One of the purposes of estate planning is to keep estates out of probate. However, there are some approaches that are commonly used to avoid probate that can create their own problems.
Here are two common errors to avoid:
Mistake No. 1: Naming individual beneficiaries for all of your assets
In an effort to avoid probate, some assign beneficiaries to all of their bank accounts and other assets. But this is a mistake that may lead to insufficient cash being available to settle debts and cover expenses.
Often in these situations, a beneficiary will end up putting up his or her own money to cover costs, imposing an undue burden on that party and requiring him or her to rely on the good faith of the other beneficiaries for reimbursement. This can create difficulty for, and disputes among, beneficiaries when the time comes.
This estate planning mistake can also adversely impact the administration of a living trust. Just as a car needs oil and fuel to keep running, a trust needs to have cash to function properly.
When a trust is adequately funded with cash accounts, it won’t be necessary for beneficiaries to come out of pocket to pay for debts, expenses and ongoing administration costs, such as mortgage or insurance. Be sure to protect your heirs by budgeting for these costs in your estate plan.
Mistake No. 2: Using joint accounts
In many instances, individuals will add others to their accounts with the expectation that the funds will be divided among the heirs, only to have the joint account holder fail to follow the wishes of the decedent. (Frequently, this involves an adult child who will end up in a dispute with his or her siblings when the time comes to share the money.)
In addition to the potential for abuse, it is also possible for the joint account holder’s creditors to make claims against shared accounts, potentially compromising the estate for all of the heirs.
| Proper estate planning can keep your estate out of probate, saving time, money and headaches for your loved ones. To learn more about estate planning, click here to read our California estate planning FAQ. |
| Estate planning and probate are easier to understand when you learn the terminology. Learn more by clicking here for our glossary. |
A better alternative: Use a living trust as a beneficiary
Forming a living trust and naming it as the beneficiary for at least some of your accounts should spare you from these pitfalls. This way, the trust will have first claim to some of the funds that can then used to pay the estate’s bills and spare a loved one from the need to provide financial support to the estate. Similarly, steering clear of the use of joint accounts may reduce the chance for potential conflicts that can be caused by the joint account holders.