“When we are planning for posterity, we ought to remember that virtue is not hereditary” – Thomas Paine
We have all heard the cautionary tale – don’t go through probate. Probate is bad. Probate is expensive. You don’t need an estate-planning attorney – handle your estate through a trust, through nonprobate assets, through payable on Death accounts.
It’s all nonsense. It’s flash and flutter, and turning you away from the more pressing concern – the minimization or elimination of estate taxes – to a rallying cry that will have – in most instances – less an effect on the wealth you pass on to succeeding generations. Many of the “avoiding probate” techniques do not reduce taxes.
1. Handle your estate through a trust. Common request, and very popular in Connecticut and in Florida. The problem with putting your entire estate in a trust is that for you to use the assets in the trust, you (as the grantor) must have indicia of control over the assets. If you have indicia of control over the assets, then the assets are Federal Estate and in most instances state Estate taxable.
2. Nonprobate assets. Nonprobate assets are assets that pass outside of the probate estate – nothing more. These assets are life insurance, retirement accounts, and assets that are payable on death like, in New York, the Totten trust accounts. These assets – by their very designation – move outside of the probate estate, but could not only be included in the taxable estate, but also trigger income with respect to decedent. Income with respect to decedent is taxed at the top marginal rate after approximately $1,300 of income to the estate.
The only method to avoid probate and reduce your estate tax liability would be to divest yourself of a sufficient amount of your assets during life. With that lost of estate must come with a complete loss of control.
Probate is not scary – but it does involve a court and with a court, comes court supervision. In most instances, you will need an attorney to shepherd you through the process.
We recommend getting a will and a cogent estate plan together and reviewing those documents every five years or so. Avoiding probate is not the be all and end all of estate planning. It is one tool to consider among the range of options for reducing or eliminating estate taxes to the greatest extent possible.