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There are several ways you can keep assets out of the tedious probate process

by Ryan C. Hamilton, Esq.
October 6, 2023

Probate, often considered a cumbersome legal process, can be a significant concern for individuals planning their estates. This article aims to shed light on what probate entails, why avoiding it is important and various strategies to navigate this process effectively. A goal of this article is to provide you with knowledge needed to protect your assets and provide your loved ones with a seamless transition in the event of your passing. Before we delve into avoidance strategies, it's crucial to grasp the basics of probate, its purpose and the key components involved.

What is probate?

Probate is the legal process of settling a deceased person's estate. Its primary purpose is to ensure the proper distribution of assets, payment of debts and the resolution of any disputes.

These are the key players in the process of probate, which is known as succession in some states such as Louisiana:

  • Executor: The person responsible for managing the deceased's estate as outlined in the will.

  • Administrator: Appointed by the court when there is no valid will or appointed executor.

  • Beneficiaries: Individuals entitled to receive assets from the estate.

  • Creditors: Entities or individuals owed money by the deceased.

There are four common steps in the probate process. The first is filing the petition and initiating the probate process by submitting the necessary documents to the court.

The second step is determining the value of the deceased’s assets. Next is paying off the deceased's debts, including taxes. Once those steps are complete, assets are distributed according to the last will and testament’s instructions or state laws (intestacy rules).

What is the importance of avoiding probate?

paper boat sailing around and avoiding probate

Understanding the reasons for avoiding probate is vital. Let’s examine the potential drawbacks and negative impacts of the succession/probate process on your estate.

  • Cost implications: Probate can be costly, as various fees and expenses, including court costs and attorney fees, are involved.

  • Time delays: Probate can be time-consuming, often taking several months or even years to complete.

  • Lack of privacy: Probate proceedings are a matter of the public record, potentially exposing sensitive information to the public.

How can I avoid probate?

One key strategy to avoid probate is by creating a revocable living trust. A revocable living trust is a versatile estate planning tool that offers several benefits, primarily focused on providing privacy, control and flexibility to both the grantor (the person creating the trust) and the beneficiaries. Let’s dive deeper into these benefits and consider a step-by-step plan on how to establish and fund a revocable living trust.

The key goal of a revocable living trust is to bypass the probate process entirely or minimize its impact. Assets held within the trust do not go through probate, which can save time and money for your loved ones after your passing.

What are the steps to establish and fund a revocable living trust?

Booklet opening animation of our free requestable booklet 'Understanding the probate process'
  • Consult with an attorney: Estate planning can be complex, so it's wise to consult with an experienced estate planning attorney. They can help you draft a trust document that aligns with your goals and complies with state laws.

  • Choose a trustee: Select a trustworthy individual or entity to serve as the trustee of your trust. This person will be responsible for managing the trust assets according to your instructions.

  • Draft the trust document: Your attorney will draft a comprehensive trust document outlining the terms, conditions and instructions for your trust. This document will specify how assets should be managed during your lifetime and how they should be distributed upon your passing.

  • Transfer assets to the trust: To fund the trust, you will need to transfer ownership of your assets into the trust's name. This typically involves changing the title of assets like real estate, bank accounts, investments and personal property to the trust's name.

  • Update beneficiary designations: For assets that should not be titled in the name of the trust (e.g., retirement accounts, life insurance policies), update beneficiary designations to ensure they align with your trust's distribution plan.

  • Maintain the trust: While your trust is revocable, you will continue to manage your assets and make changes as needed. Keep records of all trust-related transactions.

  • Review and update: Periodically review and update your trust to reflect changes in your life, such as marriage, divorce, births, deaths or significant asset acquisitions.

  • Successor trustees: Designate successor trustees who will step in to manage the trust if you become incapacitated or pass away.

Another way to keep assets out of the probate process is to gift assets while you are still alive. Gifting assets while alive is an estate planning strategy that allows individuals to reduce the size of their estate, ultimately minimizing estate taxes and ensuring their assets go to their chosen beneficiaries efficiently. It’s important to understand the concept of gifting, why it's beneficial, the implications of gift taxes and the exemptions available.

How does gifting reduce the size of the estate?

