I regularly have people come into my office and say “My estate is simple” and think that not much work will be involved in planning their estate. Their estate plan is usually anything but simple. What you may think is a simple estate is quite different from what an estate planner may think of as simple.
I consider a simple estate to have two qualifications, one relating to assets and the other relating to beneficiaries: 1) other than your home and a vehicle, you have three or fewer accounts or other titled assets; and 2) you have three or fewer beneficiaries other than your spouse, who all love another, and during the entire process, hold hands, and maybe even sing Kumbaya. Anything other than this is not simple.
Although probate is not as time consuming and expensive as it once was, your overriding estate planning goal may still be to avoid probate. If you have a “simple” estate, there may be a way to avoid probate without the necessity of a trust by using transfer or payable on death beneficiary designations and deeds. If you use this method, you have to give up the beneficiary protections you can get with a trust for divorce, creditors, remarriage, governmental benefits, addictions, disability, pets, family cottages, lazy children or any others. In addition, the use of transfer or payable on death beneficiary designations may avoid probate, but there are no assurances of this outcome.
If you do not have a simple estate, I do not advise using this technique because it could easily turn into an estate plan that doesn’t work as intended. Similarly with an attempt to do your own estate plan in order to save a few bucks by not paying the attorney to plan it properly. I see many of these do-it-yourself on a regular basis. It typically costs much more to fix these plans, than it would have cost to plan it properly in the first place. In some instances, there is no way to “fix it” and your family will have to live with your “plan”.
For example, you may be tempted just to add one or more of your kids’ names as joint owners on your bank accounts or other titled financial assets. Your plan is that they can handle the account for you when you are unable or out of town, and they would also inherit it upon your death. I have seen parents’ life savings garnished or liens placed on their homes by creditors of children who were named as joint owners with their parents. I have also seen children joint owners refusing to sign off on the sale of Mom or Dad’s home unless they receive their share of the proceeds. You probably have also read the stories in the newspaper about greedy joint owners clearing out their parents’ bank accounts. We will be discussing the pitfalls of joint ownership in upcoming columns.
A better option than joint ownership to increase the likelihood of avoiding probate of these assets would be to complete a transfer or payable on death beneficiary designation. In that situation, neither your loved ones nor their creditors will have access to the account during your lifetime, but your loved ones will receive it after you are gone. If you want your loved ones to have access to the accounts for your needs during your lifetime, you can give them a durable financial power of attorney.
For real estate, the best type of deed to escape all of these joint ownership pitfalls and also avoid probate in a simple estate is a certain type of transfer on death deed which is called a ladybird deed. With this type of recorded deed, you transfer a remainder interest in your home to your loved ones and keep a life estate. You retain the right to rescind the transfer at anytime during your lifetime, so it is not considered a completed gift. Upon your death, your loved ones record your death certificate and then they are the legal owners of your home. The deed is not considered a transfer for Federal gift or estate tax purposes until after your death. It is also not considered gift or divestment in the event that you have to apply for Medicaid to pay for nursing home care.
Titled vehicles do not need beneficiary designations. If the value of all vehicles owned by you is less than $60,000, your heirs can transfer the vehicle into their names without probate. It is not too bad if you only have one, two or even three children. But what if you have nine children? Some Secretary of State offices require all nine of the kids to come in to title your vehicle into their names.
The downside of using beneficiary designations as primary estate planning tools is that you must be extra vigilant with monitoring them. You may still end up in probate if your beneficiary is a minor or is mentally disabled.
I have seen parents who have attempted to equalize the inheritances by naming different children as beneficiaries of different accounts. But inevitably it doesn’t work out as intended when market values and interest rates change or beneficiaries die or become incapacitated. I recommend monitoring these beneficiary designated accounts on a monthly basis to make sure they stay in accordance with your plan.
Also, make sure you know what the transfer or payable on death beneficiary designation form says will happen if a beneficiary dies before you do. Sometimes it goes pro-rata to the other beneficiaries. Other times it would go to the deceased beneficiary’s estate, heirs or descendants. Sometimes it even goes back to your estate. It all depends on the fine print that is usually on the back side of the form. And there is no standard form; every form is different. We will be discussing more of the pitfalls of beneficiary designations in an upcoming column.
In addition to the transfer on death beneficiary designations and deed, you should also have financial and healthcare powers of attorney and a will. Your financial and healthcare powers of attorney keep you out of probate court in the event you became mentally incapacitated. The will is going to be used as a backup in the instance one or more of your attempts to avoid probate fails. It is good to plan for all contingencies.
If you are attempting to avoid probate for a simple estate plan in this manner, you should do it with the advice and guidance of a qualified estate planning professional. If you try this on your own, you will generally get what you pay for.
By: Matthew M. Wallace, CPA, JD
Published edited July 20, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Probate Avoidance 101 for a simple estate