What is “probate” and why am I trying to avoid it?

What is "probate" and why am I trying to avoid it?

Is "probate" an 8-legged monster that will suck the life out of your lifetime hard work and savings upon your death? Or, did probate just get a bad reputation somewhere along the way? The answer actually is not as simple as some may believe. This post will explain the probate administration process, try to dispel some of the myths, and provide you with some basic information that you can consider when talking with your estate and financial planning professionals.

Introduction

"Probate" is the name of the court in Ohio that governs the administration of the financial affairs of deceased persons. There are several other subjects over which the Ohio probate courts have jurisdiction. However, those topics are beyond the scope of this article.

Why do we need probate courts? One primary reason we need probate courts is to assist with a lawful, supervised procedure for transferring the assets and property of a deceased person to his or her surviving heirs. This procedure is intended to avoid conflict and provide certainty.

In some situations, the plan of distribution of a deceased person's estate might be obvious. For example, if a man is survived by only his wife, and he has no children, everyone might simply assume that his intent was to leave all of his assets to his wife.

What if the family picture was more complex? What if there is a surviving wife and children? Should the wife still receive all of the property or should the children receive some portion? What if the husband had children from a prior marriage that survive him, he is survived by a second wife, step-children, and children from his second wife? Who gets what?

What if the husband sent a letter to his church telling his pastor that upon his death, he wanted the church to receive an inheritance from his estate? What if that letter wasn't signed by the husband, but was typed on his stationery? Is that valid?

All of these questions demonstrate exactly why we need probate courts in Ohio, and why we need uniform rules and regulations about how to execute a document that will be legally recognized. However, as society has become much more efficient with respect to the registration of assets and property, the laws have recognized and even sanctioned procedures that allow for the faster and more efficient transfers of assets that permit those assets to bypass probate court oversight.

Probate court processes are seen by many as lengthy, drawn out, and expensive. That can be true at times. There are some very valid reasons to try to avoid probate court, and there are sometimes situations where a probate court's oversight might be beneficial.

Some common myths about probate court

Myth #1: If I avoid probate, I avoid estate taxes.

This is one of the most common misconceptions about probate court. People believe that if you can avoid probate court, no estate taxes will be owed. This is incorrect.

A prior blog post discussed in greater detail the estate tax, how it is levied, and how it can be avoided or minimized. The estate tax applies to all assets owned by a decedent at the time of his or her death regardless of whether the asset requires probate administration or if the asset bypasses probate administration by way of a payable on death beneficiary designation, simple trust, or survivorship account.

Myth #2: Probate court will take a percentage of my assets upon my death.

This myth is sometimes a spinoff of Myth #1 (avoid probate and you avoid estate taxes). Others believe that the probate court will assess some type of levy or assessment against the assets separate from the estate tax. This is incorrect.

The probate courts do charge court costs for an estate administration, but these costs typically are less than $300 for a full estate administration.

Myth #3: If I avoid probate, no one can contest my will (or my estate plan).

A part of this myth actually isn't myth. If a person dies and has an estate plan that does completely avoid probate administration altogether, then the person's will has little or no consequence. This is because all of the assets bypass probate administration. A person's will controls the administration of a person's probate estate. Without probate assets, the will has almost no effect.

However, this does not mean that the person's estate plan is not immune from attack by a disgruntled family member that wishes to contest that plan. A trust, payable on death beneficiary designation, survivorship account classification, or even a gift made before the person's death are all subject to inquiry and attack by a disgruntled heir / family member.

Myth #4: I can avoid probate using a POD designation or survivorship account designation, but the beneficiary is legally bound to follow the provisions in my will.

This is the granddaddy of all myths. Parents many times make the foolish mistake of naming only one child as the beneficiary of assets, or naming only one child as a joint and survivor owner of assets, or the single beneficiary of life insurance to take advantage of probate avoidance benefits. However, they mistakenly believe that the provisions of the will are legally binding on those non-probate assets. They mistakenly believe that the single beneficiary is required to distribute the assets that he or she receives pursuant to the will. This is incorrect.

This can create extensive problems and potentials for family disputes merely because the parents did not plan properly. Problems such as these can easily be avoided if careful planning is done by an estate planning professional.

How do you avoid probate?

As you can see by some of the above myths, extreme caution must be taken when planning your estate with the goal of avoiding probate. Planning should be done only with the assistance of an estate planning professional such as an attorney. There can be significant tax consequences, inequitable distribution consequences, family infighting, and unnecessary legal expenses merely because there was no careful plan developed.

Ohio law provides individuals with a variety of tools to avoid probate. Individuals can establish trusts to hold property and pass it to others upon the death of the owner. They can identify one or more payable-on-death or transfer-on-death beneficiaries for bank accounts, securities, and even real estate. Beneficiaries can be named on retirement accounts, life insurance policies, and annuities. One or more persons can be named as survivorship beneficiaries to a jointly owned asset such as a bank account, security, or real estate.

Again, designating persons as beneficiaries under any of these mechanisms should be done only after considering all of the potential consequences. The prior blog article regarding joint and survivorship accounts is a perfect example of the terrible consequences that can occur when such planning is done without the assistance of a professional.

Why do I want to avoid probate?

Two major reasons that people identify as reasons to avoid probate.

• My assets remain confidential and are not open to inspection by the public. Probate estates are open to public inspection because they are maintained in court files. If you wish your family's net worth to be absolutely confidential, you may want to plan to avoid probate.
  
• Probate can be expensive and involve delays. Because assets in an estate require judicial orders and paperwork to access and transfer, family members sometimes must hire professional advisors to assist them with the probate administration process, satisfy court filing requirements, and file documents accounting for even simple and undisputed expenditures and distributions. This takes time and money.
  

Is probate ever beneficial?

In some situations, a person may actually want court-oversight and supervision of his or her assets upon her death. The probate court has particular expertise in this oversight and also has the power of the Ohio judicial system to protect a decedent's assets from theft, mismanagement, negligence, fraud, or other misconduct. Many times, the probate court can prevent the problem before it happens depending upon the nature of the estate.

Get advice

Estate planning requires careful thought, a review of your assets, and professional guidance. Reaching your goals, protecting your family, and minimizing taxes and expense can be accomplished, but shoddy planning can create headaches, litigation, and needless expense and delay. Talk with your attorney about these issues and get your questions answered.