Often people salivate like Pavlov’s dogs when they see an opportunity to reduce the amount that their estate may have to pay in probate fees, without having an idea of the cost or savings. Talk about conditioning!

What is a probate estate, you ask?

When people die they have an estate. The estate is a sum of all their assets and liabilities. Some examples of an estate asset are your interest in your home, retirement accounts, personal belongings, life insurance and pensions if there is a survivor benefit. Liabilities could be your mortgage and credit card debt.

If you have a will and leave assets to other people, then your will may need to be reviewed by the probate court. Each jurisdiction (where you live or have property) has their own sets of rules and thresholds. If you die without a will then you are known as "dying intestate," which means the rules of the state will decide who gets what. Most jurisdictions also levy a fee on the amount of your probate estate.

In the above example, depending on how things are titled, the only item that may be part of the probate estate could be your personal belongings. This is because you are allowed to transfer assets at death in a variety of manners.

The first is known as operation of law, which refers to the way a deed or account is titled. If you are married you probably have seen a jointly owned account come in with the letters JTWROS after both names. That stands for Joint Tenants With Right of Survivorship, and upon the death of one holder the other receives their share. If you have an account with $10,000, then $5,000 is in your estate and zero is in your probate estate.

The next method is known as transfer to a named beneficiary. If you have an IRA or other qualified pension plan you will have a beneficiary. If your balance is $2 million when you die, then the $2 million is in your estate and zero is in your probate estate.

Life insurance policies work the same way, as they will be in your estate but aren't subject to probate.

Items that are held in a trust are also not subject to probate and that is why living trusts are very popular in states that have high fees and or a long drawn out process.

The last process is known as a will and that's where probate kicks in. Many people do not realize that much of what they leave others is in all likelihood transferred outside of the will.

In 1999 the law was passed that allowed for brokerage accounts and savings accounts to be established, which would have a named beneficiary. In theory the person named in the account as a beneficiary could simply file a claim and present a death certificate and receive the assets or their share from the account. These are known as payable on death or transfer on death accounts and again vary by state.

I thought that these accounts would be useful to ensure that a person receives money in a timely fashion. Boy was I wrong.

An elderly client had a brokerage account and named her three children as beneficiaries with specific percentages. When she passed away we contacted the brokerage firm to begin the process of liquidation. We were told that we needed to provide a copy of the death certificate, which was not an issue. Then we were told that a letter had to be provided signed by all beneficiaries stating who should get what, the method that should be used and the amounts.

Well, the kids lived all over the country and determining the amounts that each received was really the responsibility of the brokerage firm since they had the beneficiary designations. All we should have had to do was state in kind or in cash. The brokerage firm stood fast on their demand that we create a spreadsheet showing who should get what. They even insisted that an account be opened to make the transfer easier. Of course they charged a termination fee when the accounts were settled and the beneficiaries moved the assets to their own broker’s firm.

We did finally get everything transferred correctly but it took 6 weeks and three botched attempts at the transfer of assets. In fact, the deceased’s statement was 25 pages long when normally it was four or five.

Was it worth it? Not really when all was said and done. The client through other planning had virtually nothing subject to probate and the time and effort to settle the brokerage account was much more than anticipated. Perhaps having multiple beneficiaries was the problem or perhaps it was simply the custodian. There seemed to be no law and order in this process.

However if the amount of the assets had been more substantial I would certainly use the transfer on death account again but would establish an account separately naming each beneficiary and perhaps keep a separate regular account for limited cash needs.

You do need to understand the costs and process in your own jurisdiction to determine what is a time/money saver and what is simply an academic exercise.