Gifting, in the context of estate planning, involves transferring assets from one person (the donor) to another (the recipient or donee) without expecting anything in return. This can include various types of assets, such as cash, real estate, investments, personal property or even business interests. The primary goal of gifting is to reduce the taxable value of the donor's estate, as the value of the gift is subtracted from the total estate value.

a present wrapped with money as the wrapping paper

Here are some key points to understand about gifting:

  • Lifetime gifting: Gifting while alive allows you to see the impact of your gifts and ensure they benefit your loved ones directly during your lifetime.

  • Annual gift exclusion: The IRS permits individuals to make tax-free gifts up to a certain annual limit per recipient. In 2023, the annual gift exclusion was $17,000 per recipient. This means you can give up to $17,000 to as many people as you want annually without incurring gift taxes or affecting your lifetime gift tax exemption.

  • Lifetime gift tax exemption: In addition to the annual gift exclusion, individuals also have a lifetime gift tax exemption, which, as of 2023, was set at $12.92 million per person. This means that you can give gifts exceeding the annual exclusion limit, but those gifts count against your lifetime exemption. Once you exceed this threshold, you may be subject to gift taxes.

However, there are a few pitfalls with donating all your assets to avoid probate.

One pitfall is losing your homestead exemption. Yearly taxes on the primary residence will be higher unless the person you donate the property can take a homestead exemption on the house.

You also need be aware of risks. For example, once you donate your property to your child or heir, the property can be used to settle their debts and legal claims. Also, you’ll have a loss of collateral. Obviously, once you donate your property you can no longer use the property as collateral for a loan.

There’s also a loss of step-up in basis for heirs if the property increases in value between the time you donate it and the time you pass away. This would create a higher capital gains tax when the property is ultimately sold.

Small succession affidavits can avoid probate

Another probate-avoidance strategy is through the use of small succession affidavits. Small succession affidavits provide a simplified and cost-effective way to transfer assets from a deceased person's estate to their heirs without the need for a formal succession/probate process.

a puzzle piece labeled probate

Small succession affidavits are typically available in situations where the deceased person's estate is relatively small, and there are no complex issues or disputes among heirs. The criteria for using small succession affidavits vary by state, but they generally include:

  • Small estate size: To qualify for a small succession affidavit, the total value of the deceased person's assets typically must fall below a certain threshold.

  • No formal will: Small succession affidavits are usually applicable when the deceased person did not have a formal will (intestate).

  • No outstanding debts: The deceased person's estate should not have significant outstanding debts or creditors that require payment through the probate process.

  • Heirship clear and uncontested: The identity of the heirs and their entitlement to the estate should be clear and uncontested. This means that there should be no disputes among potential heirs.

Use transfer-on-death and payable-on-death designations to bypass probate

Another way to keep assets out of probate is through the use of transfer-on-death (ToD) or payable-on-death (PoD) accounts.

Transfer-on-death and payable-on-death accounts are financial tools that allow individuals to designate beneficiaries who will automatically inherit the account's assets upon the account holder's death. Let’s discuss how ToD and PoD accounts work, their mechanics and the process of setting up these accounts for various types of assets to ensure a smooth transfer of assets to your chosen beneficiaries.

In contrast to numerous other states, Louisiana has adopted legislation akin to the Uniform Transfer on Death Security Registration Act. This act empowers individuals with brokerage accounts to nominate beneficiaries for transfer-on-death designation. Subsequently, upon the presentation of the account holder's death certificate, the brokerage firm disburses the account's funds to the designated beneficiary, bypassing the probate process entirely. It's worth noting that, while Louisiana hasn't officially enacted a ToD law for brokerage accounts, certain brokerage firms have permitted this mode of registration.

ToD and POD will not supersede Louisiana laws regarding community property and forced heirship. Therefore, there are some issues that could arise when attempting to use these types of accounts in Louisiana.

How do I choose the right strategy to avoid probate?

It's essential to tailor your estate plan to your specific circumstances and goals. We strongly recommend consulting an estate planning attorney for personalized guidance and advice. An attorney can help you navigate the complexities of estate planning and ensure that your chosen strategies align with your unique situation. In conclusion, probate can be a lengthy and costly process, but with careful estate planning, it can be avoided or minimized. By understanding the strategies outlined in this article and seeking professional advice when needed, you can secure a smoother transition of your assets to your loved ones. Providing them with the peace of mind they deserve during challenging times is one of the greatest gifts you can offer through thoughtful estate planning.

The author is an attorney based in New Orleans, Louisiana. His major practice areas are successions/probate, trusts, wills, donations, real estate law, business law, personal injury, DWI and traffic. For more information, visit www.rchamlaw.com.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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