By Jonathan Rikoon
Partner
Debevoise & Plimpton LLP

Conventional wisdom offered by many books and seminars proclaims the perceived benefits of avoiding probate. This usually entails arranging for assets to be disposed of through other devices such as living trusts, joint property, Totten trusts, “POD” (payable on death) accounts, life insurance and pension and retirement plans.

The key question: why avoid probate?

  • In some states there may be large probate court filing fees, not to mention legal costs of preparing probate court papers.
  • If the will is challenged there can be delay, uncertainty and substantial legal costs.
  • Even without a will contest, the normal probate filing process can cause delay of several weeks before beneficiaries start to receive distributions. (But: a small joint account can tide the family over until the probate filing is complete.)
  • Generally contents of a will are on the public record. Many individuals prefer to keep these matters private.
  • Compensation paid to the executor or personal representative who carries out the will is fixed by state law or the probate court. (But: a will can override those rules.)

Trust can be Challenged Like a Will

By no means do your problems disappear if the estate avoids probate. Consider...

  • Living trusts as well as other non-probate alternatives can be challenged in much the same manner as wills are challenged (although the costs and burden of proof may be more difficult).
  • Trustees need to be paid just like executors, although the fees are calculated differently (and can be set in the document, just as in a will). What’s more, there are additional costs associated with creating and operating the trusts during life that are not incurred if only a will is used.
  • There may be additional lifetime recordkeeping and tax filing requirements for using an inter vivos (living) trust instead of a will.
  • The trust may also become a public record. Here’s why: There will almost always be some assets still owned by the individual at his death, like items acquired after setting up the trust, Social Security checks, etc. Thus it is almost always advisable to have a will, even if it is a simple will that directs the executor to transfer all of the assets of the estate directly to the inter vivos trust. And in many states once the will is filed in probate court the living trust will also have to be filed (so the court can figure out who the beneficiaries are that need notice of probate). Thus the trust can become just as much of a public record as a will.
  • Use of a qualified lawyer to prepare your operative documents, as well as obtaining good tax advice from a financial planner, accountant or attorney, is just as important whether someone chooses to use a will or a living trust. Therefore the cost of professional planning fees is not reduced by avoiding probate.
  • In complex situations, where an individual owns business interests or real estate, or has a blended family or estranged relatives, the lifetime planning to avoid needless post-death costs, taxes and conflicts is much more significant and should be addressed whether or not probate is avoided.

Another Myth: Avoiding Probate Means Avoiding Taxes

Not the case. Sure, there are many methods your tax professional can find to minimize taxes. But just because assets are disposed using a living trust, doesn’t mean they will be exempt from taxes. The tax-minimization techniques, which are relevant only to multi-million dollar estates, generally work equally well with a will or a living trust.

Still, avoiding probate makes sense in some situations:

  • In some states probate is particularly expensive, may require close court supervision and may preclude nonresidents from acting as executor. Each state’s law is very different on these particular items.
  • Setting up certain types of trusts prior to marriage can reduce or eliminate the ability of a spouse to force a marital election against the other spouse’s will, in some states.
  • Using a living trust instead of a will may help avoid the delays associated with probate of a will if there are no known next of kin (or if they cannot be located).
  • A living trust is sometimes more difficult to overturn.
  • A living trust may be a better choice than a will for a person who anticipates his inability to manage his own financial affairs. That’s because the trust permits a trustee selected by the individual, rather than a court appointed person, to manage the individual’s financial matters during a period of incapacity based on the terms of the trust rather than state law. (But: a durable power of attorney can provide much the same flexibility especially if the assets are modest.)
  • A living trust (possibly in conjunction with a will and an LLC or family partnership) is a useful tool to reduce postmortem costs and delays if an individual owns real estate (usually residences) in multiple states or countries. (But: beware that in some foreign countries trusts are disfavored and actually increase gift taxes and death taxes as compared to outright bequests.)