Not all Probate Avoidance Strategies are Created Equally

A properly drafted and funded revocable living trust (RLT) is one of the best probate avoidance strategies currently available.

During Incapacity

RLTs can address incapacity issues of the grantor.  Estate planning documents such as a General Power of Attorney (GPOA) can address incapacity issues, however, these types of documents are not always honored by third parties and can thus fail.

Scenario 1: Husband becomes incapacitated.  Husband had a GPOA stating his wife should be given the authority to manage his assets during his incapacity.  A third party, such as a financial institution where the husband owned assets, may or may not honor the GPOA.  If the third party doesn't honor the GPOA, the wife now probably has to go to probate court for an incompetency hearing in order to manage her husband's assets.  Weeks or months typically pass.  Court appearances occur with lawyers, judges, and witnesses.  A considerable amount of the wife's time and money may be required during all of this.  All of these probate court proceedings are publicly available information.  And at the end, the wife may finally get some paperwork from the court forcing the third party financial institution to allow her to manage her husband's financial accounts.

Properly drafting and funding an RLT does not have this potential probate involvement during incapacity.

Scenario 2: Husband becomes incapacitated.  Husband had a properly drafted and funded RLT, which, among other things, stated that during his incapacity, his wife is appointed as the successor trustee with the authority to manage his assets.  The third party financial institution would allow the wife to manage her husband's assets during his incapacity under this scenario, with no probate court involvement, no time delay, no additional costs, and no loss of privacy.

Beneficiary designations on retirement accounts or life insurance policies cannot address incapacity issues.  Titling assets as Joint Tenancy with Rights of Survivorship (JTWROS), Tenancy by the Entirety (TE), Pay-on-Death (POD), or Transfer-on-Death (TOD) cannot address incapacity issues.  These strategies can avoid probate, but only upon someone's death, and therefore cannot address incapacity issues which by definition only occur during someone's lifetime.

Upon Death

If a husband and wife die simultaneously in a car accident, any assets owned JTWROS with only the husband and wife as joint owners, TE, or POD/TOD accounts only listing the other spouse as the beneficiary will fail.  And any assets they owned such as retirement accounts with the spouse as the primary beneficiary and no contingent beneficiaries will fail.

All of those assets will go through probate after all, having failed to be retitled outside of probate, due to the lack of a living beneficiary to assume ownership.  When all non-probate retitling possibilities fail, probate court is required to retitle assets upon someone's death.

If the RLT assets transfer to certain other trusts upon the grantor's death, and are drafted in a certain manner, the beneficiaries may be provided creditor protection and spendthrift protection.

Even if assets held JTWROS, TE, POD/TOD, or otherwise passing by beneficiary designation successfully pass upon the husband's death to the wife, these are outright transfers.  So now the wife owns those assets outright.  And, until further notice, those assets will not have any protection from the wife's potential creditors nor any spendthrift protection.

To summarize, JTWROS, TE, POD/TOD, and beneficiary designations can avoid probate upon someone's death, but not always, such as in a case of a simultaneous death of a husband and wife with no other beneficiaries listed.  And they only take effect upon death and therefore cannot address incapacity issues.  GPOAs are sometimes not honored by third parties, necessitating probate court involvement during incapacity.

In contrast, properly drafted and funded RLTs can be structured to avoid probate in all of the scenarios described above, during incapacity and upon death, and therefore may be a better probate avoidance strategy than combinations of JTWROS, TE, POD/TOD, beneficiary designations, and GPOAs.  RLTs may also be structured to provide non-grantor beneficiaries with creditor and spendthrift protection.

If you are a prospective client and would like to learn more about hiring us for a financial consultation, where, among other things, we would review your current estate planning documents and provide recommendations, please visit our Schedule Meeting page.



Mike McErlane, DO, MBA, CFP^®, CFA^®, RICP^®, EA, MCEP^®

Mike McErlane is the owner and founder of Comprehensive Financial Planning for Doctors, LLC based in Frisco, Texas.

Comprehensive Financial Planning for Doctors, LLC (CFPFD) is an Investment Adviser registered with the Texas State Securities Board.  Registration of an Investment Adviser does not imply any specific level of skill or training.  CFPFD only transacts business in states or jurisdictions in which it is registered or exempt from registration.  A copy of CFPFD's current disclosure brochure is available through the Securities and Exchange Commission's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

The opinions and analyses described are subject to change at any time without notice.  Any information is considered general and is not intended to provide any specific advice or recommendations.  Your use of the information is at your sole risk.  You should consult with your financial advisor, attorney, tax advisor, insurance agent, or other professional advisor before taking action on any information or implementing any strategy.