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What happens to your property when you pass away? With certain exceptions, the answer to that question is generally up to you. Yet, many people are surprised to know that steps taken during their lifetime can have a significant impact on how their property – including homes, stocks, cars, bank accounts, or any other item of value – transfers when they pass away.
The words “probate court” often send shivers down the spine of future Executors of estates. In reality, the probate process does not have to be an ordeal if you have proper counsel. Still, putting all of your property through the probate process is both involved and expensive – at a time when emotions and finances might be fragile. Understanding how to avoid probate court starts with understanding which items of property are probate assets.
Your estate is comprised of all of your property or assets. But Maryland law only recognizes certain assets as part of your estate for the purposes of probate court. Specifically, the “net estate” in probate court is made up “property of the decedent” or person who has died. This definition might seem broad, but it is actually pretty narrow. For example, John Smith dies and leaves behind his wife, Jane Smith. If the Smith house is in both John and Jane’s name, then it is not necessarily a probate asset because it is not exclusively in the name of decedent John Smith, and Jane may have the right of survivorship. But if John’s car is only in his name, then it is a probate asset which must pass through probate court.
Suppose John has an IRA and a life insurance policy, are these probate assets? They are not probate assets, so long as both assets have beneficiary designations attached to them. Because these assets involve contractual obligations to pass them on to beneficiaries, they automatically pass to the designated beneficiaries at the time of John’s death. This concept is known as “passing by operation of law,” and alleviates the probate court’s responsibility to pass on the assets. Similarly, joint bank accounts are not probate assets because they are not solely in the name of the decedent.
As this example shows, there are steps you can take to avoid a significant probate process. Especially if you are married, you may have already taken some of these steps as a matter of course. However, successfully avoiding probate requires focused planning. You have to understand your assets and understand what will happen to them when you pass. Even if you draft a comprehensive will, the assets passed through the will are likely probate assets. What if you are single, or a recent widower who has inherited most or all of your spouse’s assets? How are you going to avoid probate then?
One popular tool for avoiding probate is the creation of trust. A trust is a legal designation, governed by a document, which can direct the distribution of property. In fact, your trust functions as an extension of you. You can even place property and assets in the name of the trust during your lifetime. But the trust is still technically a different legal entity than you. Therefore, assets in the name of the trust are not probate assets and pass according to the terms of the trust. Trusts have numerous advantages. For instance, you can place conditions on gifts, provide for real estate transfers, or have the profits from stocks or other income earning property distributed to your family over time. Again, all of this property will not be considered probate assets because it is in the name or your trust.
Estate planning is a unique process, but a little planning now can pay dividends later. By working with the estate planning attorneys at Altman & Associates to avoid the probate process as much as possible, you will save on time, money, and frustration in the future. In the event of your death, your family’s peace of mind is critical. The compassionate estate planning and probate attorneys at Altman & Associates treat every client and every family with an individualized approach, setting up your estate plan, will, and trust from scratch. Please visit us at one of our convenient office locations in Columbia and Rockville. Contact us by phone at (301) 468-3220 or to schedule a consultation.