Six Planning Tools to Consider, if Your Goal is Avoiding Probate.
If avoiding probate is on of your goals, consider the advantages and disadvantages of these tools:
1. Revocable Living Trust (RLC)
Assets transferred to a Living Trust are not subject to Probate, because legal ownership of real estate, bank accounts, stocks and bonds or any other asset is held by the Trustee of the Trust. You can designate yourself as the Trustee of your Living Trust, and list another person or financial institution who will take over upon your incapacity, thereby avoiding Probate Conservatorship or the need to settle a Probate Estate. Instructions in the Living Trust tell the Trustee how to handle and distribute the property and assets in the trust.
ADVANTAGES: The Trust is Revocable. You can withdraw any or all of the Trust assets, and you can change or revoke the Trust anytime you want, without needing approval from a Probate Court. If you become incapacitated, your family won't have to get a Probate Conservator, because you designate the successor Trustee who steps up for you. Our services include planning Living Trusts for people who want to keep this control over their estate, and for couples who want to eliminate Massachusetts and Federal estate taxes. The Living Trust can also save their survivors from paying capital gains taxes on stocks, bonds and real estate that has appreciated in value.
DISADVANTAGES: Because it is Revocable, the Living Trust assets are still owned by you and will be subject to your creditors. The assets will be countable if you ever need Medicaid benefits to pay for nursing home care in a nursing home. If you want to avoid probate AND have asset protection, you need an Asset Protection Trust.
2. Limited Liability Company (LLC)
The LLC is a business organization that can own property and assets. Using a Trust or Family Limited Partnership, shares of the LLC can be owned and transferred without Probate Court involvement.
ADVANTAGES: Unlike a partnership or joint ownership of property, the members who own shares of the LLC avoid personal liability for losses, accidents or debts connected with the ownership of LLC assets. When properly organized, the LLC can be structured to avoid Probate Proceedings.
3. Beneficiary Designations
Death benefits of a Life Insurance policy, and funds remaining in an IRA or Annuity, can be transferred to the people you designate. Massachusetts banking law explains how you can open a bank account that is held in trust for someone else, and then distributed to them upon your death. You can also designate beneficiaries on securities accounts, using standard procedures explained in Massachusetts securities law. A Primary Beneficiary is the person named to receive the proceeds of an asset upon your death.
A Contingent Beneficiary is a secondary person who may, or may not, share in the distribution the the asset. A person would be a Contingent Beneficiary if you fill out the form so that he takes an interest in an asset only if the Primary Beneficiary had died before the time of your death.
ADVANTAGES: You can always change your designated beneficiaries by filling out the forms provided by the financial institution. As long as you understand the effects of your designations, this is a low cost approach to planning.
DISADVANTAGES: Unlike a Revocable Living Trust, you cannot give specific instructions about how to hand money over to beneficiaries in particular circumstances. Family members may get into arguments, or become reluctant to spend the money on you, if you need care and cannot speak for yourself. A Living Trust does provide this higher level of instruction, and can also be written to stretch-out the distributions from tax deferred assets such as an IRA. This postpones the income taxes on IRA funds for many years into the future. Also, you should not name your Estate as Beneficiary of an asset (such as an insurance policy or an IRA account) unless you want Probate Proceedings to be required for transfer of those assets.
Married couples usually own their homes jointly, as Tenants by the Entirety. The surviving spouse automatically succeeds to the decedent's entire interest in the property. Your deed must use legal language that specifically expresses the fact that your property is owned by you and your spouse as tenants by the entirety, otherwise Massachusetts laws will apply another form of property ownership such as tenants in common or joint tenants. If you own property as an individual person, and want to transfer it to yourself and your spouse, Massachusetts law allows you to create a tenancy by the entirety.
ADVANTAGES: When you own your home as "tenants by the entirety" Massachusetts law provides important protection from creditors of a spouse: creditors of one spouse cannot seize a principal residence owned by both spouses as tenants by the entirety. Upon the passing of the first spouse, the surviving spouse does not have to go through Probate Proceedings to clear title to the property..
DISADVANTAGE: Unless there is additional planning, Probate will be needed upon the death of the surviving spouse.
5. Life Estate
Life Estate is an interest in real property that is transferred by a Grantor for the life of a living person. In this illustration, Bob & Mary Smith keep a life estate and their two children Diane Smith and Sam Smith get a remainder interest:
The Remainder is the portion of the property remaining after the death of the person who had retained the life estate. To Transfer with a Retained Life Estate means that you have transferred property, but kept (retained) that property for your lifetime.
ADVANTAGE: The property passes to the Remainder people upon your death, without the need for Probate Proceedings.
DISADVANTAGE: You can't change your mind and revoke the transfer of the property. The remainder people (in this example the two children) would have to sign a deed giving your house back to you. .
6. Joint Ownership
This is where two or more people own a joint interest in an asset or a piece of property. In this illustration, Mary Smith has made her two children the joint owners of her house. You can create joint ownership for many forms of property including real estate, bank accounts, your safe deposit box, and stocks and bonds. There are different legal methods to own property jointly. Joint Tenancy is an equal interest in property taken by two or more people in the same conveyance. When a Joint Tenant dies, his/her interest passes to the surviving Joint Tenants, and not to the heirs of the person who died. This is called The Right of Survivorship, which gives the surviving owners the full ownership of the decedent's interest in the property. Right of Survivorship gives each surviving owner a greater ownership in the property, if any other owner of that property dies.
ADVANTAGES: If the joint ownership arrangement is properly structured, the asset will pass to the surviving owner without need for Probate proceedings.
DISADVANTAGE: Tax laws can cause gift tax, estate tax and income tax consequences if your transfer property into Joint Ownership. Even Norman Dacey, in his book How to Avoid Probate, did not recommend the use of Joint Ownership as a way to avoid probate.
Don't take steps toward avoiding probate until you have obtained professional advice on all of the advantages and disadvantages that apply to your specific circumstances. Be sure to read the next page, with examples of 9 Risks You Must Consider Before Transferring Your House to Joint Ownership or a Life Estate Arrangement with Your Children.