Probate is the process by which a deceased person’s remaining property is distributed to other individuals or entities.
For example, if a deceased person leaves a valid will, the property will be probated as dictated by the will. If a deceased person does not leave a valid will, the property will be probated to his or her family through the state’s applicable intestacy scheme.
Why Should I Avoid Probate?
The process of probating one’s property can be very costly. Probating must be done through a probate court, and thus requires court fees, attorney fees, executor fees, and other costs that can quickly add up. Therefore, it is often in one’s interest to avoid the cost and time of probate if possible.
How Can I Avoid Probate?
A deceased person’s property is probated only if it is not already committed to distribution through another legal mechanism. Thus, one can avoid probate by making other arrangements that commit their assets to automatic distribution. Other legal mechanisms that can be used to automatically distribute property include:
- Joint-bank accounts
- Jointly-held real estate
- Payable on death accounts
For example, a home or bank account held jointly by two spouses may avoid probate if the property is already legally committed to pass to the surviving spouse upon one spouse’s death. Similarly, one very effective way of arranging to have assets distributed, and avoiding probate, is through the creation of a trust.
What Is a Trust?
A trust is where a "settlor" gives money to a "trustee" to hold for, and later distribute to, named "beneficiaries." In other words, it is a gift that someone arranges to have given to another party, sometime in the future. Thus, the gift is already committed and cannot be probated.
Trusts can be designed in almost any manner one chooses. For example, the settlor can determine:
- The amount in the trust
- Which person(s) the trust will be distributed to
- What the trust money is to be used for
- When the trust will begin distribution
- At what frequency the trust will be distributed
What Is the Difference Between a Revocable and Irrevocable Trust?
Trusts can be arranged as either revocable or irrevocable. A revocable trust may be terminated or altered at any time by the creator of the trust. However, an irrevocable trust is final upon its creation and may not terminated without the consent of the beneficiaries.
Still, both a revocable and an irrevocable trust avoid probate.
What Are the Tax Differences Between Revocable and Irrevocable Trusts?
For tax purposes, the distinction between revocable trusts and irrevocable trusts is that assets in a revocable trust may be subject to an estate tax, while assets in an irrevocable trust are not.
When a person dies, an estate tax may apply to the value of their remaining assets as they are transferred to other individuals (e.g. through probate or revocable trusts). In calculating the value of the deceased individual’s estate, assets in irrevocable trusts are exempt, and not taxable, because the deceased individual has already completely relinquished their ownership rights to these assets.
Note that either type of trust may be subject to income taxes as it is distributed to the beneficiary.
How Can I Maximize the Value of My Estate for Distribution?
Everyone’s situation is different. There are a number of factors that will determine how best to arrange your assets for future distribution, including:
- The value of your assets
- Amounts owed in debt
- State laws
- Applicable taxes
- Your estate distribution goals
An experienced estate lawyer can best help you evaluate these factors and organize your assets in order to maximize the value of your estate for future distribution to your loved ones.