How to Avoid Probate

probate court docket with gavel

Many people want to save their families the hassle and expense of going through the Michigan probate process after they pass away. Probate is the process where the court facilitates administering your estate for the benefit of the persons listed in your will, if you have one, or through other methods set forth by law if you do not have a will. However, not all assets pass through the probate process, so learning which assets may be subject to probate and which assets may not will be useful in determining how to establish your estate plan. To the extent possible, many people would prefer to have their assets transferred to their beneficiaries or loved ones without the supervision and public exposure of probate court. But a common misconception is that writing a will avoids probate: it does not. Here are some options to avoid probate, along with guidance about which estate planning vehicles may be right for you and your family.

Why You May Wish to Avoid Probate

Probate is the process of court-supervised settlement of a person’s estate after they have passed away. It involves naming a personal representative (in other states, this person may be called the “executor” or “administrator,” who acts on behalf of the estate. That person has many responsibilities to the estate:

  • Inventories all the estate’s property
  • Puts values on each item as of the date of the decedent’s death
  • Oversees the sale of items not specifically gifted
  • Settles the estate’s debts
  • Administers the court process
  • Notifies creditors, both known and unknown
  • Communicates with the court and beneficiaries
  • Provides an accounting of financial status of the estate
  • Pays the decedent’s last income taxes and estate taxes, if any
  • Distributes the remaining assets to the person’s heirs or beneficiaries

The larger a person’s estate, the more costly and complicated the probate process becomes because there are more assets to account for, handle, and distribute. In addition, conflict between heirs over the validity of a will or each person’s inheritance can draw out the probate process for months and sometimes years. Until any will contest is resolved, beneficiaries may be left waiting to receive their inheritance.

Many people also attempt to avoid probate because they don’t want to make their financial affairs public. Probate is a public process, and any person can search the probate records to find information you may otherwise wish to keep private. Additionally, part of the probate process involves publishing a public notice to creditors -- inviting creditors to make any claims they may have against the estate within a certain period of time (and if they do not, the creditor will be barred from coming forth in the future to make a claim). Then the will, the estate inventory, and any other matters of concern to the estate are filed in the probate court record, which is open to the public. While most people don’t go looking into others’ personal affairs, creditors, local journalists, and disinherited heirs might. If you want your affairs to remain private, you will want to look into options for how to avoid probate.

Does a Will Avoid Probate?

No. One of the most common misconceptions a client has about estate planning is that if they have a “will,” their estate will not pass through probate. Unfortunately, this is not true. A will merely directs the probate court who will administer their probate estate, who may make decisions about their funeral arrangements, who they have nominated to be the guardian of their minor children, and who should receive their probate assets when the process is complete. Unfortunately, some persons who attempt “do it yourself” wills or consult with a general practitioner who does not specialize in estate planning may complete only a will, thinking they have now avoided probate. It doesn’t. In fact, while there are statutes that control what happens if a person dies without a will, the probate court’s main job in estate administration is to review the validity of a person’s will and make sure the personal representative follows it in distributing the estate’s assets. If your goal in estate planning is to avoid probate, you are going to need to do more than simply execute a will.

How to Avoid Probate

If you die owning assets only in your name, and you have not created a trust, you have not created any special deeds, and you do not have any beneficiary or other contractual designations, then all your assets will go through probate, whether or not you have a will. That’s why, as a general rule, probate avoidance techniques are designed to transfer property out of your name, either before or after your death. So if a will does not avoid probate, how do you ensure your assets avoid probate? There are several options, and some of them are free.

  • Beneficiary designations, Transfer on Death (TOD) designations, and Pay on Death (POD) designations, typically all avoid probate, so long as there is no dispute over the designation and so long the beneficiary is not a minor and has capacity to receive the asset.
  • Trusts avoid probate, but only to the extent that the trust is “funded” with your assets. A trust can be funded by either re-titling the asset out of your name and into the name of the trust, or on your death, by naming the trust as the beneficiary of the asset.
  • Joint Ownership of an asset avoids probate, but only for the death of the first owner. If two people own an asset jointly, and they die at the same time (with no other way to avoid probate in place) then the asset will need to pass through probate.
  • Certain Deeds - certain types of deeds will avoid probate for real property. For example, Michigan allows Enhanced Life Estate Deeds, commonly known as “Ladybird deeds,” to avoid probate.
  • Business ownership- if assets are owned by an LLC or another business entity, it will avoid probate to the extent that the operating agreement of the LLC or business entity has succession planning in place.
  • Vehicles and other items titled through the Michigan Secretary of State [SOS] - The SOS has forms the next of kin can use to transfer ownership of a vehicle or other asset titled through SOS on the death of an owner. However, there are certain limits as to the value of the vehicle, and it will not avoid probate if the person to whom you want the item transferred to is not your next of kin.

Using a Trust to Avoid Probate

Many people have heard about using a trust to avoid probate. This works because when you “fund” a trust, you transfer assets from your name into the separate trust entity. Your trust documents name one or more trustees (you can be one of them) whose job it is to maintain the trust assets and use them for the benefit of named beneficiaries (you can be one of these as well). There are two main kinds of trusts:

  • Revocable living trusts
  • Irrevocable trusts

If you want to have access to your assets and use them to support yourself and family during your lifetime, a revocable living trust may be the right choice. This type of trust gives you control over the assets while you are alive, and gives you the option to transfer assets back out of the trust, should you need them. Or you can simply name your revocable living trust as the beneficiary of your account, so the asset only goes into your trust on your death. An irrevocable trust, on the other hand, puts the trust assets out of your reach as the grantor, setting it aside for your beneficiaries, and making it so you cannot change the terms or access the money any longer. Some persons use irrevocable trusts to protect assets, reduce their taxable estate, or plan for Medicaid if a nursing home is needed.

