Summary: Avoiding probate can offer the person who plans many possible rewards. They can include savings of time and money and stress. There are, as with many things in estate planning, multiple ways to achieve a particular objective. Some ways of avoiding probate may accomplish the goal, but may do so by creating potential pitfalls in terms of negative tax implications or exposure from civil lawsuits. By planning properly and carefully, you can effectively avoid probate and do so with opening yourself up to unnecessary risks.
At its most fundamental level, avoiding
probate involves making sure that you do not have assets in your probate estate
when you die or, if you do, they are small enough to be distributed using one
of your state’s highly simplistic and abbreviated procedures for very small
estates. One of the many relatively simple ways to make sure an asset isn’t in
your probate estate is to make sure that you aren’t the last living co-owner
left. If your asset is co-owned and one or more co-owners (often called “joint
tenants” in technical legal verbiage) survive you, then the asset goes to that
person or people without requiring probate administration.
To achieve that end, some people take
the step of “adding” someone to an asset (or assets) to create this sort of
joint tenancy and method for avoiding probate. While this technique may well avoid
probate, it carries with it a series of potential problems that can befall you
or your loved ones. For one thing, “adding” someone as a co-owner (joint
tenant) of an asset that you currently own by yourself is that, in the eyes of
the IRS, you have made a gift unless your new co-owner paid you. By just
“adding” someone with no money changing hands, the tax authorities consider
what you did as giving 50% of that asset to that other person. This could
potentially create gift tax issues for you and income tax issues for the other
person (among other things.)
Another potential issue is that the
person you’re adding as a co-owner immediately takes full rights to one-half of
the property. That means that, after you add him/her, he/she has all the same
power and authority over the asset that you do. Want to sell the asset? He/she
has to approve it. Want to refinance that asset? He/she has to sign off.
An additional thing to keep in mind is
that adding someone means additional exposure from potential legal judgments.
Perhaps you trust your daughter implicitly and think that she is a safe person
to add to the title on your home. But even the most upright and trustworthy of
people can find themselves facing civil lawsuits related to their business
ventures, a divorce or an auto accident. If your child is a defendant in any
such case and the court enters a judgment against her, that asset that you and
she now co-own could potentially be used to satisfy that legal obligation of
hers.
Other methods of avoiding probate may be
much safer. For example, avoiding probate with a revocable living trust allows
you to reap all the same benefits of probate avoidance as adding someone to
your asset(s), but will allow you (if you choose) to maintain sole and complete
control over that asset(s) during your lifetime, and will not subject your
wealth to civil lawsuit exposure the same way that adding someone to a
deed/title would. To be sure, avoiding probate with a living trust is not as
simple as avoiding probate by adding a co-owner to your assets, but it is
safer. And anything worth doing is worth doing well.
This article is published by the 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 www.legacyassuranceplan.com.
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