Bradley & Riley PC on Avoiding Probate – LIVING WELL Magazine



Courtesy Bradley & Riley PC, Linn County LIVING WELL Magazine

The internet provides multiple articles on the horrors of probate and supplies various “do-it-yourself” techniques for avoiding probate. Many of these techniques have unintended consequences resulting in bigger problems than the probate proceeding itself.

What is Probate? 

Probate is a court-supervised administration of your affairs. The court appoints an executor who is responsible for gathering your assets, paying your debts, filing any necessary tax returns, and distributing the remaining assets to the beneficiaries named in your will.

Reasons to Avoid Probate

A probate proceeding is not a private matter. The court file, including your personal financial information, is a public record and anyone who appears at the courthouse and requests access can review it.

A probate proceeding can be expensive. Iowa collects a payment for court costs, based on roughly .2% of the gross value of your estate. In addition, Iowa law allows both the executor and the attorney who assists the executor to collect a reasonable fee for their services, generally not to exceed 2% of the estate’s gross value. If your gross estate totals $3,000,000, this would result in approximately $6,000 in court costs and as much as $60,000 each to the executor and to the attorney.

In addition, owning real estate, mineral interests, or time shares located in other states may require your executor to complete a probate proceeding in each of those states.

“Do-it-yourself” Techniques

Some individuals seek to avoid probate by owning all assets with another individual as joint tenants with rights of survivorship. Upon the death of the first owner, the surviving joint owner automatically becomes the asset’s sole owner. Joint ownership with your spouse may be appropriate, but in most other circumstances, joint tenancy ownership is not recommended.

During your life, the joint tenancy owner will have all the same rights of ownership as you. If you name your child as a joint owner of an account, then your child can withdraw some or all of the money without your permission. If your child defaults on a loan or fails to pay child support or income taxes, the funds in your account can be seized to pay your child’s obligations.  Owning real estate, stocks, or other non-cash assets in joint tenancy can also result in increased income tax liability when those assets are sold.

After your death, the joint tenancy owner becomes the sole owner of the asset, despite any contrary directions in your will.  That surviving owner may not have any legal obligation to share the assets with your other children or use those assets to pay for your funeral, burial, or other expenses.

Beneficiary designations are also used to avoid probate. Beneficiary designations are commonly used for life insurance, retirement plans, and annuities. Others may add a beneficiary to bank accounts, stocks, or bonds, using a “Payable on Death” or “Transfer on Death” beneficiary designation. A POD/TOD beneficiary designation is preferred over joint tenancy ownership because the designated beneficiary does not acquire any rights during your life. At your death, the named individual automatically owns the asset without the need for probate. However, the same problems can arise with inequitable distributions among your beneficiaries or lack of funds to pay your own financial obligations. Further, Iowa does not allow you to add a beneficiary designation to real estate holdings.

Revocable Trust Technique

Creating a revocable trust (also called a living trust) and transferring your assets into that trust is the best way to avoid probate. If you properly transfer all your assets into the trust during your life, then no probate proceeding will be required after your death. Privacy is maintained and court costs are eliminated because the trust is not administered through a court-supervised proceeding. Trustee fees and attorney fees are typically reduced because the fees are based on a reasonable fee standard rather than the 2% fee schedule used for probate. Use of a revocable trust allows you to avoid probate, while eliminating the drawbacks associated with joint tenancy ownership and POD/TOD beneficiary designations.

Bradley & Riley PC offers a broad range of services, expertise and experience to clients. Reach them at 319-363-0101 in Cedar Rapids or 319-358-5560 in Iowa City.