Six Ways to Avoid Probate
The first technique is a statutory procedure created in Texas on Nov. 3, 1987, with the passage of an amendment to the Texas Constitution (Article 16, Section 15). The amendment permits spouses to agree in writing that all or a part of their community property belongs to the survivor when the first spouse dies. If implemented, the property then passes automatically without the need of probate when the first spouse dies. Section 112.052 of the Texas Estates Code contains the requirements for creating the right of survivorship in community property.
The primary problem with the method is that it combines (or stacks) the two spouse’s estates in the surviving spouse. When the combined value exceeds $5 million, federal gift and estate taxes become a problem. Unless the surviving spouse can reduce the estate below this amount before death, a severe tax problem will be encountered.
The second probate-avoidance technique involves the creation of a life estate in real property. A life estate cannot be created in personal property. A life estate is a unique form of ownership whereby the owner of the real property (the estate planner) conveys title to another person, but retains a life estate.
In this situation, the grantor, better known as the life tenant, continues to have exclusive possession with rights to all income derived from the property until his or her death. The person receiving the life estate, better known as the remainderman, gets possession and full ownership when the grantor dies. No probate is needed. The life tenant can convey his or her rights to a third party subject to the life estate. So, when the grantor dies, the property still goes to the remainderman.
Suppose a widow has 200 acres or a home that she wants her daughter to have when she dies but wants to avoid probate. She can do so by deeding (conveying) the property to the daughter and retaining a life estate. The widow becomes the life tenant, the daughter the remainderman. When the widow dies, the daughter automatically receives title to the property without the need of probate.
The primary problem with this technique is when the daughter (remainderman) predeceases the life tenant. The property then passes at the life tenant’s death according to the remainderman’s wishes, which may not necessarily correspond with the grantor’s desires.
The third way to avoid probate is perhaps the most complex. It involves the creation and use of a of living trust. A living trust is one created while the property owner (estate planner) is alive, as opposed to a testamentary trust created when the owner dies. A testamentary trust cannot be used to avoid probate; only a living trust (sometimes called an intervivos trust) can do this.
A trust, like a corporation, is recognized as a separate legal entity that can continue after a person dies. Unlike a corporation, it does not have an unlimited life. It cannot last more than one life in being plus 21 years. This is sometimes referred to as the rule against perpetuity.
Basically, the property owner (the settlor) conveys all or part of his or her property to the trust to be managed by a designated trustee. The trust holds legal title, and the trustee manages it for the benefit of the settlor or some other designated beneficiary or beneficiaries.
When the settlor dies, the trust may or may not continue, depending on the terms of the trust instrument. Either way, no probate is needed for the trust assets because the settlor no longer owned the property. One note of caution, though. Trusts face one of the highest federal income tax rates and substantial annual administrative costs especially when an institution such as a bank or financial institution serves as the trustee.