When it comes to estate planning, the most common thing I hear from clients is that they want to avoid the cost, expense and complications of probate. On the other hand, estate planning itself can also be time-consuming, confusing and expensive.
Avoiding Probate
There are many ways to avoid probate on personal property. Bank accounts can use a payable on death (POD) form and brokerage accounts can use a transfer on death (TOD) form. Retirement accounts and insurance contracts (life insurance and annuities) list account beneficiaries. Most financial accounts can bypass probate with a beneficiary designation if done properly and kept updated.
Real estate is different. Over the years, I have been told that apart from certain joint ownership situations, the only way to avoid probate when real estate is involved is to use a trust. As a result, I’ve often advised my clients to seek the advice of counsel to develop a trust-centric estate plan.
Trust-Centric Estate Plan
According to attorney Alexander Guin of the law firm of Daughtry, Woodard, Lawrence & Starling, if an individual wants to leave real property to one or more beneficiaries, there are a number of ways to do it, with trusts being one such option. Given the other means for transferring assets outside of probate, trusts aren’t needed in every estate plan. We can save our clients complication and significant expense by using trusts only when necessary.
Non-Probate Asset
Mr. Guin explained that real estate is generally a non-probate asset with interest automatically vesting in a decedent’s named beneficiaries (or intestate heirs if no will) as of the date of death. The heirs may need to probate the will for the purpose of clearing claims of creditors and providing marketable title, but the value of real estate is not included in the gross estate for the purpose of probate fees and costs unless it is sold by the personal representative.
Mr. Guin further explained that if the estate has no debts, the real property will not be brought into the estate to pay claims. Creditors typically have 90 days to file claims after a notice to creditors is published, but certain claims, like taxes or Medicaid liens, may extend up to two years if no notice is published.
Mr. Guin pointed out that titling of the real property can also be a tool for estate planning. Property held by two or more individuals as joint tenants with right of survivorship (JTWROS) also avoids probate. As long as the deed is properly drafted, real property can be owned JTWROS with one owner holding 1% and the other holding 99%. This is useful as it keeps the real property out of probate, and enables the 1% surviving owner to avoid probate, and benefit from a step-up in basis on 99% of the property value.
It is not technically true that the only way to pass real estate in North Carolina without probate is joint ownership or trusts – though they tend to be the primary ways. Passing real property through a will does not have to increase the cost of probate and using beneficiary designations on financial accounts can significantly reduce the cost of a probated estate. Consult with the proper legal and tax advisors on individual situations.
