Probate (Avoiding It!)

At the Elder Law Practice of H. Todd Whatley, our attorneys and staff want to do everything that they can to help families through all of the legal aspects of losing a loved one without adding more stress and heartache to an already very difficult time. If your estate goes through probate, it can be an expensive, time consuming, and burdensome process to your family. That is why we do everything that we can to avoid probate and that difficult process.

WHAT IS PROBATE?

Put simply, probate is the legal process of getting a deceased person’s assets out of their name. These assets will be transferred according to the wishes expressed in the deceased person’s will, or if there is no will, then by the rules of the State of Arkansas, which will in most cases distribute assets to the closest living relatives first and go down a list according to the law. Whether there is a will or not, the distribution of these assets is done by the court, requires filing fees to be paid, and in the end, depends on a judge’s schedule. These things can make the process very time consuming and expensive, and going through probate can easily become a substantial burden on the family of the deceased. That is why we want to help you avoid probate whenever possible.

HOW CAN I AVOID PROBATE?

Probate can be avoided by making sure that assets are not in your name at your death. Please understand that a Last Will and Testament will NOT protect you from going through probate. Your will simply tells the judge how you want your assets to be divided as it goes through probate.

You can avoid probate in a number of ways. The most popular method of avoiding probate is by creating a Trust. A trust is a legal entity that can hold property. We transfer all allowed property into the trust so that it is not owned by you at the time of death. Since property is not owned by you at death, it does not have to go through probate. Also, if you have a taxable estate, then a trust can save you hundreds of thousands of dollars in taxes if done correctly.

This sounds great, but trusts are not the “end all” they are touted to be. If they are needed, they are beautiful. However, they are more expensive at the beginning and they must be carefully maintained through the years. If you do not have a taxable estate and you have a simple distribution plan, you can avoid probate in other ways that are much cheaper (and involve very little attorney participation).

Payable on death (or sometimes called Transfer on Death) designations of bank accounts is a great way to make sure assets transfer to someone else at your death.  We can also do about the same thing with your home by creating a Life Estate Deed which passes the house to someone at your death. However, there are some significant Medicaid issues with that process. So transfer the deed only with proper advice from an attorney that has a good understanding of Medicaid.

Last Will and Testament

You will hear on the radio and from pretty much everyone that you HAVE to have a will.  I may be committing “attorney heresy” but I am of the belief that not everyone needs a Last Will and Testament.  And, I will go even one step further to say that many elderly people are actually worse off having a will that says what they think they want it to say.  Let me explain.

Having a will does NOT avoid probate.  However, having a will does not guarantee that you go through probate either.  Probate is only for the items that are “stuck” in your name at the time of your death, such as a home or bank account that is only in your name.  Therefore, if your home and bank accounts have a co-owner, then the other owner will own that asset at the time of your death.  (there are significant problems with co-ownership though)  This is a common way to avoid probate.  Also, if there is a co-owner or beneficiary to the insurance policy or the bank account, then the money there will go to the other owner or the beneficiary of that account.  You make a beneficiary to a bank account by having the account “Payable on Death” to a person.  This still allows the account to be owned by you solely, but then at the time of your death, the money then goes to that person.

A Last Will and Testament is the road map for the probate process.  It states who gets what at the time of your death and possibly who should be the guardian of your minor children at the time of your death.  It tells the court what to do or what your preferences are.  A Last Will and Testament is necessary for late in life marriages where the money needs to go to your children rather than to your spouse, or if you want your money to go to someone other than your children, such as a charity.

How can a will make you worse off?  When my elderly clients come in for estate planning.  Many of them want to save money by doing only a Last Will and Testament.  I ask them what they want to do with their stuff when they die.  Their reply, without fail is “of course, I want to leave all my stuff to my spouse and then to my children”.  My reply is “of course, that is NOT what you want to do”.  They ask (with a startled look on their face) “Why would you say that?”.  Before, I answer that question, let me just say that making this very small mistake, of putting your spouse as the immediate first beneficiary of your will, can cause you to lose ALL of you estate to the nursing home.  Non-elder law attorneys do this all the time, and I personally think it is approaching malpractice to do a Last Will and Testament that way.

