Earlier this week, we discussed the various dangers of having a website generated form or document prep company prepare your estate plan. We have also seen at least one story in the news discussing a “Poor Man’s Trust.” One of the biggest advantages to an estate plan is avoiding probate. An estate plan that mostly avoids probate is not very useful for one very big reason: Creditors. Even if you shell out the money for a trust, creditors are entitled to payment from the trust when there are insufficient funds in the probate estate. The benefit here is in the privacy of the trust. It’s significantly more involved and more expensive for a creditor to begin the probate process. The contents of a trust are generally kept private, so a creditor would not be able to find out if their will be any assets to pay them- and they can’t know if they will be throwing good money after bad.

There are ways to pass assets outside of probate, and an attorney who is familiar with estate planning and probate will know the types of problems associated with these. That is not to say these methods should not be used, but they should only be used with an understanding of the possible problems. An attorney who has prepared estate plans and navigated probate administration will know that there are ways to keep closely held companies out of probate.

Most of these strategies are best used in conjunction with a revocable trust, but they can be used alone in certain circumstance, and an attorney should be used to help make that decision. When someone does not consult an attorney and decides to use these, we call it a “Poor Man’s Trust.” When we recommend these strategies for our clients- it’s because we know the potential risks, and additional costs as well as the benefits. When these strategies are recommended, it’s because it’s a cost effective way to meet our clients’ needs without exposing them to unnecessary risk.

Beneficiary Designation

Beneficiary designations are available on most IRAs and bank accounts. To make a beneficiary designation, the owner of the account will fill out a form provided by the financial institution where the account is owned. This creates a contractual arrangement between the financial institution and the account owner. Some other methods are Transfer-on-death or Pay-on-death designations. These are set up the same way, a form from the financial institution.

Regardless of how the beneficiary designation is made, upon the death of the account owner the beneficiary only needs to present a death certificate to the institution to have the account transferred or the funds paid to them.

The risk in this type of arrangement is providing your account information to the beneficiary. If they don’t know where you bank they may not know where to look for your account. Alternatively, you may need to provide information regarding where you bank to your beneficiary prior to your death. There is also the risk that an unscrupulous person through undue influence could convince an account owner to change the beneficiary designation or add them to the account.

Lady Bird Deed

Lady Bird Deeds are an interesting type of deed that not all states recognize. In short, a Lady Bird Deed works like a life estate deed with an additional caveat- the remainder interest only becomes possessory upon the death of the life tenant IF the life tenant owns it at their death. This means that there’s enough uncertainty associated with Lady Bird Deeds that for Medicaid and tax purposes there’s no perfected gift.

These deeds transfer the property at death by operation of law meaning there’s no probate required. It also means that if the life tenant decides to sell the property, rent it, give it away, or make any other disposition, they do not need the remaindermen to consent to the transaction. This lets the life tenant retain a high amount of flexibility, while still avoiding probate.

Because the most valuable advantage to Lady Bird Deeds is avoiding probate, the remainderman predeceasing the life tenant could mean the property would fall into the estate of the remainderman. Depending on their situation, this could be really bad.

Joint Tenancy

Joint Tenancy is great when it comes to real property and bank accounts. When a joint tenant dies, their interest evaporates and the surviving tenant owns the whole property, account, or asset. No probate is necessary, presenting a death certificate should do the trick. For more detail on joint tenancy, check out our past post. It’s important to note that in Florida the default co-tenancy in real property is tenants in common.

Real Property

Joint tenancy in real property can include Joint Tenants with Rights of Survivorship (JTWROS) and Tenants by the Entirety. The difference in these two types of joint tenancy comes down to whether the joint tenants were married to one another when they acquired the property. In this type of co-ownership, both people own the undivided whole property. As mentioned above, when one dies the other owns the property.

If joint tenancy is being used as an estate planning tool, the risk here is similar to the risk of a Lady Bird Deed- the intended recipient predeceases the intended donor. This would put the property right back into the intended donor’s estate. They would have to start back at square one.

This result could be avoided by using a trust- the predeceased beneficiary is generally accounted for in a trust.

Vehicles

In Florida a vehicle titled as Person A “OR” Person B works as a joint tenancy. This is particularly perilous when it comes to vehicles- under vicarious liability the owner of a motor vehicle can be held responsible for damage caused by someone else’s careless driving. It may not be a big deal if this is someone in a nursing home or who is not driving, and is otherwise judgment proof. Regardless of the living situations or assets, titling a vehicle jointly should be approached with extreme caution- and the advice of an attorney.

So I can avoid probate with a poor man’s trust?

Well, maybe. Using these in conjunction with a will or other estate planning tools can give the desired results. Using these methods leave a lot to chance- exactly what you are trying to avoid by planning and the primary goal of an estate planning attorney. Most people are trying to avoid paying the expense of a trust. The variable being ignored by taking this approach is the cost and effort involved in probate. It’s expensive, public, and vulnerable to claims of creditors. The cost of using a revocable trust instead of a mishmash of poor man’s trusts is far less than the cost of probate.

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