Avoid Probate to Save Time and Money
Jane Darling died last December. Mary Darling, her daughter went to see a lawyer to settle her mother's final affairs.
Jane Darling managed to accumulate some assets while raising her three children. After sorting through the paperwork, this is what was found.
Jane owned her own home. The house is titled in her name and her husband's name, joint with right of survivorship. When her husband died five years ago, nothing was done to memorialize his death on the land records at the local court house. The house is worth about $150,000.
Jane also had a checking account. When her husband died, Jane had his name removed from the account and substituted her daughter's name so that her daughter could use the account to pay bills in the event of an unexpected health problem. The checking account had a balance of about $10,000 at her death.
Jane also had three CDs at the same bank. Like her checking account, she added her daughter's name to each account, joint with right of survivorship. The CDs were worth approximately $20,000 each at Jane's death.
When Jane's husband died, he left her with about $100,000 in stock. The account was placed in Jane's name and, at the suggestion of her broker, she designated that the account be Transferred On Death equally to her three children.
Jane also had a small IRA - about $20,000. The IRA was made payable to her husband when it was open 20 years ago. She never changed that. The same thing was true with the life insurance policy of the same size.
Finally, Jane left a Will designating her daughter Mary as the executor of her estate. The Will leaves all of her assets equally to all three children.
Probate versus Non Probate
The house is titled jointly with survivorship but the joint tenant was her husband. He is dead. So, Mary will need to file the paperwork necessary to have Dad's name removed from the deed. Once his name has been removed, the house will be in Jane's name alone and therefore subject to probate.
Unfortunately, the same is true for both the IRA and the life insurance.
However, there is good news. The checking account and the CDs are jointly titled with the daughter, Mary. Those assets will pass directly to Mary free of any probate administration. The brokerage account will also pass free of probate because the three children are named as equal Transfer On Death beneficiaries.
So, $190,000 of this estate will require formal administration through Probate Court. The rest will not. While this is not a problem, it is less than ideal. After all, if Jane had set up all of her assets so that the entire estate would avoid probate, the time and cost of administering her affairs would have been cut from about $10,000 to less than a third of that amount. This could have been easily arranged with a little forethought and preparation.
Who Gets What?
The checking account and CDs are payable to Mary. Even though the Will leaves all of Jane's assets equally to the three children, the checking account and the CDs are not subject to the provisions of the Will. This is what it means to "avoid probate". That is a great way to save time and money. However, did Jane really want those accounts to go to just Mary? Maybe yes, maybe no. But, the law doesn't care what Jane "wanted". The law says those accounts go to Mary.
Summary of Assets
1. House (Title JTWROS with husband) |
$150,000 |
2. Checking Account (Title JTWROS with daughter) |
$10,000 |
3. CDs (Title JTWROS with daughter) |
$60,000 |
4. Stock |
$100,000 |
5. IRA (Payable to husband) |
$20,000 |
6. Life Insurance (Payable to husband) |
$20,000 |
|
$360,000 |
Conclusion
Avoiding probate is a great way to save time and money. However, it is important to be sure that all of your assets are set up to go to the person you wish. Don't leave others guessing about your true intentions. Take the time to look at all of your assets. Go to the bank, call your broker and call your life insurance agent. Be sure your beneficiary designations are up to date.
Jane's IRA went through her estate and will also be subject to income tax. And, to the extent that Jane's "total" estate exceeds $338,000, she will owe some Ohio estate tax. Those taxes would use up about a third of the IRA. Both of those taxes could have been avoided if Jane had made the IRA payable to a charity. It is a small portion of her estate. However, she would have been able to make a bigger financial benefit to a charity than she was able to make with her own children. It's probably the most "efficient" way to make a charitable gift.