Probate vs. Non-Probate Planning

A popular topic with my clients is whether their estate planning is better off if structured to avoid probate, the court supervised process.  Some clients come to our first meeting believing, from wherever they heard it or previously have experienced, that if probate were to apply after their death, this is the worst thing ever from a cost/delay/complexity perspective for their Estate.  It is certainly true that the probate process does have cost/delay/complexity.

However, on the flip side, non-probate planning generally requires more upfront costs than standard Will (probate) planning; in addition, this type of planning also requires more due diligence and follow up work by the client going forward.  And, if this work does not happen, you can end up paying more for a non-probate estate plan upfront as well as down the road if the Estate ends up in probate anyway.  So, this type of planning is certainly not for everyone.

In summary, and as further discussed below, what is the best planning, including a combination of both, always depends on the client’s specific facts, including such factors as whether a New York or New Jersey resident.  This Article will go through what one needs to consider and do in making the right estate planning decision in this regard for yourself and your family.

PROBATE ASSETS VS. NON-PROBATE ASSETS

Probate is the court-supervised legal process for managing a deceased person's estate which involves, among other items, validating the terms of a Will.  While the most important Article in a Will for many of my clients with young children is the Guardian provision,[1] a Will also controls what happens to a person’s accounts/properties after their death that go through probate.

I spend a lot of time with clients explaining the difference between which of their accounts/properties are probate assets and which are non-probate assets to avoid future surprises.

Probate assets are accounts/properties owned by an individual at death, solely in the individual’s name AND, which the individual does not have a named transfer on death (TOD)/payable on death (POD) beneficiary (TOD Beneficiary) for such account/property at the time of the individual’s death.  The distribution provisions in a Will control who gets these assets.

In contrast, non-probate assets are properties or accounts of an individual that at the time of death are: (i) owned by a trust, such as a revocable living trust (see more discussion below); (ii) jointly owned with another person(s) where such asset is then owned by the surviving owner(s) going forward by operation of law; or (iii) owned in the individual’s name, but has a TOD Beneficiary named on file with the applicable administrator, financial institution or governmental body.  The terms of a Will are NOT relevant to who gets the non-probate assets.

So, if individual A solely owns a brokerage account with a financial institution and has named individual B as TOD Beneficiary, individual B will receive the brokerage account on individual A’s death even if individual A has left everything to individual C in a valid Will.  The brokerage account is a non-probate asset and the terms of the Will do NOT apply to this brokerage account.

In contrast, if individual A’s brokerage account with a financial institution did NOT name a TOD Beneficiary, including if individual B predeceased individual A and individual A did not name a new TOD Beneficiary, then the brokerage account goes into probate on individual A’s death and the terms of individual A’s Will controls, such that individual C will receive this brokerage account.

PROBATE - ISSUES

Costs

There are various costs associated with probate, such as court filing fees, attorney fees, appraisal fees and so on.  However, how much expenses depends on a few factors. 

First, if this is an Estate where everyone gets along and no one is contesting the Will, this will be less costly than the horrible World War III family disasters where the Will is being contested, lots of attorneys are involved and there are significant costs for the Estate.

In addition, where the probate takes place is also very relevant to the amount of costs.  The New Jersey probate system is extremely efficient and easy to navigate with the various Surrogate Courts throughout New Jersey.  While there are several requirements throughout the New Jersey probate process, the various expenses/filing fees are generally reasonable for straightforward Estates.

In contrast, there is the New York probate system.  From its higher court filing fees to the fact that New York’s probate rules are more complex with more hurdles, requirements and tougher Courts, this results in higher costs overall. 

Delays

Probate can also last many months and sometimes years as probate can be a time-consuming process with the different steps.[2]  Each property/account in an Estate must be assessed, valued, sorted and distributed. The liabilities of the Estate must also be dealt with.  A large estate or multiple beneficiaries can draw out the process.

It is more likely that a NY Estate is dragged out longer, but this could also possibly happen with a NJ Estate depending on the underlying facts of the Estate.

An important item to note.  The delay concern is not only about the length of the probate, but also how long it takes to open probate, which is when the Court formally names the Executor, the person responsible for legally acting on behalf of the Estate. 

This initial delay in opening probate can be very problematic since all probate accounts are frozen, with no access allowed, from date of death until the Executor is named.  In New York, it can take 4-6 months to open straightforward probates.  Consequently, if a stock brokerage account is locked, this could be disastrous during this time period, particularly if the stock market plummets.[3]

Finally, because of this initial delay concern, it is always wise to keep a certain amount of funds in a bank/brokerage account naming a loved one as a TOD Beneficiary in order to pay for certain upfront costs at death, such as your funeral/burial and other costs.

Public Records

Another potential issue of probate is that probate is public, such that documentation and information about your estate and your beneficiaries can be potentially obtained.  This is particularly concerning to certain clients who are disinheriting certain family members or concerned that certain individuals may cause issues, so that they elect a non-probate planning pathway. While litigation against an Estate can still occur even with such a structure, the risk is clearly reduced due to the private nature of the planning. 

