What is Probate?
Probate is the court process of administering a deceased person's estate. The estate's representative must wind up the decedent's affairs, which includes identifying assets, paying debts, filing tax returns, accounting to the court, and distributing assets. Probate court administration also publicly discloses the decedent's financial affairs and assets.
The benefit of probate is that a judge supervises the deceased person's estate. If you don't have a friend, relative, or professional that you trust to do this for you, then you may need the added protection of probate.
As you can imagine, this is a time-consuming and lengthy process made more difficult by Rhode Island's system of part-time probate courts. A probate can take more than six months—possibly more than a year—to administer. The fee to file a probate is based on the value of your personal property and can be as much as $1504. On the other hand, a properly drafted revocable trust can be administered in much less time.
Furthermore, the probate process usually requires an attorney, who has to be paid, and your estate representative is also entitled to be compensated. Your estate must pay these fees as well as the court fees and other costs. Probate normally costs thousands of dollars.
Can’t I just put my heir’s name on my property as a joint tenant and avoid probate?
Holding real property or financial accounts as joint tenants with a right of survivorship seems like a simple solution, and in some cases it is. But beware of the drawbacks.
If you put someone else’s name on an account or deed, you have given that person your property at your tax basis. That means, if you bought your home 30 years ago for $50,000 and today it’s worth $200,000, and your heir does not live in the house, there would be a $150,000 capital gain, potentially costing your heir $22,500 to $30,000 in taxes. But if your heir inherits the property, it receives a “step up” in basis. So, if your heir sold it for $200,000, there would be no capital gains tax.
Also, the judgement creditors of your joint tenant can use your property to satisfy that judgment. For example, if your joint tenant has a serious auto accident and the judgement is not satisfied totally by insurance, your property could be sold to satisfy that judgment.
How can I avoid probate?
Fortunately, we now have many ways to avoid the lengthy and costly probate process.:
Payable on Death (POD) and Transfer on Death (TOD) Bank Accounts transfer assets to the person or entity you chose after your death.
Real Property Deeds can give an heir the right to use and/or occupy property until his or her death.
Beneficiary Designations of certain types of assets, such as life insurance policies, annuities, and IRAs, allow you to name a beneficiary, the person who will inherit the assets.
A Revocable Trust distributes your estate without court supervision. A revocable trust has other benefits as well. Only a professional can determine what is best in your situation.
What is a revocable or living trust?
A revocable trust (also called a "living trust") is a special type of trust. It's a "living" trust because you create it while you're alive. It's "revocable" because, as long as you're mentally competent, you can change or terminate the trust for any reason. You need no one's permission to do so. A living trust becomes irrevocable, that is, not subject to changes, when you die. In that way, it acts like a will.
After you create the revocable trust, you transfer certain assets to it. Most importantly, you will need to record a new real property deed that names your living trust as grantee. Assets such as bank accounts, retirement accounts, and life insurance policies may be assets in the trust, also, or may go directly to your beneficiaries. You need to discuss this with an attorney to determine which assets to put in the trust.
You then manage the trust assets as you have always managed your assets and file your income taxes under your own name. When you die, the person you named as successor trustee takes over as trustee and manages your assets until they pass to your beneficiaries. Probate will not be necessary because the assets belong to a trust, which does not die.
What is the difference between a living trust and a living will?
A living trust is designed to manage your assets. A living will may also be called an advanced health care directive. You may download an advanced health care directive for free from the Rhode Island Attorney General's website or one should be part of your estate plan. Make sure to have your signature witnessed or notarized.
What are the benefits of a revocable trust?
The purpose of revocable trust is to avoid probate and provide long-term property management. You will probably appoint yourself as the initial trustee, leaving you free to exercise complete control over all assets in the trust. An elderly or disabled person can name someone else to manage his or her affairs if needed.
The IRS treats a revocable trust as if the assets were still owned by you, allowing you, as trustee, to buy, sell, trade, mortgage, liquidate, gift or otherwise treat trust property as personal property without impacting your income taxes.
When you pass or if you become disabled and cannot manage your affairs, the successor trustee that you chose takes over and pays bills, collects money due to you, and oversees your assets.
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