If you are like many of my older clients, you have heard that “you have to avoid probate, it’s horrible and expensive.” So, what is probate?
What is probate?
After an asset-holder dies, the court appoints either an executor named in the will or an administrator (if there is no will) to administer the process of probate. This involves collecting the assets of a deceased person to pay any liabilities remaining on the person's estate, and to distribute the assets of the estate to beneficiaries.
In Minnesota, where I live, the probate process is generally pretty simple. It depends on how much debt and assets the deceased had at death. Large estates are, predictably, more complex that smaller ones. If your estate is smaller than $75,000 in Minnesota, your heirs may be able to collect personal property without going to court by using an Affidavit for Collection of Personal Property. Heirs may not take your personal property until 30 days after your death. If your personal property exceeds $75,000 or you own real estate in your name alone, your estate must be probated.
Probate can be expensive – sometimes. Cost can range from 3% to 7% of the value of the estate. The expense of probate comes from the attorney’s time needed to complete paperwork, file papers with the probate court or appear before a probate judge.
And, as the probate process unfolds, all the estate assets are frozen. Nobody can get at any of the inheritance until the process is complete. Probate usually takes at least a few months and often more than a year to complete.
In addition to the expense, delay and inconvenience, probate court proceedings are public records. Some families would prefer to keep estate matters private.
The rules governing probate vary by state. Some states’ probate processes are more difficult, and others are simpler. If you own property in more than one state, you will need to probate the estate in the state where the deceased resided AND any state where the deceased owned real estate.
You situation may vary, but in general, here are some easy ways to limit probate:
- Complete beneficiary designations on:
- Life insurance.
- Annuities.
- 401(k)s and other work-related retirement accounts.
- Individual Retirement Accounts.
- Set up Transfer on Death or Payable on Death agreements for your assets. These agreements spell out who should own an asset when the original owner is dead. They can be used to split assets to multiple beneficiaries. These agreements DO NOT require probate. You can use them on:
- Bank and Savings and Loan accounts.
- Brokerage accounts.
- Some real estate properties.
- Name a joint owner where appropriate. This person owns the asset at your death.
- Consider a revocable living trust to clarify your wishes for other properties or special situations. You will pay an attorney to draft your trust, but a trust can be very helpful. Some more details are below.
For most families, the probate process can be greatly simplified with the help of an estate planning attorney. Many folks don’t like the idea of dealing with lawyers, but I am a HUGE believer in the value of estate planning attorneys. Yes, it will cost some money, but I consider it a GREAT investment to spend a few hundred dollars to have everything set up correctly so that you can avoid a few thousand dollars in probate costs.
If a family has the proper documents in place, the probate process can be very simple and smooth. And other basic estate documents can simplify various issues BEFORE your death. The four basic estate documents everybody needs are:
Will:
A will, also known as a last will and testament, is a legally enforceable declaration of how a person wants their property and assets distributed after death. In a will, a person can also recommend a guardian for their minor children and make provisions for any surviving pets.
Advance health care directive:
An advance directive, also called a living will, is a document expressing a person's wishes about critical care when they are unable to decide for themselves. With an advance directive, individuals have the power to make future decisions about their own critical care without outside influence. A person who wishes or does not wish to be placed on life support can create an advance directive that hospital staff will follow should the person become incapacitated. Take note that this “estate planning” documents is needed BEFORE you die.
Healthcare power of attorney:
With a healthcare directive you name a person to act on your behalf regarding healthcare matters should you become incapacitated. This person must be willing to ask challenging questions and needs to put aside emotions about a medical procedure or option to ensure the incapacitated person's end-of-life wishes are fulfilled. Openly communicating with one’s medical power of attorney about potential situations is important in clarifying end-of-life care preferences. Stating one’s opinion on tube feeding and hydration, receiving antibiotics, mechanical ventilation and aggressiveness of CPR are important topics. Other points of discussion are the person’s fears regarding medical treatments and under which circumstances the person might want more or less aggressive measures taken.
Financial power of attorney:
A power of attorney (POA) is a legal document giving one person (the agent or attorney-in-fact) the power to act for another person (the principal). The agent can have broad legal authority or limited authority to make legal decisions about the principal's property, finances, or medical care. The power of attorney is frequently used in the event of a principal's illness or disability, or when the principal can't be present to sign necessary legal documents for financial transactions.
A power of attorney can end for a number of reasons, such as when the principal dies, the principal revokes it, a court invalidates it, the principal divorces their spouse, who happens to be the agent, or the agent can no longer carry out the outlined responsibilities.
Conventional POAs lapse when the creator becomes incapacitated, but a “durable POA” remains in force to enable the agent to manage the creator’s affairs, and a “springing POA” comes into effect only if and when the creator of the POA becomes incapacitated.
Trust (maybe):
Depending on what you own, and your preferences, sometimes a trust can be very helpful with estate matters. A trust sets up a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.
Here are a few reasons to use a trust:
- If you own property in more than one state, like a lake home, you might consider a trust to avoid having to probate your estate in two states.
- If your state has expensive, or lengthy, probate. A trust can skip probate and avoid both the cost and the delay.
- If you value your privacy highly, you can use a trust to keep your estate details private.
- If you have an heir that needs extra supervision, like a minor child, an heir with a history of substance abuse, or an heir who currently receives government assistance for a disability. A trust can allow you to make special plans for each heir.
Everybody should have estate documents. Everybody should review those documents every few years to assure they conform to current law and to your current situation. And every situation is a little different. A free consultation with an estate planning attorney is great idea to be sure your documents fit your needs.
When you are looking for an estate planning attorney, a great place to start is to ask your Certified Financial Planner™ professional for a recommendation. Your CFP® professional is your advocate to help you reach your financial goals and she has the training and the experience to know the best attorneys in your area. The CFP® professional is your guide to a complete, integrated approach to your financial success. They will know where estate planning planning fits for your family and they will have plenty of experience with the best attorneys in your area. Ask your advisor for a couple attorneys they recommend, meet with both and discuss your exact situation.
Any good attorney should meet with you for an initial consultation at no charge. This will give you a chance to get to know the attorney and how they work with clients. They will typically give you a good idea of what sort of approach would fit your situation. I am a big believer in the power of chemistry to improve your advisory experience. If you are comfortable with the attorney, I expect your results to be much better.
Generally, you want to talk with an attorney who specializes in estate planning. The attorney’s specialty should be very clear in your initial contact with the law office. And I suggest you talk with an attorney with some experience to be sure they have seen their plans unfold over time. The process of setting up plans is different from the process of executing them when the time comes.
If you are trying to decide whether you really need an estate planning specialist and would like some advice, give me a call. I’m happy to answer questions and discuss your situation. Follow this link to find a time for us to talk.
A great place to start looking for the right advisor is to talk with a couple CERTIFIED FINANCIAL PLANNER™ professionals.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great estate planning and financial choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.