Can you avoid probate without a trust? The short answer is yes, but the alternatives can have risks and offer limited control over your assets. In this episode of Absolute Trust Talk, Kiersten Howe and associate attorney Jessica Colbert explore various probate-avoidance strategies, including beneficiary designations, transfer-on-death accounts, and joint ownership. Tune in to gain valuable insights, understand the drawbacks of these methods, and discover more secure ways to prepare for death or incapacity while minimizing risks.
Time-stamped Show Notes:
0:00 Introduction
1:00 There are a few options for avoiding probate without a trust, but we don’t recommend going an alternative route unless there are extenuating circumstances.
3:00 One common method is a Transfer-on-Death account, but this type can have many issues. Listen in to learn why.
4:56 Another way to bypass probate without having a trust is through Assets Owned in Joint Ownership. Here’s what you need to know.
6:53 One consideration often overlooked is incapacity planning – a key aspect of estate planning and another reason we don’t like using the Transfer-on-death method.
8:15 Final takeaway: Most of the options for avoiding probate without a trust come with risks because they neglect to consider many common circumstances in future planning.
Transcript:
Hello and welcome to Absolute Trust Talk. This is our video podcast at Absolute Trust Counsel. I’m Kirsten Howe here with Jessica Colbert, and we are going to talk about something that estate planners don’t often talk about or don’t like to talk about, which is, can we avoid probate without a trust?
We don’t always, 100% of the time, do trusts for our estate planning clients, but it’s probably 99% of the time. We’re only okay with not setting up a trust in very unusual situations.
But today, Jessica and I are going to talk about the various techniques that you can use to avoid probate without setting up a trust. Of course, we’ll talk about why we don’t like those techniques in many cases, just so you get the full picture.
Let’s start. Jessica, start walking us through these various techniques that people can use.
One of the first techniques we’ll discuss is beneficiary designations or a Transfer-on-Death, Pay-on-Death account. They act fairly similar.
For retirement accounts, you wouldn’t put those in the trust. Instead, you would name a beneficiary designation, which designates who you want to receive that asset upon your death. Similar to life insurance policies, those typically wouldn’t be owned by a trust, although they could be. Similarly, you would designate a beneficiary, stating who you want to receive that policy upon your death.
Now, Transfer-on-Death and Pay-on-Death, commonly called TOD or POD accounts, act similarly, but you can use them for any financial account, like a checking, savings, or brokerage account. It’s the same idea where you’re saying, on your death, this asset will go to the person you’ve selected.
Right. To reiterate, retirement assets are never going to be transferred to the trust while the employee who owns them is alive because that would trigger a big tax bill. So, we never do that, but in the planning process, we want to make sure we’ve coordinated with that to ensure we have the right beneficiary named.
The problem with planning based on beneficiary designations, whether a retirement asset, a life insurance policy, or some other kind of TOD account, is that it’s a pretty blunt instrument. You name the beneficiary – often, they’ll allow you to name a backup beneficiary – but that’s it. You don’t get to say, “I want to hold that money in trust because this person is only 18, and I don’t think they’re mature enough.” You don’t get to say any of those things. You don’t get to protect it from creditors or anything. It’s a very blunt instrument. We tend not to like it. But it can work in certain situations.
What’s next? What’s the next technique that we want to talk about?
Next is a technique that we never use: a Transfer-on-Death deed. This deed acts similarly to what we just talked about, but it’s for real property. A real property owner executes a deed that says that upon their death, they want their property to go to this specific person.
As Jessica said, we don’t use them in our firm for a variety of reasons, which I’ll start talking about. Again, to reiterate, the same is true with the accounts – Transfer-on-Death, the life insurance – it’s a blunt instrument, and you can name who you want to get the property if you die. I don’t think you can even name a contingent beneficiary. I think it’s just that one person. And if that person dies before you, then you’re back to square one. You have no trust and no death beneficiary.
People need to understand that it really only works with joint ownership. If you own property together with another person and you own it as joint tenants, when you die, even if you record a Transfer-on-Death deed, it’s still going to go to the joint tenant. It really only works for a single property owner. Again, it’s just a blunt instrument. It doesn’t give you any flexibility, so we don’t use it.
Another reason I don’t use it is that there are so many potential things that could go wrong that if I wrote a Transfer-on-Death deed for a client, I would then have to write a two-page letter explaining why I don’t recommend this. I don’t want to get sued by their children down the road if it doesn’t work out. That’s just my personal opinion about that.
Okay, let’s go on to our last technique.
The last technique we’ll discuss is Assets Owned in Joint Ownership. You kind of touched on this by talking about deeds owned in joint tenancy, just like how you can own real property in joint tenancy. If you own a joint account with someone, that is a joint tenancy. If you have a joint account with your spouse, maybe you have a joint account with your parent. Upon your death, that asset would then become that other person’s.
It doesn’t matter what your will says or if you have a trust. Nothing matters. All that matters is that you owned that asset as joint tenants. Using this as a planning technique is a little sketchy.
Let’s say, I’ll give you an example, and we see this a lot. The mother owns her home, and she only has one child. Why do I need to set up a trust? I’m just going to create a joint tenancy. So, the Mother signs a deed that says, “I now transfer this property to Mother and Daughter as joint tenants.” So now they own it together.
First of all, that transfer is a gift. It’s a taxable gift that the mother just gave to the daughter, and it has to be declared with the IRS.
Secondly, the daughter is now the co-owner of this property, and if the daughter gets into trouble with creditors, they could come after that property. If the daughter gets a divorce, that property is going to be something that the judge will look at when settling the assets between the spouses. There’s a lot of risk there that you’re taking on, especially if it’s your home that you live in. You don’t want that to be subject to somebody else’s bad decisions. We definitely don’t like that. It’s just risky.
I’m going to add here that I do not like these techniques most of the time. They’re not our preferred technique for transferring property on death. They’re also less desirable for lifetime incapacity. As estate planners, we must also plan for incapacity, not just death.
If you have assets that are not in a trust and you become incapacitated and somebody has to help you access those assets, they’ll do that using your Power of Attorney, which is a valid estate planning technique. Every adult should have one. But we do know that, a lot of times, financial institutions give people a really hard time with Powers of Attorney.
But we see that our clients’ children who go into the financial institution and say, “My mom is now incapacitated, and I’m the trustee now,” are much simpler. It’s much easier. They are willing to deal with the successor trustee. They might get a little squinty-eyed when looking at a Power of Attorney. So you’re not really doing yourself any favors on the incapacity side by using these techniques.
Jessica, anything you want to add?
No, I think that you covered it.
What would you say the takeaway is here?
The takeaway is that these techniques can work only if everything goes exactly as planned. We encourage everyone to be very aware of the risks involved. If people die out of order or like you said, creditors could be involved, just be aware of the risks.
Alright. That’s very good. Thank you, Jessica, for your insight. Thank you all for joining us. I hope you learned something. We look forward to connecting with you next time.
Resources Related to This Episode:
- Absolute Trust Talk Episode 140: Navigating Trust Complexities: The Family Home Dilemma: https://absolutetrustcounsel.com/140-navigating-trust-complexities-the-family-home-dilemma/
- Absolute Trust Talk Episode 128: Revocable or Irrevocable Trust: Which is Right for Me?: https://absolutetrustcounsel.com/128-revocable-or-irrevocable-trust-which-is-right-for-me/
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your own unique needs to effortlessly build a secure future now. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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