DO YOU REALLY NEED TO AVOID PROBATE?
You can pick up many financial planning books or articles that will emphasize the “evils of probate” and encourage the reader to “avoid probate.” Many of these articles are designed to generate fear in the reader and rely upon state laws where estate administration is cumbersome and costly. This second article in our planning series will focus on removing the mystery from “probate” and outlining administration and title options under Idaho law.
You have probably heard the word “probate,” but what is it really? Simply put, probate is the legal process of appointing the personal representative (executor), paying the decedent’s debts and final expenses, determining the heirs (whether through a will or intestacy), liquidating assets, paying all estate and/or income taxes of the decedent, and distributing assets to the heirs. The “estate” generally refers to all property, debts, rights and obligations of the deceased person. Each person has an “estate” on death without taking any action whatsoever as the estate is created automatically by law. However, to have authority to act on behalf of the estate, the court generally must appoint the personal representative (also known as the executor or administrator in other states). Once appointed, the personal representative assumes fiduciary rights and responsibilities to properly administer and distribute the estate and is accountable to the court, creditors, and beneficiaries regarding the estate.
The laws of probate vary among the states and may be fairly straightforward or very complex and costly. These probate laws govern the administration of the “estate,” which include the details of how the personal representative is appointed, the priority of creditor claims against the estate, the identity of the beneficiaries in intestacy (if death occurs without a will), and distribution and closing of the estate. Idaho has adopted the Uniform Probate Code which provides for an efficient means to administer an estate without added court oversight or large additional cost. In most Idaho estates, all documents are sent to the court and no appearance is made before the court unless a dispute occurs or for certain identified matters. The initial appointment of a personal representative and determination of the heirs (through a will or intestacy) is generally a fairly swift process and can take less than one week except in more difficult circumstances. If you are an Idaho resident, the need to probate the estate should not alone be a motivator to establish a trust or adopt more complex planning (although there may be other reasons which justify a trust or more complex planning documents).
You may have read or received the recommendation that you create a revocable trust to “avoid probate” or protect your assets from creditors. Many of the administrative steps outlined above regarding debts, taxes, and distribution will need to occur whether the estate is administered through a will or through a revocable trust. Often the only difference is the initial filing of the pleadings for appointment of the personal representative. A revocable trust will also not protect your assets from creditors because the person who creates the trust will generally retain the right to revoke, amend or terminate the trust, which will not prevent a creditor from accessing the trust assets to satisfy your debts or liabilities.
There are situations where use of a revocable trust or other structure are appropriate. One situation is if you own assets in more than one state, particularly real estate, the need for a more complex plan is appropriate to minimize the possibility of going through probate in more than one state. With multi-state real property, it may be appropriate to establish a revocable trust or to hold the real property in a business entity such as a limited liability company or limited partnership. Another situation where revocable trusts are beneficial is age or physical infirmity where your assets can be held and effectively managed by another through the trust for your benefit. If a revocable trust is used, the assets must be titled in the name of the trust to be governed by the trust document and “avoid probate.” In addition, a will is still generally required to transfer assets outside of the trust to the trust for administration as part of probate of the estate (remember the estate is all assets of the decedent which may be outside of the trust). Generally a “pourover” will is used with a trust to transfer all assets outside of the trust into the trust for comprehensive administration.
Because use of a trust and estate planning generally involve important legal issues, it is recommended that you consult with your legal and tax advisors to ensure any action taken is appropriate for your circumstances. This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes. Next issue we will focus on asset titling and coordinating beneficiary designations to accomplish your planning desires.