My answer is that my estate plan for the elderly client is not so much focused on death but on the issues that surround a person toward the end of their life. First, how do 99% of all elderly people own their possession?  Jointly with their spouse.  That means that they own it together and that when one of them dies the other spouse automatically owns all of the property.  Therefore, your statement in the Last Will and Testament is simply repeating what is automatically going to happen.  The first spouse dies and the other spouse then is the surviving owner.  Then, what is the problem with my will saying the same thing that is going to automatically happen?  Medicaid!!!!  We can get a spouse on Medicaid and protect a very large portion of the estate.  We do this by using the Medicaid laws to get as much of the property to the “well spouse” (in their name alone) and leave nothing for the spouse that is in the nursing home.  So, the well spouse owns everything and the sick spouse is in the nursing home and getting Medicaid.  Now, what happens when the “well spouse” dies in a car wreck going to see the sick spouse?  If they did their will with Legal Zoom or even the attorney that did what they told them to do, all of the assets go to the spouse in the nursing home.  That spouse looses their Medicaid benefits and the entire estate will most likely be lost to long-term care expenses.  You never thought of that did you?!  That one adjustment to your estate plan, done by an experienced elder law attorney, can protect your entire estate.

I’ve obviously not told you everything that you need to know to do this correctly due to it taking many more pages than you care to read.  There are some major legal issues that have to be handled to get this done correctly, but it can be done and you cannot do it by yourself.  That is simply a fact.  Actually, not having a Last Will and Testament (if it says to leave everything to your spouse) is best, compared to the Legal Zoom Will, when you are elderly.  Arkansas law says that only one third goes to your spouse and two thirds goes to your children.  This is much better than having an improperly written Will.  Spending the money it takes to get a true professional to do it correctly can literally save you your entire life savings.

Revocable Living Trusts

Revocable Living Trusts (RLT) are very popular these days for a number of reasons.  The primary reason is to avoid probate, the process of getting things that are “stuck” in your name to your heirs through a court process.  Probate is time consuming, expensive and public.  I can think of very limited circumstances (actually none right now, but if you really pushed me, I MIGHT could come up with a reason) why you should go through probate.

A trust is a legal entity that can own property.  Having a RLT avoids probate by changing the legal owner of your property to the trust.  You actually deed your house to your trust, you change the name of your accounts to the trust and (possibly) make the trust the beneficiary of your retirement accounts.  Doing this makes sure that these assets are not stuck in your name at the time of your death.  The trust owns the property but someone has to manage the trust, a Trustee, and typically that person is you as the creator.  You are the Trustee of the trust.  You manage it.  Also, there is a beneficiary of the trust.  That person is typically you also.  Therefore, you create a trust, but you are in control of the trust and you benefit from the trust.  Also, there is someone designated to step into your shoes should something happen to you.  That person is the successor Trustee.  They can step in and manage the trust if you become incapacitated or die.  That is how we avoid probate.  Since the trust is the owner, the trust doesn’t die and there is someone to manage the trust if you can’t.  It is a beautiful tool.

A trust does have some issues.  First, it is significantly more expensive and a hassle to set up.  There are more attorney fees for creating a trust.  We have to put in all sorts of contingency language and standard language to cover all the requirements to create, run and terminate the trust.  However, when compared to the expense of probate, it is typically much less expensive in comparison.  Probate fees typically run 5-7% of the amount of the estate.  A small $200,000 estate, including the full value of the home and any bank account that goes through probate, will usually cost between $10,000 and $14,000.  In comparison, a trust will cost in the neighborhood of $1750 to $2500.

A trust is also quite time consuming to get set up after it is created.  You have to get all your appropriate bank accounts into the trust and that means changing ownership or beneficiary forms.  However, it is much better when you do those things now than paying an attorney to do it at the time of your death with court supervision.

Many people believe and are told possibly by attorneys, that the RLT does protect your assets from Medicaid.  A trust does NOT help you with Medicaid.  Since you are the beneficiary of the trust, Medicaid will count everything in the trust as yours and for your benefit, including the house, which is normally not counted by Medicaid.

Other ways to avoid probate:

Beneficiary Designations: Make someone else the beneficiary of your accounts (rather than co-owner) by making them Payable On Death (POD) or Transfer On Death (TOD).

Life Estate Deeds (or Beneficiary Deeds): These are two ways to make sure real estate goes to the people you want without going through probate.  There are VERY significant issues with each of these relating to Medicaid that you must understand. Do NOT execute these documents without a full explanation of how Medicaid will treat these deeds and whether it is right for you.

Irrevocable Trusts (gifting Trusts, Medicaid Asset Protection Trust “MAPT”): This is a trust used in very limited circumstances to protect assets.  You must understand the pros and cons of this type of trust and its implications with Medicaid prior to creating and funding this trust.

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