NON-PROBATE PLANNING

TOD Beneficiary Designation

Part of this planning involves naming TOD Beneficiaries in retirement accounts, brokerage accounts, life insurance policies, bank accounts and certain other accounts/properties.  Upon death, after sending a death certificate to the financial institution/insurance carrier/administrator, these accounts go directly to beneficiaries on file without going through probate.   So, in one sense very easy!

However, there are certain assets that you can’t designate TOD Beneficiaries.  While New Jersey allows you to name a TOD Beneficiary for your automobile, you cannot use a Transfer on Death deed for real estate.  In New York, since 2024, while you can file a Transfer on Death deed for real estate naming a beneficiary,[4] you cannot currently name a TOD Beneficiary for your automobile.

In addition, this type of planning does not always align with what a client wants as the TOD Beneficiary form, in general, is very simplistic.  For example, if you want to leave everything to your children who are under 18 years old, these TOD Beneficiary designations require such accounts to be left outright and if the worst case happens, this could mean that your child receives funds outright when he or she turns 18 years old, which is the age a child is deemed to be an adult under New York/New Jersey law.  Most of my clients do not want this result.[5]

Revocable Living Trusts

Most non-probate planning uses a trust(s) instead of a Will as the main legal document.  There are different types of trusts, but the most common for the specific purpose of avoiding probate is a revocable living trust (Revocable Trust).  A Revocable Trust replaces a Will as the primary legal document that describes in detail how a person’s assets will be distributed after their death.

Unlike a Will that does not go into effect until you pass away, a Revocable Trust is effective immediately upon signing and becomes relevant when it is funded with assets, which occurs when a person (or a couple if doing a joint Revocable Trust) legally transfers his or her assets to the Revocable Trust.  This is part of the reason why this planning has more costs upfront.

Going forward, during a person’s lifetime, that person is the beneficiary of the Revocable Trust as well as the person who controls the trust property (as the Trustee) the same way as if this trust did not exist. This person can revoke or amend the terms of the Revocable Trust at any time until such person’s incapacity[6] or death.

An easy way to combine TOD Beneficiary planning with the Revocable Trust planning is to name the Revocable Trust as the beneficiary on such accounts.  This allows that the specifics of the Revocable Trust apply to such account at a person’s passing, so that the minor child does not get the accounts outright at age 18, but instead, such funds are left in trust until the child is of a certain age set forth in the Revocable Trust provisions.

Issues with Non-Probate Planning 

The main issue is making sure that the necessary work occurs with this type of planning to ensure that the non-probate goal is met when a person passes away.

First, and this needs to be repeated, forming the Revocable Trust by itself is meaningless as a Revocable Trust that owns no assets means nothing.  If you go this direction, for example, the house deed then must be changed and filed to be owned by the Revocable Trust, which would generally require a real estate attorney to take care of to ensure that correctly done.  Hence, additional costs.

Second, if you have a CD account with a TOD Beneficiary named, that is great.  However, when the CD account matures in the future and you then invest in a new CD account, you need to then make sure to name a TOD Beneficiary again for this account as well.  There is continued work and diligence needed.

In summary, I have had too many clients, whose loved ones have died, come to me after their death where, while there was non-probate planning work done, since there were one or two probate assets owned at time of death, probate needed to be opened.[7]

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[1] A Will is where one names a “Guardian” whereby if such parent(s) dies before his or her kid(s) turn 18 years old, the parent(s) names the individual who cares for the child.  Your Will is the only place where you can officially tell a Court who should be the Guardian of your minor children in the event of your death.  If this is not done and family members subsequently dispute who should be the Guardian after a parent(s) death, the laws of New York and New Jersey would determine, which may not be what the parent(s) would have wanted.  Hence, the importance of this provision.

[2] For example, in both New York and New Jersey, Executors are advised to wait for a specified time period to make distributions from an Estate to the beneficiaries of the Estate to avoid potential personal liability exposure.

[3] While opening probate in New Jersey generally takes only a week for straightforward Estates after filing of a probate petition, there is still some delay as under NJ law, probate cannot be opened, at a minimum, until after ten (10) days have elapsed since the death of the decedent.

[4] In NY, this law does not currently apply to NY Co-op apartments, which are unique assets and not treated as real estate.

[5] Another example where TOD Beneficiary accounts are sometimes not aligned with what a client wants is if you have two adult children and one has a kid, your grandchild.  If you name the two adult children on the beneficiary form and one predeceases you, the other adult child generally receives 100% on your death on such forms; in contrast, in a Will or in a Trust, you can direct that your grandchild would get the deceased parent’s 50% share, which is what many clients want.

[6] One of the benefits of this trust is that it contains provisions for a seamless transition to a successor Trustee to manage the Trust assets in case the initial Trustee becomes incapacitated, which is spelled out in the Revocable Trust.

[7] A Revocable Trust is always paired with what is a called a “pour-over” Will, which stipulates that any assets that slip into probate at death should be transferred to the Revocable Trust and distributed according to its terms.  It's mostly used as a fail safe for any assets that falls into probate.  But probate must be opened.  And, by the way, in New York, the Surrogate’s Court generally asks to receive and will review the Revocable Trust and from experience, follow-up questions follow from the Court.  So best to avoid this!