Trusts can also be useful if you want to put conditions on when and how a beneficiary receives their inheritance, and what they can use it for. There are special provisions you can use for:

  • Trusts are great vehicles for you to place your assets if you have minor children or children who are still young adults and who may not be ready to handle an inheritance outright, at a young age.
  • Special needs trusts, which shield disabled people from losing public benefits when they inherit property
  • Spendthrift trusts, which give beneficiaries the benefit of assets while avoiding immature financial decisions
  • Earmarking funds for college, a wedding, buying shares in a family business, purchasing a home, or other specific expenses
  • Giving assets to a charity or nonprofit organization
  • Providing monthly income to beneficiaries over time after your death
  • Property maintenance trusts, which set aside money for taxes, utilities, and upkeep of family homes or other property
  • Pet trusts, which provide directives and funds for the care of precious, exotic, or long-lived pets

Because a trust is like a separate entity, it lives on after you pass away, avoiding probate control over its assets. The successor trustee takes control of the property within the trust immediately after the grantor’s death or incapacitation and has the authority to use and distribute it according to the terms in the trust documents.

Many people pair a trust with a “pour over will.” This document names the trust as the sole beneficiary for any assets that would pass through probate at the time of your death. While this does not avoid probate, it does ensure that if there is a “forgotten asset,” for example, an account where you forgot to put a beneficiary designation, the pour-over will directs that the asset will go into your trust when the probate process is complete.

Inter Vivos Gifts

One of the easiest ways to remove items from probate is to give them away while you are still alive (inter vivos or “between living people”). By passing on heirlooms, collections, and even savings to your family during life, you can avoid probate over those assets, since they are no longer in your name when you die. There are tax consequences if you give too large a gift at one time, so be certain to talk to your estate planning attorney or accountant to create a plan to space your inter vivos gifts out over time.

Jointly Ownership of Real Property

Another choice is to own property, most often real property, such as houses, vacation property, and time-shares, jointly with a spouse, child, or other person you intend to receive it after you pass away.

When married couples purchase property together, they obtain it as “tenants in the entireties” unless they take direct action to do otherwise. This contains built-in joint ownership, meaning that when one spouse dies, the other will have full ownership of the property automatically, with additional creditor protections.

You can jointly own real property with others as well. By titling a piece of property to two or more people as “joint tenants with full rights of survivorship,” each person on the title will share an interest in the property for as long as they are alive. When one joint tenant dies, the others retain ownership while avoiding probate.

Michigan also allows “Lady Bird deeds,” which transfer real property to your intended beneficiaries while you are alive, but retains the right for another person (including the grantor) to use it during their lifetime. For example, you and your spouse may gift your home to your children, but use a Lady bird deed to continue living there until you each pass away.

Each type of property ownership has specific language that must be included in the deed to make sure it will pass to the joint owner on your death. Your estate planning attorney can help you prepare, execute, and record the deed correctly.

Joint Accounts

Joint ownership is most commonly used for real property like the family home or a vacation cabin, but you can also add people to bank accounts and other assets to avoid probate over those accounts. This is often a straightforward process completed with the help of a banker or financial advisor. However, you should be careful about who you choose to own property with. Joint ownership happens immediately when you add the person’s name to your account. If they have creditors, go through a divorce, or face other financial challenges, you could lose your funds to collections.

Payable on Death Bank Accounts

To avoid joint ownership concerns, many bank accounts can also be made “payable on death” [POD]. By completing your bank’s forms, you can designate a beneficiary now, and the funds will be paid to the beneficiary (and the account closed) upon your death. You may designate one or more beneficiaries. In that case the funds will be divided based on percentage. However, some pay on death designations don’t allow for successor beneficiaries in case your first choice dies before you do--you will need to check with each institution’s policies. That also means you may need to update them if an intended beneficiary passes away. Finally, you should never name a minor or a person who is receiving government benefits as a beneficiary of any account, as there are additional complications and court involvement that can occur, and the possibility of losing benefits.

Retirement and Investment Account Beneficiary Designations

Most retirement accounts (including IRAs, 401(k)s, and 403(b)s) have similar beneficiary designations. In fact, your financial advisor may have required you to complete a beneficiary designation when you created the account. IRAs and stock brokerage accounts can also be made “transferable on death” under the Michigan Uniform Transfer-on-Death Securities Registration Act, with a similar form to the one used in pay-on-death bank accounts. When creating an estate plan designed to avoid probate, it is important to make sure these designations remain accurate and up to date, especially after a divorce.

Avoiding Probate Court Requires Advance Estate Planning

Finding the best ways to avoid probate for your assets requires careful planning and a clear understanding of the financial laws and tax consequences behind the various tools. The larger your estate, the more you need the assistance of an experienced estate planning attorney.

At NSSSB, we know how to structure an estate plan to minimize or avoid probate supervision over your estate. Our Ann Arbor estate planning attorneys are happy to meet with you to review your portfolio and other assets, identify your desired beneficiaries, and develop strategies to avoid probate and maximize your heirs’ inheritance after you pass away. We consider the full range of probate avoidance strategies to find the right balance of ownership, control, and use of beneficiary designations for your estate. Click here to schedule a consultation with one of our experienced attorneys.

Categories: Estate Planning