In recent years, many news reports across the United States have touted the many reasons for attempting to avoid the probate process. They report that the process can be costly, time-consuming and frustrating. However, as discussed elsewhere on our site, Texas is unique to most states. With the option for an independent probate administration, the cost and frustration associated with probate in most other states is completely avoided.
In spite of the ease of the Texas probate process, many Texans have become convinced that they should attempt to avoid probate at all costs. In that effort, they have been advised that creating bank accounts as “joint tenants with rights of survivorship” or “payable on death” accounts is the best method of avoiding problems at death. Conversely, others have created Revocable Living Trusts as a method of avoid probate.
Unfortunately, both of these methods create costly pitfalls for the unwary.
Joint Ownership with Rights of Survivorship Accounts....
Upon death, bank accounts owned as joint tenants with rights of survivorship pass directly to the surviving account owners without passing under the Will or as part of the Decedent’s estate. These accounts can easily be created by completing the signature card at the bank where the account is held. Creating these accounts makes the transfer of the money in the accounts at death relatively easy.
Unfortunately, however, many people do not understand the implications of creating an account as joint tenants with rights of survivorship. For instance, many people as they age add one of their children to their bank accounts so that the child can assist them in paying bills, etc. While the intent is solely to add the child’s name for convenience, many people unknowingly check a box on the bank account agreement that says “joint tenant with rights of survivorship,” and they thereby leave the money in the account to that one child, rather than letting it pass under their Will at death.
In another scenario, the owner of the account may have hired a lawyer to create an estate plan prior to death that is designed to minimized taxes at death. However, the joint tenancy accounts pass outside the Will and can accidentally require the estate to pay substantial amounts of estate taxes.
In case after case, the attorneys as Ford+Bergner have encountered situations where someone created a joint tenancy account without correctly understanding the implications. Whether the creation of such account ends up leaving a larger portion of the estate to one child instead of your children equally, or the account frustrates the estate planning and thereby costs thousands of dollars in taxes, the creation of an account as joint tenants with rights of survivorship should be undertaken very carefully and with competent advice from a lawyer.
Beneficiary Designations and Payable on Death (POD) Accounts....
Increasingly, banks and other financial institutions offer their customers the opportunity to name a beneficiary on their bank or brokerage accounts. In some cases, these as known as “beneficiary designations,” and in other instances, they are known as “payable on death” accounts. In either circumstance, the result is the same: upon the death of the owner of the account, the bank or brokerage firm will pay the funds in the account directly to the person(s) named as beneficiary or payable on death recipient.
The beneficiary designation is a contract between the owner of the account and the bank or financial institution. You may find beneficiary designations on life insurance policies, retirement funds, and IRAs. These designations prevent the accounts from needing probate consideration. However, they also keep the accounts from being utilized as part of the estate plan created under the account owner’s Will.
Payable-on-death (POD) bank accounts are also an effective way to avoid probate. Any money in the POD account passes directly to the named beneficiary upon the person's death. The added benefit of a POD account is that the account holder retains exclusive rights to the account while he or she is alive, and retains the right to change the beneficiary to the account. Like the beneficiary designations, the POD accounts are not able to pass under the Decedent’s Will and be used as part of the estate plan put into place in the Will. Without proper coordination between the Estate plan and the beneficiary and POD designations, the estate may be subjected to substantial estate taxes.
For a full discussion of the importance of coordinating beneficiary and POD account designations with the provisions of your Will for proper estate planning, please see the Estate Planning Information Center on our website.
2. Revocable Living Trusts
Because of the complexities, cost, and time involved in the probate process in most states, many people exercise the option to create a Revocable Living Trust during their lifetime. In its most basic explanation, the Living Trust is a substitute for having a Will. Instead of having your assets distributed according to the provisions of a Will at the time of your death, the assets will instead pass pursuant to the terms of the Living Trust established during your lifetime.
In order to achieve this goal, you are required to create the trust during your lifetime and transfer all of your assets into the trust prior to your death. Upon death, all of the assets in the trust will be distributed pursuant to the terms of the Trust, rather than pursuant to your Will or as part of your estate.
While these trusts have great value in some states, they offer very little value in Texas. For a more complete discussion of these trusts, please see the Estate Planning Information Center of our website, where we provide a more complete discussion of the pros and cons of this option for avoiding probate.
In brief, these trusts provide little benefit because the probate process is so simple in Texas if you have a well-drafted Will. Additionally, very few people ever actually completely transfer all of their assets into the trust during their lifetime. As a result, assets remain outside the trust at death and are then subject to the probate process. Accordingly, you end up going through the probate process to address the issues that did not get transferred into the Trust, in spite of the fact that the goal of creating the Living Trust was to avoid probate altogether.
While these trusts have benefits in some specific situations, they are not an effective mechanism of avoiding probate in Texas.