Avoid Probate

Applying the following methods can help achieve all the “alleged protections” a revocable living trust provides and more. Some of the most common uses of trusts (but by no means exclusive) include: 1. the ability to define an age or ages at which time trust assets are distributed to a beneficiary, 2, incorporate provisions to protect a married child’s inheritance in the event he/she ever gets a divorce, or has financial difficulties, 3. create a provision  for a family member with disabilities or “special needs” in order not preserve eligibility for government benefits Plan, 4. provide instructions to a successor trustee to manage the grantor’s assets and care for the grantor in the event of incapacity of the grantor, 5. create provisions to leave assets for the use of a surviving spouse with restrictions on distributions in the event of re-marriage of a surviving spouse.

Revocable Living Trust – Liability to Creditors for 2 Years

Placing assets into a revocable living trust does not avoid the decedent’s creditors claims. In fact, most jurisdictions, including Florida, allow the creditors of a decedent’s estate to reach assets placed into a revocable living trust to pay the debts of the decedent.  Florida law indicates the successor trustee has a duty to pay known or reasonably ascertainable creditors of a deceased grantor out of trust assets if the assets in the probate estate of the decedent are insufficient to do so. Creditors have 2 years from the date of the death of a decedent to make a claim against the estate of a decedent.  In order for a creditor to reach the assets in a decedent’s revocable trust after the death of the grantor, the creditor will have to first have the debt deemed a valid debt of the decedent in the probate court. Placing assets in a revocable trust does not avoid creditors of the grantor upon death. However, placing the assets in a revocable trust makes it more difficult for a creditor to perfect the claim if a probate is not opened for the deceased grantor’s estate.

Use a “Enhanced Life Estate Deed” (Ladybird Deed) on property to Avoid Probate

The most popular method for older clients who want to avoid probate and ensure their property passes to their children was to use a quitclaim deed conveying a life estate to the parent, with the remainder to the child. This is referred to as a traditional life estate deed. The goal was to ensure that on the death of the parents, the children would own the home and not have to open a probate. With that type of deed, for IRS, gift tax purposes there is an outright gift of the remainder to the children at the time of conveyance. An IRS gift tax return would also have to be filed if the remainder interested was valued over $13,000 (in 2012). The parents also give up control of the remainder interest in their home upon transfer. This type of life estate deed results in an immediate conveyance of the remainder and constitutes a disqualifying transfer for purposes of Medicaid nursing home eligibility. In addition, if the parent wants to convey or mortgage the property in the future, all remaindermen must sign the paperwork. If there is an outstanding mortgage on the home at the time of conveyance of the remainder, that conveyance is subject to State of Florida Document stamps. Finally, if the child has creditor problems problem or gets a divorce, the remainder interest could be attached. A positive attribute of the traditional life estate deed is the parent’s preserve the step-up in basis for the children,

The “Enhance Life Estate Deed”. The probate avoiding method of the new millineum! With this type deed there are technical legal “terms of art” used whereby the person conveying the interest retains an interest for life in the property, and also retains the powers to sell, convey. lease, mortgage, or do anything he/she desires with the property.

With the enhanced life estate deed, the need for probate is avoided.

With the enhanced life estate deed, probate is avoided because the parent/person who did the original conveyance to the child retains all of the rights to do whatever they want with the property while they are alive. This in legal jargon is called a “life estate”. The children, or other loved ones would be named as being entitled to a future “remainder interest” when the person holding the life estate dies. Upon the death of the parents the homestead passes free and clear of the decedent’s creditors claims so long it is given to surviving lineal descendants (blood relatives).

One must be careful when creating an Enhanced Life Estate deed, or any other deed. Using the wrong language, conveying to the wrong persons, or including or deleting legal terms could result in unintended consequences. For instance, a person cannot convey their homestead during lifetime if they have a spouse or minor children. Such an attempt to convey would be voidable. Wording of the deed is important. It is not something an office supply store or internet form will properly achieve.

Caution – Joint Tenancy accounts – Adding people to your deed. Unintended results

Many people will add a family member to an account as a “joint owner” or just add their family member to an account (i.e John “OR” Sue). With the joint account scenario, the IRS could very well consider the adding of a person to the account as a “gift” of the portion transferred.

There are additional legal issues that can arise with using the “OR’ designation. Creditors of the added person could try to attach the assets in the account if there are judgments against the added person. In addition, the person being added to the account inherits the original person’s basis in the property. The result is that when the originating person on the account dies, the added person will lose a step-up in the basis of the assets for income tax purposes, thereby being subject to higher capital gains taxes upon the added person’s sale/liquidation of the asset.

Titling of Other Assets – can avoid probate as well.

So the next excellent tool a person can use to avoid probate without the need for a revocable living trust is to properly title bank accounts and investment accounts.

For bank accounts use of the Transfer on Death designation (TOD) or sometimes referred to as Paid on Death designation (POD) allows a person to name a beneficiary who will own the asset upon the passing of the primary account holder. Upon the death of the original account holder, probate is avoided, the step-up in basis for income tax purposes is preserved, and the claims of the designated beneficiary creditors cannot reach the assets as long as the original account holder is alive and retains title. Most importantly, the account title holder does not need the approval or signature of the designated beneficiaries to do anything with the account and can change beneficiaries as desired.

So, Can You do this Yourself?”

Many things can be accomplished without the guidance or direction of an attorney. The above are legal transaction you really need the help and guidance of an attorney who is trained in dealing with the use of these titling techniques and use of the enhanced life estate deed.

Gregory G. Glenn, Esq. is a Certified Elder Law Attorney by the National Elder Law Foundation. He has practiced elder law since 1995. Prior to law school Mr. Glenn worked as a management consultant at the Big Eight accounting firm of Coopers & Lybrand, CPA’s and also at Dunn & Roth, CPA’s as a staff accountant. He has his law degree from MSU and completed his legal studies at the University of Miami School of law. His focus in elder law is on estate planning for the over 65, disability planning, probate, and Medicaid eligibility planning. His office is in Boynton Beach, Florida.