How to Avoid Probate

Reader Question: How can I avoid probate at death?

Answer: Probate is a court administered process whereby at death, the court oversees the transfer of your probate property from your name to the persons or organizations designated in your will.  If you die without a will, your probate property is transferred according to state law.  Probating a will can be expensive and typically takes from six to twelve months to complete but it can take much longer.  Because of this, lots of people prefer to avoid probate.  The good news is that Alabama is considered a ‘low cost’ probate state.  At death, property is transferred from your name (ownership) in one of three ways: by title; by beneficiary designation; or by probate.  The trick to avoiding probate is to make sure all of your assets are set up as transfers under either joint title or beneficiary designation.  Examples of transfers by title include joint bank accounts and real estate held in joint names.  Examples of transfers by beneficiary include your 401k plan, IRA or life insurance.  The best way to make this happen is to make a list of every asset you own and be sure each asset is set up under either a joint title transfer or beneficiary designation.  This can be very tricky and, in many cases, is ill advised so you should not do this without the assistance and advice of a competent professional.

Reader Question: In a prior column you mentioned the need for an updated Power of Attorney (POA).  Could you elaborate why this is necessary?

Answer: A Power of Attorney (POA) is a document you have drawn, typically by an attorney, whereby you appoint someone as your ‘agent’ to make financial decisions on your behalf under certain circumstances.  In the typical POA, this means if you become incompetent due to sickness or injury, this person is able to step in and sign checks on your checking accounts, withdraw and deposit money into your bank account and generally act in your place for any and all financial decisions.  Often the ‘agent’ is a spouse or someone you trust to make these types of decisions for you.  Typically the POA comes in one of two forms: a general and durable POA or a ‘springing’ POA.  With a general and durable POA, your agent can act on your behalf at any time…even when you are fully competent.  With a springing POA, your agent must have a letter from your physician declaring you incompetent.  The general and durable POA is less trouble to use since your agent doesn’t have to prove incompetence but we only recommend it where you have a very high level of trust your agent won’t use it unless necessary.  Otherwise, we often recommend the springing POA.  I should note that there are many different forms of POAs that are drawn for specialized purposes.

Prior to 2012, we were finding it increasingly difficult to get financial institutions to accept validly drawn POA’s.  For example, we had a case where we submitted a request for a Required Minimum Distribution (RMD) from an IRA using a POA for an incompetent person.  The financial institution rejected the POA saying it lacked specific language that the institution required.  Failure to take a RMD in a timely manner results in a 50% federal penalty and getting an updated POA from an incompetent person is not possible…so you can see the dilemma.  We did figure a work-around in this case but the situation got so bad that a group of attorney’s drafted legislation which was passed by the Alabama legislature effective January 1, 2012, which now compels the financial institutions accept the POA.  So if you have a POA dated prior to that time it may, or may not, be valid depending on the institution.  It’s vitally important that you have a POA for if you don’t have one and become incompetent, someone will have to hire an attorney, go before the court and get a court issued POA.  This can be expensive, time consuming and the document will likely lack the flexibility that you’d prefer.  Be sure your attorney is familiar with the new law.