Many clients ask about probate, specifically what probate is and how to avoid it. Below you will find some basic information. However, this information does not replace a comprehensive estate planning conversation with an experienced estate planning attorney.
What is Probate?
Probate is a legal proceeding during which the assets of a person who has passed away (referred to as Decedent) is transferred to the beneficiaries. There are two types of beneficiaries: (1) Devisees, and (2) Heirs. Devisees are the beneficiaries named in a will. Heirs are determined by the law. If the Decedent did not leave a will or any written estate plan the heirs are determined by law, also referred to as intestacy. In intestacy cases, the Colorado Probate Code determines the heirs by intestate succession.
According to Colorado law a probate has to remain open for at least six months. One of the most common complaints I receive from clients is that the probate takes long and they cannot find closure. But compared to other states, probate in Colorado can be rather simple, especially if the original will is available, there is no real estate outside of Colorado, and the probate is uncontested. Any real estate outside of Colorado will trigger an ancillary or second probate in the other state. Still many clients prefer their loved-ones not having to go through any probate process. The loss of a loved-one is stressful as is and clients usually want to make the process as easy as possible for their loved-ones.
How to Avoid Probate
Below are some of the most common, but not a comprehensive list of, tools used to avoid probate:
1. Revocable Living Trust
Trusts are no longer just for the rich and famous. Nowadays, trusts are more commonly used for modest estates due the probate avoidance benefits. Similarly to a will, you specify who should receive the assets and when. In addition to probate avoidance, a trust also allows for additional beneficiary protections, such as creditor or divorce protection. However, the trust needs to be funded properly, meaning certain assets need to be retitled and beneficiary designations need to be coordinated. I do not recommend setting up a trust without involving an estate planning attorney due to the complexities of retitling and potential income and capital gains tax implications.
2. Pay On Death, Transfer On Death or Beneficiary Designations
For certain assets, such as bank accounts and investment accounts, beneficiary designations can be added. Those designations are commonly referred to as “Pay on Death” or “Transfer On Death.”
While such designations can help avoid probate for such accounts, they do not give the beneficiary any protections against divorces, creditors or protection from themselves. Additionally, this plan only works in case of death. Oftentimes clients experience incapacity, and incapacity requires either a Power of Attorney or some form of trust to allow an agent to act on our behalf.
3. Joint Ownership
Oftentimes family members are added as joint owners on deeds and bank accounts to allow for a smooth transfer in case of death. While joint ownership can prevent probate, it comes with other dangers. For example, if the joint owner has to declare bankruptcy, your house and bank account are now part of the proceeding. Same applies to divorces. Even responsible heirs can run into such issues. For example, I had a client who added his son on as a joint owner on the family business before he became my client. Son was very responsible and happily married. However, his wife developed an illness, and medical expenses caused son to declare bankruptcy. As a result, the family business became part of the bankruptcy proceeding. If you own a business, a solid estate and business succession plan is crucial to secure the future of the business.
In summary, various estate planning tools are available to achieve certain goals. A good estate planning attorney will ask the right questions to understand your specific circumstances and goals, and help you determine how to accomplish your goals.