Saturday, November 13, 2004

Younger Parent Estate Planning: Fundamentals: Probate and Non-Probate Assets

I know that we would all like to dive into the question, “Who is going to take care of our little ones if we’re gone?!!” But if I can ask you to be patient with that question while I take you through some fundamentals, I think you will find it easier to reach an answer eventually.

But let me say this about that question. Whatever the answer you eventually develop, you will not be perfectly satisfied with it, because no one will love your child nor take care of him or her in just the way you would have loved and cared for that child. The answer, then, will not solve satisfactorily the problem of an untimely death (is there ever a “timely” death?); the answer will be a “This is the best we can do under terrible circumstances” answer. I have seen younger (and older) parents bring their estate planning process to a grinding halt, because they could not come up with the perfect plan to respond to the contingency of death; they would not agree to an imperfect plan. But death has a sting. We don’t develop plans to avoid the sting, because we cannot. The plan by necessity will be imperfect.

OK. Now the first fundamental that you have to get in your head is this: the world is divided into two kinds of assets: probate assets and non-probate assets. At least that’s the way I look at the world, and I’m writing this post.

A probate asset is an asset that has to go through a court proceeding in order for the asset to get from the person who owned it at his death to the person who is to become the owner of that asset. The court proceeding is popularly called "probate", and the court that presides over the process of transferring ownership is popularly called the "probate court".

For example, let us assume a young married couple, whom we will call Dulce and Peter Clarke. They have a three children, Billy, Pepe, and Maria Elena, ages 9, 6, and 3. Peter has a sailboat that he owned before he and Dulce were married. (By the way, he never gets out in it anymore. He ought to sell the thing. But it has lots of memories for Peter that do not exclusively have to do with Dulce.) The certificate of title for that sailboat shows the owner as “Peter F. Clarke”. He never changed the title certificate after he was married. If Peter dies, then getting a new title certificate with the name of the new owner on it will require a court proceeding, the boat will have to go through "probate".

A non-probate asset is an asset that does not require a court proceeding to get from the person who owned it at his death to the person who is to become the owner. For example, let’s assume that our young parents own a bank account entitled Dulce Clarke or Peter Clarke. If one of them dies, then the other “automatically” becomes the complete owner of the account. A probate process is not involved in the ownership of the account moving completely to Dulce at Peter's death. (The change of title is really not "automatic", but it seems that way when we compare it with changing title in a probate proceeding. More on what we really mean by "automatic" later.)

If Peter before his death had arranged to get a new certificate of title for his sailboat that named the owners as “Peter Clarke and Dulce Clarke, as joint tenants with right of survivorship”, then the boat at his death would have avoided probate and complete ownership would have moved “automatically” to Dulce.

Note that, after Peter’s death, the bank account is now owned only by Dulce. It becomes a probate asset as far as Dulce is concerned. If Dulce does nothing about the account, then when there will be no “automatic” change of ownership when she dies. To change the ownership of the account from Dulce’s name to the name of the person to receive the account, we have to have to move the asset through the probate process.

The word probate is a word that has become loaded with negative baggage: attorneys’ fees, court costs, executors commissions, creditors claims, taxes, delay, delay, and delay. In the popular view, an important goal of estate planning is to avoid probate, because that seems to mean avoiding all of that baggage. I expect that we will learn that avoiding probate does not necessarily divest assets of all of the baggage that is commonly associated with probate. It is death that brings most of that baggage, death and bad planning. But that is for another day. The main thing to understand at this point is that the asset world can be divided into probate assets and non-probate assets.

No comments: