Avoiding probate

Occasionally, people ask how to avoid probate.  A person asking that question probably ought to ask, “Should I try to avoid probate?”  What is probate?  Probate is the process of transferring property from one generation to the next.  It is usually accomplished by filing the Decedent’s Last Will and Testament in the county court where the Decedent lived at the time of death.  The Texas probate system is one of the most efficient and modern of all of our 50 states.  Due to the speedy and inexpensive nature of probate in Texas, there is often no need to avoid probate.  However, avoiding probate may be desirable in situations involving small estates.

Develop a Plan

If a person wishes to avoid probate, the first step is to develop a plan.  An important prerequisite of the plan should be to allow the current owner of the property the unrestricted control of the assets for the remainder of their life. The planner must understand and know how to apply the state and federal laws relevant to avoiding probate for each asset.  Understanding the nature of how title is passed with respect to each asset is critically important to design and implement a plan to quickly and inexpensively transfer the asset to the succeeding generation without undertaking a probate procedure.

Financial accounts such as checking, savings and brokerage accounts can be transferred at death by completing an appropriate form at the depository institution where the account is held.   In essence, the form establishes a third party beneficiary contract between the owner and the depository institution.  There are a couple of options available to avoid probating financial accounts.  The method with the fewest disadvantages might be to place a “Pay on Death” (POD) beneficiary designation on the account.   The POD designation means the depository institution will pay the contents of the account to the person or persons listed on the POD form as soon as a valid original death certificate is provided.  Many institutions do not require the designated beneficiaries to approve changes to the POD designation in the event the account owner later wishes to change the POD form and exclude the beneficiary. Further, POD accounts do not allow the beneficiary to access the account until the owner has died.

It is also common for financial accounts to be held as “Joint Tenants with Rights of Survivorship” (JTROS).   The JTROS form establishes a joint account among all of the persons listed on the JTROS form.  Upon death of one of the owners, the surviving owners will own the balance in the account.  A potential problem is that a new co-owner placed on the account by the original owner can legally withdraw the original owner’s funds.  What if the original owner wants to take the new co-owners off the account?  Believe it or not, many depository institutions require the new account holders to agree to the removal of their name as an owner of the account.  These problems point to the need for expert advice to develop an estate plan.  Designing a “do it yourself” estate plan for thousands of dollars of wealth carefully accumulated over a lifetime is recklessly asking for easily avoidable problems.

Is Probate So Bad?

While strategies to avoid probate also exist for real estate and other types of assets, they entail more complexity and risk.  Recognize that analysis of estate, gift, income and property taxes must be completed.  What happens to the asset if one of the joint owners is sued by an unrelated third person? What if a co-owner suddenly gets a divorce?  These risks should be considered before one gives someone else an interest in an asset.  The flexibility of the arrangement in the event changes are desired in the future should also be evaluated.  Current and future estimated costs of implementing the plan must be compared.  In general, unexpected changes in the health, family status, financial needs or other areas of the donor’s life can expose shortcomings in the probate avoidance plan that sometimes cannot be easily fixed.  If the goal is to avoid probate, expert assistance should be consulted and the potential advantages and disadvantages of various strategies should be carefully considered prior to selecting a probate avoidance strategy.   Some of the most expensive probates occur in estates of decedents who had an ill-conceived probate avoidance strategy that failed.  Often the problem, though expensive to fix, could have been easily avoided by seeking competent advice in advance.   Avoiding probate is a good idea for some people but it should not be undertaken as an experiment!

This article was written by Craig W. Watson, Attorney