A little probate never hurt anyone, that’s what I’m learning from the process of handling my mother’s posthumous affairs and the administration of her trust.
Like many people, I had been under the impression that having a legal structure that delineates the distribution of a person’s assets meant you didn’t have to deal with probate – which means filing with the courts after a death, either with a will or if there is none – and it would be smooth sailing for closing bank accounts, selling her house and distributing the family heirlooms.
“But sometimes you just need a little probate,” says John Ross, an elder law attorney at Ross & Shoalmire, based in Texas.
It turns out that there’s a good reason that estate lawyers have clients sign a will and a trust at the same time. Families often need both because of commonly missed financial planning tasks and other things beyond anyone’s control, despite the best intentions.
A trust can solve a lot of problems, but settling financial matters that aren’t included in the trust means probate in some form – either a shortened version for estates under a certain threshold set by the state where the person lives, or a full process that can be lengthy and expensive. And that means filing a will at the local courthouse and getting an administrator named, which might cost time and money.
Empty trust buckets
The most common scenario that would cause you to go to probate even though you have a trust is that people take the steps to create the legal structure, paying thousands of dollars to a lawyer, and then stop short of putting their assets in the trust.
“Think about a trust like it’s a bucket. It’s a great thing, as long as the bucket is completely full of your stuff. If your stuff is not all in the bucket, it’s not so great,” says Ross.
Most of the time, this involves property, like a house, that needs to be retitled to the trust to be covered by it. Instead of a house belonging directly to Jane Doe, for instance, it would belong to The Living Trust of Jane Doe. But a trust can also involve cars over a certain value or boats, jewelry, artwork and other valuables.
Even if your lawyer handles this part for you in the original setup, you have to carry it through to all subsequent sales and purchases. Ross worked with one family where he set up a trust, and then years later the clients sold the house he had titled to the trust, but didn’t title the new house to the trust. When they died, their children had to go through probate to inherit the house and sell it.
“Title needs to be clear or it has to be probated,” Ross says.
What’s so bad about probate? For most people, it’s just the added time and expense. A lawyer to sort out the issues could cost $5,000 or more, and the process could take a few months to years. You have to sort out creditors and deal with all possible heirs, which can be tricky in some family dynamics. The process is also public, so anyone can look up the records online. Eric Bronnenkant, head of tax at Betterment, had to probate his mother’s will after she died. “The most challenging part was selling the house. Because it passed through her will instead of a trust, it had to go through probate. It took about a year,” he says.
Missing beneficiary designations
If you can name beneficiaries to a financial account like life insurance, a bank account or IRA, then you shouldn’t need probate for those. Most financial institutions will ask for a death certificate as verification, and then distribute the funds to the named heirs.
Note that the money will go to whomever is named on the forms, whether that’s an ex-spouse or somebody else you no longer want to get the money, so you need to make sure to update those slots as your life changes.
If you forget to name beneficiaries altogether on any account (or the ones you named are no longer living and you named no contingencies), then that money will get locked up until your heirs go to court. A trust will not help them.
“A lot of times, clients get done with signing a trust, and pat themselves on the back. But for probate to be avoided, we really have to make sure that there are no assets in an individual’s name alone with no beneficiaries listed,” she says.
My family faced this issue, because my mom had one checking account in her name only, and by the time we realized that, she was too ill to go to the bank and change things. I had power of attorney over the account while she was alive, but that ends at death. I thought I had left just enough in the account to cover her immediate expenses for the month after her death, and then I’d shut down the account. But the bank heard immediately from Social Security, which was notified by the funeral home, and they locked the account after a few days. That left us scrambling to pay her bills out of our own pockets and file for probate.
Even if you do everything correctly with the titling of your assets in a trust and naming beneficiaries to your accounts, your heirs still might end up dealing with probate.
“Say you come to our office and get a trust created and set it all up, and then you die in a car wreck. There will be a wrongful death settlement. You can’t put money from your own wrongful death settlement in a trust before you die,” says Ross.
The same goes for things like tax refunds that come after death, or other checks that are made out solely to the estate of the deceased person. We got one such check for return of premium for a long-term-care insurance policy.
Those post-deaths checks will likely be written out to the estate of the deceased person, and without probate, there is no legal establishment of an estate. It’s a different legal entity than a trust. So the process is to go to probate, establish the estate by court order, get a personal representative appointed, open a bank account for the estate with a special tax ID number, deposit the check and then distribute the funds.
“If you’re talking about a large sum, it would be worth it at that point,” says Ross. “It kind of stinks, but that’s just the way the system works.”