Picture this…your wife has passed away, you’ve just finished paying off your home, and now you begin to re-assess what your plan is for when you will die. Who will handle things for you? Where will your possessions go? How much will it cost my loved ones? These are all great questions, and it is never too early to being thinking about and planning for the inevitable.
Your possessions will likely go to your loved ones, especially if you already have a will in place. They will use your will, go to the court, and follow the court’s procedures for distributing all of your assets. However, did you know that you can often times avoid the court systems (and the hefty fees / lawyer bills) by doing some planning in advance? Estate planning, to be specific.
If you die without a will, the state determines where most of your possessions will go. See our previous article on “What if I Die Without a Will“. If you took our advice and made a will, then you still have to go to the court to “probate” the will. This means that you will go before the judge and the court will oversee the process of making sure that the will is valid and that its instructions are carried out. That typically means an attorney, many months of delay, and of course, expenses. Depending on the complexity of the estate, it could run on the low end of $3000 to in excess of $10,000. Probating a will is not cheap.
Fortunately, there are ways to bypass the probate process. Usually, the biggest asset that people would like to have skip probate is their residence. Because it is an asset with a deed, the only way to change the owner after the owner has passed away is through the court system. That is, unless you plan ahead by using some estate planning techniques.
A life estate is not for everyone. It is a property deed which leaves you with ownership of your house and property while you are still living. Your property deed is what shows the world who owns your house and land. It is a piece of paper filed with your local probate court, and typically shows who you bought it from and in whose name the property is now in. It is very similar to a car title (but not quite). With a “life estate deed”, when you die, the person or people you have listed in this special deed will automatically become the new owners of that property. Instantly. No court system required (at least after death…you should record your deed before you die, which does involve a trip to the local probate office). The people you give the property to can’t evict you, because they are not the owners of the property until you pass away. Thus, it remains YOUR property until your death, and then it instantly becomes THEIR property.
The biggest drawback is that once you do it, you’ve done it. There’s no turning back. Thus, if you have a feud with your children, and you decide later on that you don’t want them to have the house and land…there’s not much you can do. You already gave it to them (but they don’t get it until you die). Now, if they “want” to give their portion back to you, that’s another story (you’d need to contact us if that applies to you).
Thus, depending on your family situation, that may or may not be the right choice. It bypasses probate, but you give up some flexibility. Another options would be a revokable trust.
A trust is an entity that holds assets for the benefit of one or more persons, and is managed by a trustee. Thus, you can put possessions into a trust, have the trustee watch over them, and then the trustee will do with the possessions what you direct him or her to. So, for example, you could put your house into a trust, and direct the trustee to give it to your son, your oldest daughter, but not your youngest daughter. And you can tell the trustee to only do that once all of your children have turned 30. The trustee is bound to do all of that. A revokable trust is one in which you can put the property into and then make changes, to include pulling the property out of it at any time. Thus, if 10 years from now, you want to bless you youngest daughter whom you previously did not want to give a dime to…you can. You can also write your son out of the trust benefits at the same time. You can add two more houses, or take away all the houses and put in a ten dollar bill. You have quite a bit of freedom in this regard.
Now, when you couple the power of a trust with your estate planning, you can kill two birds with one stone (no pun intended). You can bypass the court system (probate) when you die by putting stuff into the trust. You can also make changes to what is in and what is not, and who gets what, very easily. Simply inform the trustee. You don’t have to go through all of the formalities of re-drafting a will every time you want to make a change as to who gets what. The only real drawback is the upfront cost of setting up a trust. It will cost a bit more than simply doing a will or even including a life estate on your property. But, you get added flexibility, and the money you save by avoiding probate will often times more than make up for the additional costs of planning.
There are lots of ways to handle passing on your real estate to your loved ones. Hopefully this helps explains just a few. The will ensures that it will happen as you want it to, but you will have to go through the probate court to make it happen. The life estate option allows you to avoid the probate court, but once you establish the new deed, it is very hard to undo it. Finally, the revokable trust is a bit more complicated, and will likely cost more than a will upfront, but the added flexibility and cost savings after you die will likely make up for it. You may find that the added up-front costs are well worth it in the long run for your loved ones who will be receiving your hard earned assets. This list of options is NOT exhaustive, and thus, you really need to sit down with an attorney to go over all of the possible issues with YOUR unique scenario. Depending on the size of the estate, you will also have many tax issues to consider, too, but that discussion is for another day.