Clients often come into my office for estate planning meetings and tell me they wish to avoid probate. Often, these clients have had a bad experience with a long, expensive, and emotionally charged probate proceeding that occurred after the death of a parent or other family member. Other times, clients have a negative opinion of probate that has been formed through receiving information from friends and family that is not always entirely accurate. In this article, I will explain what probate is, discuss some of the advantages associated with avoiding probate, and describe how this can be accomplished. It should also be noted that all of the information in this article will focus on South Dakota law.
1. What is Probate?
Probate is the court process of proving the validity of a will and distributing assets in accordance with the will's provisions. Probate also occurs when you die without a will and you have assets in your name alone. In summary, probate involves having the court appoint a "personal representative" (South Dakota's term for executor), who will then gather all of a deceased individual's assets, determine any liabilities that need to be paid, and distribute the remaining assets out to the heirs or other beneficiaries (also called devisees) named in the will. Typically, probate takes eight months to a year to complete. One of the reasons that probate takes so long is that, after starting a probate, we have to wait four months for potential creditors to make any claims they may have against the estate.
In South Dakota, if an individual owns more than $50,000 worth of assets or any interest in real property, in his or her name alone, at the time of his or her death, a probate proceeding will be necessary to transfer these assets out of the decedent's name and into the name of the decedent's heirs. A trust can help avoid probate, since assets can be transferred to the trust prior to death and then transferred to the beneficiaries through the administration of the trust after the individual's death rather than through the probate process. Also, beneficiary designations and transfer-on-death or payable-on-death designations can be used to avoid probate.
It is worth mentioning that probate often is not as bad as many believe. In South Dakota, for example, our access to the court system is very good. Hearings can be scheduled on the court calendar fairly quickly, and costs and attorney's fees are often substantially lower than in other jurisdictions. If a probate is uncontested, it can be administered informally, which means that no court hearings are required. Also, probate is a process that provides transparency for heirs and ensures that all of your final bills get paid in a timely fashion.
2. Estate Tax Planning
In the past, avoiding estate tax was a major concern for many people. This is because, compared to current estate tax exemption levels, the amount that each person could pass at their death without incurring an estate tax bill was very low. For example, in 1997, each individual could only pass $600,000 at their death free of estate tax. In 2017, each individual can pass $5.49 million. Now that this exemption level has risen dramatically, few individuals need complex trusts designed to avoid estate tax liability. However, agricultural producers should keep in mind that the value of real property has also risen significantly, making it important for agricultural families to discuss estate tax with their Certified Public Accountant and their attorney. An appraisal may be needed to determine the fair market value of their land and to determine if more complex estate planning is appropriate.
Many clients wish to avoid probate because they value privacy. Probate proceedings are a matter of public record. This means that a third-party could attend all of the hearings in open court, get a copy of a will, and gain knowledge about all of the assets that an individual owned at the time of their death. I have found that clients involved in agriculture are especially motivated by privacy, and seek to avoid probate for this reason. South Dakota's trust statutes surpass other jurisdictions in their ability to maintain privacy, and many clients choose to take advantage of this protection.
4. Complex issues with a child or other beneficiary
Using a will and going through probate may not be ideal for individuals with children or other beneficiaries that cannot or should not receive a large amount of assets at once. For example, when an individual has a child with specials needs, the sudden influx of assets may disqualify the child from receiving assistance from government programs. In these cases, a special needs trust should be carefully drafted to ensure that the beneficiary continues to receive benefits.
Also, clients often choose to use a trust to delay distributions to children or other beneficiaries that lack the age or maturity to handle money. For example, if a couple with young children passes away, and such couple does not have a trust set up, their children will receive all of the assets in a bulk payment as soon as they turn 18. With a trust, these distributions could be held until the children are older and are more equipped to handle finances. Also, if a child has substance abuse issues or financial problems, clients often wish to hold such child's inheritance in trust for the child's lifetime and direct the trustee to make distributions for the child's benefit.
Speaking to an attorney that practices in your jurisdiction is the best way to determine the type of estate plan that will work best for you. I always advise people that even if they choose another attorney, they should avoid using online forms and trust packages sold by out-of-state companies. Unfortunately, we often see such "do-it-yourself" lawyering turn into a big mess that takes much more time and expense to clean up after the individual passes away.