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AVOIDING PROBATE:
IS IT REALLY WORTH IT?

by Christopher G. Stoneman

A number of years back a gentleman named Norman Dacey came out with a book entitled “How to Avoid Probate” or some such title, in which he espoused the virtues of avoiding probate and exhorted his readers to fill out the forms which he supplied and thereby make it possible for them to attain a hassle-free and relatively economical transition into the hereafter. If the sales of his book were anything to go by, it would appear that his advice did not fall upon deaf ears. In this article we will take a brief look at some of the pros, cons and mechanics of probate avoidance.

As readers of the first article in this series already know, if a person dies owning property in his own name alone (as distinguished from jointly with another with right of survivorship, for example), it is going to be necessary for someone to “probate” the deceased’s estate before that property can be legitimately passed on to the people who are ultimately to inherit it. The best place to begin this discussion of probate avoidance would therefore seem to be a general description of what that process involves, especially in Vermont. How much of a business is it, or may it become? How much extra expense and delay does probate “normally” involve, assuming that we can agree on what constitutes normality?

An example - hopefully one mirroring a fairly common fact pattern - may be the best approach. Let’s assume a single person of substance, someone named Mildred who has been a successful entrepreneur, say; who dies unexpectedly in her late sixties survived by two siblings, a son of one of them, and two nieces who are the daughters of a third, deceased sibling; and who had a lifelong interest in American folk music. Her total net worth at death is $700,000, made up as follows (the parenthetic “P” indicates probate property, and “NP” is for non-probate property):

a house in Vermont $ 70,000 (P)
assorted stocks and bonds

300,000 (P)

an automobile

5,000 (P)

an insurance policy on her life

10,000 (NP)

a Keogh plan

75,000 (NP)

CDS and savings accounts

110,000 (P)

a condominium in Florida

70,000 (P)

books, furniture, pictures, etc.

60,000 (P)

  ___________
$700,000

The bulk of Mildred’s estate (615,000/700,000) is probate property. Only the insurance and the Keogh are nonprobate.

Let’s further assume that the decedent has her things in good order and has recently made a will dividing her assets among her relatives and an ethnomusicological organization of the kind referred to above. She makes corresponding designations for her Keogh plan and leaves her insurance to a friend whom she has also named as her executor. In short, she is well organized, a model of preparedness. What will be entailed in the probate of an estate such as Mildred’s, how much will it cost, and how long is it likely to take from start to finish?

The first step will be for Mildred’s friend to file the will in the probate court for the district in which Mildred resided. Notice of this filing will have to be sent to all those people who would have been entitled to receive Mildred’s estate if she had died without a will (because they will in a very real sense have been disinherited once the will becomes proven). Notice has also to be sent to any person who is named in the will, such as the folk music organization, so that the beneficiaries will know of their good fortune. Mildred’s heirs under Vermont law will be her two siblings and the two children of her deceased sibling. Note that the son of Mildred’s living sibling is not an heir because his parent (a sibling of Mildred) is alive at Mildred’s death. However, having been named to receive a legacy in his aunt’s will, the son is entitled to notice as a prospective beneficiary if the will is established. The heirs may consent to the probate of the will without further ado; or they may if they prefer withhold consent and go to a hearing in at least 30 days’ time at which they may lodge any objections they may have.

If all goes well, Mildred’s friend will be appointed as executor and will assume responsibility for inventorying and valuing Mildred’s assets; publishing a notice to creditors in a local newspaper; accepting or rejecting the claims of any who come forward; preparing and filing all necessary tax returns and paying the taxes; giving a written account of how he has discharged his duties as executor; and, in assuring no one objects, obtaining a decree from the probate court for the distribution of Mildred’s net assets. All of this may occupy a year or more or it may be completed within a matter of months, depending upon the complexity of the estate and the diligence of the executor. This does not mean that everyone must wait for a whole year before receiving anything from the estate. One or more interim distributions can, and in may cases should, be made along the way. The executor will be entitled to compensation for his services based primarily upon the amount of time which he can demonstrate that he has justifiably been obliged to spend on the job.

