Trying to avoid probate? Just a will alone won't

Dear Jonathan: My wife and I prepared wills several years ago. We thought by doing so that we were avoiding probate which was the main purpose why we prepared wills. However, a close friend of ours recently died and her estate is now being probated even though she prepared a will. This came as quite a shock to us as we thought we had everything covered. Could you please shed some light on this?

Jonathan says: Yes. Unfortunately, many people share the same misconception that by preparing a last will and testament probate can be avoided. Whether probate will be required has nothing to do with whether you have a will. Whether you have a will or not, probate will be required for any asset titled in your name alone and which does not automatically pass to a beneficiary upon your death.

Probate will not be required for assets (i) which are jointly titled with full rights of survivorship; (ii) which name a beneficiary to receive those assets upon the owner’s death; or (iii) which have been retitled in the name of a revocable living trust during the trust creator’s lifetime. These concepts are further explained below:

Jointly titled property. If two people hold title to assets as joint tenants with full rights of survivorship, then upon the death of one of those individuals those jointly titled assets will automatically be owned by the surviving individual without having to go through probate first. However, if the surviving individual retains those assets in his or her name alone, then upon his or her death those assets will need to be probated. Further, if the two joint owners die in a common accident, then those assets will need to be probated in the estate of the individual who is deemed to be the last one of the two to die.

Beneficiary designation. Any investment which names a beneficiary to receive that investment upon the owner’s death will avoid probate so long as the named beneficiary is living at the time of the owner’s death. For example, life insurance proceeds will pass to the named beneficiary without going through probate first if that beneficiary survives the owner of the policy. If, however, the beneficiary predeceases the owner and the owner has not named a contingent beneficiary, then those life insurance proceeds will be paid to the owner’s estate and will have to go through probate.

Certain other assets such as stocks, securities, bank accounts and brokerage accounts may allow the owner to name a beneficiary pursuant to a “TOD” (transfer on death) or “POD” (payable on death) designation. As such, any such asset where a beneficiary has been named pursuant to a TOD or POD designation will avoid probate at the owner’s death if the beneficiary survives the owner.

Revocable living trust. If a revocable living trust is established, which is a trust created during the individual’s lifetime, and assets are retitled to that trust while the owner is alive, then upon the owner’s death those assets that were retitled to the trust will avoid probate because they are no longer titled in the owner’s name. For example, if after creating a revocable living trust, the owner retitles his home in the name of his trust, then upon his death the home would not need to be probated because it is owned by the trust and not by the owner.

Creating a revocable living trust is a very popular method that people utilize to avoid probate, but in order to take advantage of the trust for this purpose, assets have to be retitled to the trust. All too often people will create the trust but not take the next step of retitling assets to the trust. The consequence of not following through with the retitling of assets is that those assets will need to be probated at the owner’s death.

I recommend that you meet with an estate planning attorney who can further discuss probate, probate avoidance and general estate planning concepts with you in more depth to help you design and implement an estate plan that will achieve your goals, including your goal of probate avoidance. Good luck.

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, P.C., in Grand Rapids, Mich.