitled to receive your property and must approve the transfer of your assets to those individuals. Although the probate process in Arizona is relatively simple, it is still worthy of avoidance. It typically involves legal fees and will delay the distribution of your estate. Also, if privacy is a concern, a probate necessity makes information about your estate public information.
The most common and comprehensive vehicle for avoiding probate is the revocable living trust. If you transfer your assets to a revocable living trust during your lifetime, it will be the trust, not your estate, that owns the assets upon your death. The trust instrument will contain language, similar to language found in a will, which provides who will be entitled to distributions from the trust upon your death. The trust also will contain language that allows another individual (or perhaps a corporation) to serve as trustee should you become incapacitated. That will allow you to avoid a conservatorship in the event of your incapacity.
If you have a substantial estate, the revocable living trust almost undoubtedly will be the way to go. But what if your estate is not that substantial and you do not want to pay the attorney fees involved in establishing a living trust? There are alternatives.
The most common alternative is the joint titling of assets. For example, you want your house to pass to your son, so you title the house in your name and your son’s, as joint tenants with right of survivorship. Thus, upon your death, the house passes to him outside of the probate process. The same mechanism can be used on bank accounts, brokerage accounts and automobiles.
There is a pitfall associated with joint titling of assets, however. If your tenant (in this case, your son) has problems with creditors, his interest as a joint tenant can be seized. Also, the establishment of a joint tenancy is an irrevocable act. If you have a falling out with your son, you cannot undo the gift you made to him. Finally, if you were to title your residence in joint name, then sell the residence, you could jeopardize one-half of the exclusion from gain for which you otherwise would qualify.
There may be a better alternative. For real property, you may file a beneficiary deed. A beneficiary deed simply states who is entitled to the property upon your death. It is entirely revocable during your lifetime. Similarly, bank accounts and brokerage accounts may contain a transfer-on-death designation. Again, the designation is entirely revocable during your lifetime. It simply states who is entitled to the contents of the account upon your death. These vehicles avoid the risks associated with joint tenancies. Note that you are not required to name only one beneficiary on a beneficiary deed or transfer-on-death designation. For example, you could name all of your children, in equal shares.
In the case of very small estates, there is an exemption from probate for up to $50,000 in assets. That exemption sometimes is sufficient to avoid probate on those assets for which no probate avoidance device is appropriate.
Lastly, pay attention to beneficiary designations on life insurance policies, IRA’s and retirement plans. If you fail to name a beneficiary, your estate will be the beneficiary and a probate will be required. The beneficiary designations on IRA’s and retirement plans should be carefully considered, as there are significant income tax considerations associated with beneficiary designations. When considering beneficiary designations on life insurance policies, consider whether it’s possible the life insurance proceeds will cause your estate to be taxable. If that is the case, consider whether an insurance trust is appropriate.
Probate also may be required if you become incapacitated and a conservator must be appointed to manage your assets. Conservatorships can be expensive and should be avoided if at all possible. Again, the living trust is the most common vehicle for avoiding a conservatorship. There is one alternative, however, if you want to avoid the cost of establishing a living trust. A durable power of attorney, if worded correctly, will allow one or more individuals you name manage your assets in the event of your incapacity. Note that a durable power of attorney may be made effective only in the event of your incapacity or may be made effective upon signing. The advantage of having the power of attorney become effective only upon your incapacity is the avoidance of unintended use of the power by your agent. Ordinarily, however, that is not a concern. The advantage of having a durable power of attorney become effective upon signing is that it allows your agent to act on your behalf without having to prove that you are incapacitated.
To sum up, if a living trust is not appropriate for you, consider your alternatives. Quite often, through a combination of powers of attorney, beneficiary deeds, transfer-on-death designations, beneficiary designations and other measures, probate can be avoided without a living trust. In many cases, you can avoid costs and delay by employing those alternative measures.
This article contains only general information and is not to be relied on as legal advice. For advice on your individual situation, consult a lawyer in your jurisdiction. No attorney/client relationship arises from use of this article.