Preventing Probate

Proper preparation prevents probate.

I'm sure many of you have heard the term probate when it comes to settling someone's estate. Some of you may even have had to participate in the services of probate court and can attest to both the costs and challenges associated with the whole experience.

So what is Probate court? Well it is a court specifically for the purpose of settling the affairs of the deceased or incapacitated. Just like most court systems, it is both expensive and challenging to navigate. Often once extended family gets involved, other lawyers are hired to represent the interests of various competing parties.

The unfortunate reality of our fallen nature is when money is on the table; a lot of people will come forward with wild stories meant to establish a claim on the estate. Often the person with the most money, or appetite for conflict, will win.

At the expense of the deceased.

Often these legal battles can decimate the value of the estate while the persons who could have used it most are left with what amounts to table scraps.

So how can this be avoided?

There are two options:

Will

A will is a document that can be as simple as a list of who gets what that is signed and dated by the deceased. In general it is legally binding and sufficient to establish what assets of the estate should be distributed to what parties. 

Such a document will generally be upheld in probate court as binding. But that’s the rub. 

The estate still goes through probate. All assets become public record and transfer or income taxes come into play. 

In some states, real estate inheritances are taxed at 25% market value. So the children of the deceased could owe 100k on a 400k house for example. Cash due that year. 

So a will is better than nothing by far, and easy enough to do. In fact, in a short time we will be offering a completely free will service with a partner. 

How can probate and most of these taxes be avoided?

Trust

A trust is different from a will in the sense that it is considered an owner of various assets within the estate of the deceased and can contain more detail in general regarding distributions and ongoing management of the estate. 

It permits the establishment of an executor whose only role is to assure the conditions of the trust are executed properly. Often this will be a trusted friend who has no financial interests or claims upon the estate. In my case, I used an elder at my church. 

You can also declare who the guardians for your children should be AND who has power of attorney should you become incapacitated. 

Conditions regarding how children receive assets can be established too such as distributions at various milestones such as marriage, birth of a child, etc. You can also specify that they must not be addicted to any substances, or a member in good standing in a church. 

What’s more, the real estate tax transfer is generally avoided because the trust already owns the house, and other real assets, before the death of the deceased. 

Trusts can also be funded by life insurance death benefits tax-free. Legacy trusts can then be established to create a self-perpetuating multigenerational dynasty of wealth transferred through many generations. At the birth of every child, a policy is purchased from the proceeds of previous death benefits. Thus perpetuating a generally unlimited source of multigenerational wealth over generations. 

What stage of life is appropriate to purchase a trust?

Generally we recommend as soon as a household begins having children. There can be other considerations such as having some degree of net worth at least in the five figures. If you own a home, then it is also likely time to purchase a trust. 

While a trust should generally be established as early as possible; this doesn’t mean you can’t establish a trust later in life. It truly is never too late. 

In fact, often children of elderly parents are often in the position of trying to convince their parents to establish a trust to avoid potential conflict and expenses. 

If you find yourself interested in wanting to learn more, please know that we offer in-house estate planning at our distinctly Reformed firm and would be happy to help. 

Please Book a Meeting or send us a message if you’d like to discuss this with a qualified financial professional.