Avoiding Probate with Proper Asset Titling

A common question I get asked by clients and prospects is, “How do I avoid probate?” Probate is the process that a state uses to settle the estate of a deceased person, referred to as the decedent. One of the main objections many people have with the probate process is that it often violates their desire to keep their estate distribution details private because the proceedings are made a matter of public record. In addition, there can often be unnecessary costs incurred, as well as requiring time-consuming efforts on behalf of the executor settling the estate, resulting in a delay in beneficiaries receiving their share of the estate’s assets. For these reasons, and to streamline the estate settlement process for their inheritors, many people prefer to structure the ownership of their assets in such a way that avoids probate. The ownership structure is determined by the asset’s titling. Forms of ownership are governed by state law, can vary significantly and have wide-ranging consequences, including potentially negative estate planning results. We recommend that you review the ownership structure of your assets to ensure that they are in line with your current and future goals.

You should consider any ownership interests in business entities such as Limited Liability Companies (LLC), Limited Partnerships (LP), Subchapter S Corporations (S-Corp) and Subchapter C Corporations (C-Corp) as those may also be subject to probate depending on who or what holds the ownership interest. For instance, an advantage of being an individual member of an LLC may provide you creditor protection, but that ownership interest is still subject to probate. If, however, your revocable trust was the member of the LLC instead of you individually, this would allow the ownership interest to pass according to the provisions of your trust, outside of probate.

Even for those forms of ownership that pass by law to the surviving spouse, the property will become subject to probate upon the death of the surviving spouse unless appropriate planning is in place. In most states, one option is to have a payable on death (POD) designation naming a specific beneficiary added to bank accounts and transfer on death (TOD) designations added to securities or brokerage accounts. While currently allowed by fewer states, filing a beneficiary deed may accomplish this same end for real estate. With these designations listed, the assets will transfer immediately to the named beneficiaries upon your passing. While certainly not the only option and not optimal in all situations, it is important to be aware of these strategies as they may have a place in your estate plan.

Retirement accounts such as 401(k)s, IRAs, and pension plans have named beneficiaries to whom the assets will pass directly, outside of probate. The same holds true for life insurance policies and annuities. It is important to remember that specific beneficiary designations, on a bank account, brokerage account, retirement plan, or insurance contract, will override any provisions set forth in your will or trust. For this reason, it is important that you review the named beneficiary designations to ensure that the assets will pass according to your wishes.

A recurring challenge to avoiding probate is related to vehicle and boat titles. The question often arises if the title to a vehicle or watercraft should be retitled in the name of your revocable trust, if you have established one. While title to a motor vehicle can be held in a revocable trust, and thus avoid probate upon your passing, it is often better to retain the vehicle’s title in your individual name, unless the vehicle is an antique or collectible of intrinsic value. Joint ownership of the vehicle also will avoid probate when one joint owners dies. Michigan has a statute [MCL 257.236] that enables the transfer of title to a vehicle or watercraft without having to process that title through probate. Instead, title to the decedent’s vehicle or watercraft in his or her name alone can be ‘processed’ directly at a local Secretary of State office by producing the decedent’s certified death certificate, the certificate of title to the vehicle, and filing a Secretary of State form TR-29 entitled Certification From the Heir to a Vehicle. The vehicle’s title will be furnished by the Secretary of State according to the following priority: (i) surviving spouse first; and (ii) heirs, next. The primary limitation to this informal process to change title to a vehicle at the Secretary of State’s office is that (i) the decedent’s solely owned vehicles cannot exceed $60,000 and (ii) there is no other property for which a probate court administration is required, which would be the case if all of the decedent’s other assets were titled in the name of his or her revocable trust. This informal process thus enables the title to be changed either to a surviving spouse or to an heir who can then formally take ownership in order to use the vehicle, gift it to a grandchild, or instead sell the decedent’s vehicle and retain the sales proceeds.

A commonly overlooked asset is a safe deposit box. If you have a safe deposit box, it is recommended to title it in the name of your revocable trust, if you have one established. Upon your passing, the successor trustee will automatically have access to the box and its contents. Some people have had issues with their banks allowing them to retitle their safe deposit box in the name of a trust. If you come across this issue, you can shop for a bank that is happy to comply with your request. Leaving the safe deposit box in your individual name will be problematic for the executor of your estate to gain access to the box at your passing.

With numerous types of assets and various forms of potential ownership, it is easy to lose track of asset titling and not be fully aware of the estate planning results of the titling you currently have in place. Call your client centric team to assist in reviewing your current asset titling and beneficiary designations to see if any changes are needed to achieve your estate planning goals.