The #1 Mistake People Make Trying To Avoid Probate

First, Why Do People Want To Avoid Probate? Most people want to avoid probate for two reasons.  First, because assets are frozen and not available to heirs during the year or more it takes for probate to be completed. Remember, probate is the process of validating a will and is designed to give creditors time to get paid and relatives time to challenge the will. The more challenges, the greater the delays.

Second, probate can be very expensive. Attorneys can charge up to 5% of the value of the estate.

Note: You can reduce or avoid the attorney fees by appointing a family member to serve as executor of your will. They can always hire an attorney, if needed. This could save your heirs (estate) tens of thousands of dollars in legal fees.

How Do Most People Avoid Probate? The easiest and most common way people avoid probate is by putting assets in their children’s names. While this does avoid probate, it can create other very costly problems.

Example; A widowed mother owns a home worth $200,000, that she would like her son to inherit. When her husband died 10 years ago, she went through the probate process. She would like her son to avoid the hassles and costs of probate when she dies. So she decides to put her son’s name on the deed. By doing so, the son will indeed avoid probate. However, by titling the home in the son’s name she has probably created a current gift tax liability.

(or estate tax problems at her death) Depending when and if the gift is caught. (You are generally only allowed to gift $10,000 annually to each person)        

Unfortunately, she has also created a capital gains tax problem for her son. 

Let’s look at what can happen; Thirty years ago, the mother & father bought the home for $40,000. When the mother dies, because the son’s name is now on the deed, the IRS will consider him as an owner, not as an heir. If he decides to sell the home right away, he will have to pay capital gains on $160,000 of profits. That’s $32,000 or more, which is a huge amount to pay just to avoid estate taxes. It will be even more as the home appreciates in value in later years.

More Concerns; Jointly owned property, it is legally exposed and attachable by the creditors of each the owners. If any of the owners are sued, go through a divorce, or they have an income tax problem, the asset can be seized to satisfy a legal judgment against that owner. 

What’s The Best Way to Avoid Probate? Generally, the best way to avoid probate is to establish a revocable living trust, naming yourself as trustee and your heirs as beneficiaries. Because the trust is revocable, you can put assets into the trust and take them back out at any time during your lifetime. And because the assets are owned by the trust, and not by you, your estate avoids probate. When you die, your assets pass directly to the trust’s beneficiaries (your heirs).

To set up a trust, meet with an attorney who specializes in estate planning.