16 Dec 2011

There are three common ways to avoid probate in Georgia:

1. Owning something with a right of survivorship,
2. Pay on death accounts, and
3. Putting your assets into a trust.

There is a fourth way that only applies to real estate—creating a life estate. This is quite rare these days as trusts provide the same benefits with greater flexibility. For this reason, this post focuses on (1) rights of survivorship, (2) pay on death accounts, and (3) trusts.

Joint Tenancy With Right of Survivorship

A joint tenancy with right if survivorship means you and someone else own property jointly. The portion of the property owned by the person who dies first automatically transfers to the survivor. This is the “right of survivorship.”

Property transferring in this way does not go through the probate process. The transfer is effective immediately.

This is primarily used for real property (land, buildings), although it may be used for some other types of property, such as vehicles. Some bank accounts or other financial accounts may be owned jointly with a right of survivorship.

If you have a bank account set up this way, then all of the money in that bank account passes to the joint owner automatically when you die. The money does not pass through probate, and it is not subject to the terms of a will. (This is called a joint account with rights of survivorship, not a joint tenancy, although the same principals apply.)

Many people do not realize that property owned jointly with a right of survivorship passes automatically to the survivor. It is important to understand how your property—land, vehicles, bank accounts—will be transferred when you die. Otherwise, you can make all the wills and estate plans you like, but they may not have the effects you desire.

The joint tenant (or joint account holder) does not need to be a family member or spouse. It can be anyone.

Pay On Death Accounts

Pay on death accounts are where you can designate one or more beneficiaries to receive the assets of the account on your death. The transfer happens immediately, just as it does in a joint account with rights of survivorship. (Although the beneficiary will have to prove the death and their own identity before they can access the account.)

The difference between a pay on death account and a joint account with rights of survivorship is that a joint account requires two account holders. A pay on death account can be owned by only one person.

An account can often be joint with rights of survivorship and a pay on death account. An example would be an account held by both husband and wife. When the husband dies, the wife becomes the sole owner of the accounts assets. Then, when the wife dies, the account’s assets are transferred to the people listed as beneficiaries (such as the couple’s children).

The beneficiary does not need to be a family member—it can be anyone.

Using Trusts to Avoid Probate

Trusts avoid probate by transferring assets during someone’s life rather than after their death. This is called an intervivos transfer (latin for, roughly, “during life”). To understand how this works, let’s review trusts generally.

What is a trust?

A trust is a separate legal entity. A trust is created when someone gives legal title of ownership in an asset to the trust. This person is called the grantor or settlor. This means the asset is no longer legally owned by the individual—it is owned by the trust. So a home held in a trust has a deed listing the trust as the owner rather than an individual. Similarly, a car held in trust has its title in the name of the trust, not in the name of an individual.

A trust must also have a trustee. The trustee has the legal duty to manage the assets of the trust. This means the trustee can buy or sell assets in the trust’s name. So a name held in a trust may be sold by the trustee.

However, the trustee can only do so for the benefit of the beneficiary. All of the assets held in a trust are to be used for the benefit of someone, and that someone is called the beneficiary.

To state it more simply, a grantor/settlor transfers assets to a trust to be managed by a trustee for the benefit of a beneficiary.

Revocable Living Trusts—Why this works

The settlor of a trust may also be the trustee and the primary beneficiary of the trust. This allows the person who owned the assets transferred to the trust to still legally control them as trustee. Further, they must use those assets for the benefit of themselves.

The effect is that it’s just as if you held legal title to your stuff. They key is to make sure your trust has more beneficiaries than yourself, otherwise it will be viewed as an invalid trust.

The downsides of trusts

Trusts are expensive to create. Trust documents can be lengthy and difficult to understand. Further, you have to actually transfer the assets to the trust. This can be time consuming and burdensome.

Trusts are also expensive to maintain. Records must be kept to show what the trust owns and does not own. Trusts are also taxed as separate entities. (You may be able to treat a trust as a pass-through entity, but you should consult a CPA about this.)

Other probate avoidance tools

There are two other probate avoidance tools worth discussing. The first is a life estate. The second is an intervivos gift.

Life Estates

A life estate is a form of real estate property ownership. In a life estate, property is transferred to someone for their life, and then to a second person after the first dies. The way to do so in a deed is to say “To A for life, and then to B.”

This was a common probate avoidance technique in the past. As with a joint tenancy with rights of survivorship, the interest in the property is transferred automatically on the death of the holder of the life estate.

This is far more rare these days because the same effect can be obtained through a trust. Plus, a trust is more flexible than a life estate. For example, the owner of the life estate will likely find it difficult, if not impossible, to get a mortgage on the property. After all, who wants to have an interest in property that disappears when a third party dies?

Further, if the owner of the life estate wants to sell the property, they can only sell their life estate portion. Anyone who buys it will lose the property ones the original life estate owner dies. (For example, imagine the following life estate: To A for life, and then to B.  X buys A’s life estate. When A dies, X loses his right to the property, as the remainder of the property immediately transfers to B.)

Trustees do not have these problems.  The quick takeaway for this is to use a trust rather than a life estate for probate avoidance.

Intervivos Transfers

A transfer of assets during life will not be subject to probate. Remember, this is how a trust avoids probate—all the property is transferred before the settlor dies.

At the same time, intervivos transfers may still be subject to gift and estate tax. If you wish to make intervivos transfers to avoid probate, you should discusses the tax consequences with a CPA specializing in this area first. It may be more prudent to use a trust to accomplish your goals. It may even be more wise to use a will.