Probate: Its function and how to avoid it
Most single people hold a title to property under their individual name (or capacity), and most married couples do so jointly with rights of survivorship. As to jointly owned property, on the spouse’s death, the title to the property vests automatically in the name of the survivor, who now owns it individually. A problem arises when an individual property owner dies because, upon the owner’s death, no living person controls the legal title. As a matter of law, a deceased individual’s assets become probate assets over which no one has control. Essentially, the assets are now “untitled.” To fill this vacancy in title or control, legal probate was born. Viewed in this light, probate is a necessary institution that serves the invaluable function of restoring families’ access to their loved one’s financial resources after they die.
Probate is required in either of the following instances: (1) when a person dies with no estate plan in effect or (2) when a person’s estate plan is governed by a will. In the latter case, the will may be regarded as an application for legal probate by the deceased. Unfortunately, because probate is a legal process, there are two negative side effects. The first is its cost. A rule of thumb used by many Connecticut probate judges is that a fiduciary’s fee of 3% or less of the gross estate is presumed reasonable. Using this formula, the cost to probate a $200,000 estate is $6,000. The second is the unavoidable freezing of assets that occurs before a family’s access to their financial resources can be restored. At the earliest, a family’s access to a deceased person’s financial resources can be restored when the probate court appoints a fiduciary (executor or administrator) over the probate estate. When a family is relying on access to these resources to operate, or control is required to make important, time-sensitive decisions, delays caused by probate may give rise to high emotional distress. Therefore, for economic and psychological reasons, it is advantageous to establish an estate plan that avoids probate.
In Connecticut, the following strategies are used by estate planning attorneys to keep their client’s estates out of probate:
1. Living trusts—Living trusts can be used to avoid probate on virtually any asset. In a living trust, legal control over trust assets is held by a trustee. When individuals or married couples establish a living trust, they are the trustees of their trusts and in legal control of their assets while they are alive. When they die, their named successor trustee takes legal control of the trust’s assets and can administer them or make distributions to beneficiaries without probate. The seamless legal control afforded by a living trust precludes the freezing of a family’s access to its financial resources and avoids high levels of emotional distress.
2. Joint ownership—When property is owned jointly with rights of survivorship, on the death of the first owner, title to the property vests automatically in the survivor, who then owns it individually. Although probate is avoided on the first owner’s death, it is not avoided on the death of the survivor.
3. Payable-on-death designations—A payable-on-death designation may be used on bank accounts, certificates of deposit, and life insurance policies. While the owner is alive, payable- on-death beneficiaries have no access to or rights in the account. When the owner dies, if there is a living beneficiary, on presenting the death certificate and proper identification, the cash value of the account will be paid directly to the designated beneficiary.
4. Transfer-on-death designations—Vehicles, stocks and bonds, and retirement accounts could be registered so that when the owner dies, the titles pass to the designated beneficiaries. When the owner dies, the designated beneficiaries deal directly with the stockbroker or transfer agent to arrange to have the securities transferred into their names. In Connecticut, the beneficiary of a motor vehicle must present his or her claim by providing proof of the owner’s death and the vehicle’s registration, along with the necessary transfer-on-death designation, at the motor vehicle department within 60 days of the owner’s death. Payable-on-death and transfer-on-death designations only work if the designated beneficiary is alive to receive them. Otherwise, the underlying assets remain the property of the owner and become untitled probate assets when the owner dies. Therefore, it is important to ensure that designated beneficiaries are aware of their designations, so they may act on them at the appropriate time. It is also advisable to make secondary designations in case the first designated beneficiary predeceases the owner.
5. Connecticut small estate probate procedure—Connecticut has a simplified probate procedure to settle a small estate, defined as an estate in which the total value of the deceased’s property does not exceed $40,000. This procedure is not available if the deceased owned any real estate (except real estate held in survivorship form) at the time of death. The simplified procedure avoids the formalities and administrative expenses normally associated with formal probate proceedings. With careful estate planning, probate is avoidable. The above strategies are the tools. An analysis of a client’s assets and goals will determine the appropriate methods to ensure the best outcome.
The document offered above is for informational purposes only and not to provide legal advice. With respect to any specific issue or problem, you should contact an attorney for advice.