Have you ever heard the phrase “you can’t take it with you” ? Another way of saying it is “you never see a U-Haul behind a hearse.” But here is my addition; “you will see family behind a U-Haul.”
How do you prevent that from happening? We are going to discuss two legal tools for titling assets so that they transfer without the need for probate. Wait, why do you need probate? What is probate? Probate is a process used to transfer an asset at your death that cannot transfer by operation of law all on its’ own.
What does that mean? Here’s a straightforward example: your bank account, life insurance proceeds and retirement plans have beneficiary designations. At your passing, the financial institutions holding those accounts will then, upon establishment of a proof of death, cut checks to those beneficiary designees. These are considered non-probate assets because they pass, by operation of law, outside of probate according to the terms of the accounts. But what if there is a beneficiary designation failure? What if you named someone who is already deceased and no alternate is listed? What if the beneficiary is alive, but they disclaim the distribution? The financial institution then needs to be directed, typically by a Probate Court, on how to distribute the funds. Then the asset becomes a probate asset and must be administered along with the remainder of the estate.
The largest asset most people do not want the family to battle about is the homestead. We discussed how to protect the home from Medicaid Estate Recovery in last month’s article, so please read that if you have such a concern, but a homestead can be transferred easily at death in Texas with what is known as an Enhanced Life Estate Deed also known as a Ladybird Deed. Ladybird Johnson had nothing to do with the creation of this legal doctrine. Around 1982 a Florida Attorney used a cast of fictional characters, including Ladybird Johnson, in his Elder Law book and lecture materials so that his students would find the material more interesting. His son later joked that it could have been called the Genghis Kahn deed, but that there was no relationship between them or the Johnson Family.
What does it do? This deed is created so that a grantor(s) transfers property to a grantee and the grantor(s) retain a life estate. The life estate allows the grantors to keep all of their rights to the property, including the right to sell the property, and keep the proceeds. And then upon the death of the grantor(s), the property is conveyed to the grantees. This becomes a nontestamentary (outside of probate of a Will) transfer recognized by Texas Estates Code §111.052.
Titling your assets into a revocable trust prior to your death can also provide for a simple way to transfer an asset without the need for a probate. A trust is a legal arrangement in which a grantor transfers ownership of assets to a trustee, who then manages and controls the assets for the benefit of a third person, called a beneficiary. For example, my trust is the Karen Telschow Johnson Family Revocable Trust. I am the trustee of my trust and there are alternates listed when that becomes needed. The beneficiaries are my children. Since they are minors, I have allowed for alternate distributions at ages 25 and 30 of the trust assets. The trust is also the beneficiary of my life insurance policy. If the trust was not named as the beneficiary and I died before my children reached the age of 18, the insurance company could only hold it in an annuity until they are 18. At that time, they would cut my kids their checks for the life insurance proceeds. My son would probably use the money for college, but my daughter would, in all likelihood, go skiing in Europe. Because the beneficiary designee of the policy is my trust, there will be money for college and maybe first homes. That is the legacy I want to leave for my family.
That is what thinking about how to pass your assets is all about. What legacy do you want to leave for your family? A room full of angry relatives or a plan that can prevent such events? Good planning prevents battles and Court action. It also prevents people from pillaging the U-haul.
To hear more on this topic from this author, click this link to listen to their interview on Plaid for Women Radio.