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Probate, and how to avoid it

“Probate” is a word with two meanings. Specifically, it means proving to a court that a will is valid. More generally, “probate” refers to the whole process of settling an estate disposed of by will—assembling assets, notifying creditors, paying taxes, distributing bequests and so on. An individual who dies without a will is considered “intestate,” in which case the state determines the beneficiaries of the estate.

When people talk about “avoiding probate,” they’re seeking to reduce the legal costs associated with estate settlement. Over the generations, procedures that some states adopted to protect estates and heirs tended to fossilize into expensive red tape. Reforms in recent decades have improved matters. Still, legal fees and related expenses, as well as the time involveld, do vary from state to state. Relative to other states, Tennessee is less costly to probate, as well as less complicated.

How much emphasis should you place on avoiding probate? Much depends upon personal circumstances and you should seek advice from a trusted estate planning specialist.

To some extent, you may be avoiding probate already. Married couples often own their property jointly, which means that the survivor will inherit the property without the supervision of the probate court. Life insurance policies and employer-provided retirement plans have beneficiaries, and these also avoid probate with no special efforts.

The better way:

Revocable living trusts are highly flexible arrangements for the now-and-future management of securities, real estate and other assets. After you set up such a trust, you remain in control. You may put in additional assets, make withdrawals or change your mind and revoke the trust. And you’re free to alter the terms of the trust — add new beneficiaries, for instance — at any time.

In addition to all this flexibility, a revocable living trust is recognized as a separate legal entity. As a result, at your death if all your assets are held in your trust, and the trust document contains such provisions, you may avoid probate. The trust assets would receive a full step-up in cost basis for purposes of computing capital gain or loss if they were later sold.

Because living trusts aren’t subject to estate settlement delays, you can provide immediate income and support for your spouse, your children or other beneficiaries. And unlike the provisions of a probated will, the terms of a living trust generally remain private. (The recent publicity over Michael Jackson’s estate bears this out; the will is publicly available, but the terms of his family trust are not). For some people, these advantages prove more important than the reduction in estate settlement costs.

It is important to be aware that even though a trust may avoid probate, it will not necessarily avoid estate taxes and will require legal assistance if property and assets are to be conveyed to beneficiaries. In addition, a state inheritance tax return, possibly a federal estate tax return (depending on the size of the estate), and income tax returns are required to be filed in a timely matter to the appropriate taxing authorities.

Tracey Courtney is vice president and trust officer for First Tennessee Bank and can be reached at 865-971-2136.


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