Now let’s look at the cost factor first: what will be the costs of administering this estate which may fairly be said to be attributable to probating the estate and which would not have been incurred had some other set of arrangements (to be discussed later) been put in place before death? The answer is that in all likelihood there will be very few - a modest probate filing fee; perhaps a larger legal and/or accounting fee than would otherwise have been incurred (but bear in mind that probate avoidance does not obviate the need for the preparation of the returns, nor indeed, contrary to what is sometimes asserted, does it reduce estate or income taxes).

As for time delays, it may take longer to wind up the decedent’s affairs if her estate has to go through probate. But the time-consuming aspects of estate administration tend to center around taxation which, as noted, is present (or, in a much smaller estate, absent) in both situations. There are, however, two elements which for some people tip the balance in favor of probate avoidance: first, the fact that probate is a public process, which may in a given case mean an undesirable loss of privacy over the disposition of an estate; and, second, the fact that the probate court may in some cases maintain jurisdiction long after the discharge of the executor and the distribution of the estate. This will happen when a person sets up a trust under their will (a “testamentary trust”), which requires that every year until the trust is terminated the trustee is obliged to prepare a detailed account of the previous year’s transactions, submit it to the beneficiaries and obtain their and the court’s approval. Some people regard this judicial supervision as desirable mismatch as mistakes or mismanagement of the trust’s assets are presumable that much more likely to come to light.

Now let’s assume that Mildred has been advised that avoidance of probate is just what she needs. She understands that it will not save her or her estate any taxes, but she likes the idea of increased privacy and of having everything more or less taken care of during her lifetime. What typically are some of the things which she will need to be doing to bypass probate - if not total avoidance, at least avoidance with respect to the bulk of her estate?

The first and principal thing that she will need to do - short of following the advice one sometimes sees on bumper stickers: “I’m avoiding probate; I’m spending it all as fast as I can” - will be to set up a revocable living trust.

We discussed trusts in Article III and will not repeat what was said then. We should, however, say a word or two about the revocable living trust, especially in its probate avoidance function. As its name indicates, such a trust is revocable or amendable - usually by the settlor (or grantor, to use an alternative term) but also possibly by someone acting in the settlor’s behalf. It is called a “living” trust because it is established during the lifetime of the settlor (in contrast to a “testamentary” trust which is established by provisions in the donor’s will). It becomes irrevocable upon the death of the settlor, after which it functions very similarly to a will. Indeed, it is sometimes referred to as a “will substitute” and should normally contain all or almost all of the “dispontive” provisions which would go into the will if there were no living trust.

The “funding” of a revocable living trust will determine the extent to which it can facilitate probate avoidance. By funding is meant that actual transfer of assets into the trust. Compare these two scenarios:

A sets up a revocable living trust into which he initially places, say, $100. At the same time, A makes a will bequeathing his entire estate to the trust. Has A “avoided” probate? As to the $100 the answer is yes; as to the rest of his probate assets, the answer is no. However, at least in Vermont (but not in New York), substantial privacy will have been accomplished because of the fact that Mildred’s plan is not in her will, (the public document) but in the trust agreement; and as noted, there will be no annual judicial accountings.

Suppose, on the other hand, that A set up the revocable living trust as in the first scenario but during her lifetime (crucial) transfers all or the bulk of her probate assets into the name of the trustee. In that situation she will have avoided probate as to most of what she owns. Privacy will be similarly protected.

Conclusion

Probate avoidance avoids court supervision over those assests which are nonprobate, which will include assets actually placed in a living trust during the decedent’s lifetime (but will not include whose which pass into the trust pursuant to the decedent’s “pourover” will). Nominal (e.g., $100) funding of a revocable living trust is not without its benefits, since, if coupled with a pourover will, privacy and accounting avoidance will have been obtained. While there may be other, very real advantages to be derived from funded revocable living trusts (to be discussed in a later article), the revocable living trust may not always be the sine qua non for probate avoidance it is often cracked up to be

Christopher Stoneman

The complete list of Christopher Stoneman articles is: