Where There’s a Will...
Plan Now to Avoid Probate Later

by Alan Haft

Ever heard of Probate Court? It can be a nightmare. Probate Court is the place where estates of the deceased are settled. While death is by far not the most pleasant subject to address, if you are a parent or still have your parents, it is something you need to think about now so that later on no one in your family has to experience the difficult process known as “probate.”

In most cases, when someone passes away, a Will dictates who-gets-what. The assets of the estate are distributed, and everyone goes home. But in some cases, “who-gets-what” is not as easy as it sounds. It takes only one person to step forward and say, “I should have gotten that” for things to go bad. If matters escalate, the estate can then be sued. This is how you can end up in Probate Court.

Probate can be time-consuming, frustrating and expensive in terms of legal and other fees. Imagine: a parent passes away; and a person (not necessarily a family member) comes forward and makes a claim to the estate. Although it is certainly not the norm, I have witnessed many cases where the transfer of assets has been upheld in the Probate Courts.

To avoid Probate Court, one of the greatest gifts you or your parents can leave behind is a “Living Trust.” A Living Trust is a legal entity created by an attorney that owns assets that are fully controlled by the parent during their lifetime. At death, the Will, nested within the Living Trust, dictates who-gets-what. If someone isn’t happy with their inheritance, or an unscrupulous stranger lays claim to the estate, it doesn’t matter. Assets passing to heirs through a Living Trust generally cannot be contested, which is by far one of its greatest attributes.

A Living Trust can also do many other things including, but not limited to (a) helping reduce estate taxes, if any, (b) providing other important legal documents such as Living Wills that grant designated third parties the legal authority to carry out the wishes of the incapacitated, and (c) helping ensure assets remain in the bloodline of the family and are not passed to anyone else such as sons- and/or daughters-in-law.

Eliminating the possibility of probate by creating a Living Trust is one of the most important estate planning concepts you and/or your parents should strongly consider. Here are a few things you should think about as well:

1 Where are those Documents? A death in the family is obviously quite devastating. It makes matters worse when you have to locate important documents left behind. Do yourself a favor… put your family’s important documents in one easy-to-find, well-organized, secure and fire-protected safe place as soon as possible.

2 IRA/Qualified Plan Designations: the transfer of IRAs and other qualified plans such as 401ks can be a real mess for the person receiving the accounts. For IRAs, make sure the beneficiary designations are current. I’ve seen many cases where the IRA beneficiary designations were outdated, making the transfer of the asset to the new recipient not only a very frustrating experience, but also one that sometimes caused harsh and unnecessary tax ramifications as well. As for qualified plans such as 401ks, I strongly urge my clients to consider transferring the 401k to an IRA to avoid many of the pitfalls that could come up when a beneficiary receives the account. Although new laws have eased the way for inheritance of these qualified plans, the laws can still be quite complicated and cause unnecessary taxes. In almost all cases, the tax-free transfer of a 401k to an IRA is one of the most basic essentials of a highly efficient estate plan.

3 IRAs Part II: if you have an elderly parent(s), and you are the beneficiary of their IRA, ask yourself what you plan on doing with the account after you receive it. Chances are you can maintain the inherited IRA as your own and only have to withdraw what’s called a “required minimum distribution” every year. Doing so will allow you to stretch the IRA over your lifetime and thereby reap the magical rewards of compounding interest through the tax-deferred accumulation an IRA provides. But if you plan on cashing out the account, I would advise you and your parent(s) to seek council with a qualified financial and/or tax advisor. In some cases, cashing out an IRA or converting it to a tax-free Roth IRA might make more sense.

4 Speaking of taxes, there are other Taxation Issues to address: Within nine months following a death, beneficiaries of an estate must file one last tax return for the deceased. Understanding taxes that could be owed at death and how they are going to be paid is an important part of the planning process that should not be ignored.

5 Lastly, Long Term Care should be an essential part of any parental plan. If an elderly parent gets sick or requires prolonged care, who is going to pay for it? Perhaps a Long Term Care policy should be considered. But if a parent is elderly or not in good health, those policies can be cost-prohibitive. Will the parent have to use his or her own assets to pay for assistance? What about Medicaid programs? There are many laws surrounding Medicaid, and it is possible to shelter assets from what is commonly referred to as “the Medicaid spend down” that requires a parent to basically go broke before the government steps in to help. Protecting assets against the Medicaid spend down is a highly complex process and one that requires the attention of a skilled elder-care attorney.

Failure to plan is a plan to fail. So, do yourself a favor: Address these issues with a qualified advisor so that a potentially difficult process will be easier to endure, thanks to a little planning.