Avoiding the probate process can save money, speed up the transfer of assets to beneficiaries, and preserve family privacy.
Some actions for avoiding probate are fairly simple, but others may require the assistance of a knowledgeable estate planning, tax and probate attorney.
What Does Probate Mean?
Probate is a legal procedure, where a court (often a specialized probate court) oversees the distribution of a person’s property upon death.
The court appoints someone to ensure that all debts are paid, and that the remaining property is transferred to the proper parties.
To probate a will, the property is distributed according to the will. It is important to understand that a will does not avoid probate.
The costs involved in probate include filing fees, newspaper publication charges and attorney fees. For an average estate it will take from about six months to two years.
Probate also makes the deceased person’s finances a matter of public record. This includes the nature and value of assets, the person’s debts, and who will get the assets.
Determining how to avoid probate requires looking at how ownership of property is currently set up, and making any necessary changes. It also often involves tax considerations.
One or more of these methods may be used to avoid probate. Which method, or combination of methods, is best for you will depend on your situation.
1. Give Away Property
One way to avoid probate is to transfer property before you die. You can’t give away all of your property because you will need some of it to live on. However, gifts can be part of an overall estate plan.
The main drawback to a gift is that you no longer have the use of the property. If you intend for the gift to be the recipient’s share of your estate, and you don’t clearly state this in writing, the recipient may be able to claim a share of any property that needs to be probated.
Also, if a gift exceeds a certain amount, the federal gift tax may apply.
2. Establish Joint Ownership for Real Estate
Property that is jointly owned with a survivorship right will avoid probate. If one owner dies, title passes automatically to the remaining owner. There are three types of joint ownership with survivorship rights:
Joint tenancy with rights of survivorship. The title to the property passes to the other owner when one passes away.
Tenancy by the entireties. Available in some states, this is the same as joint tenancy with rights of survivorship, but it only applies to married couples.
Community property Also only for married couples. This is only available if you live or own property in Alaska, Arizona, California, Idaho, Nevada, Texas or Wisconsin.
In a tenancy in common, the interest of a joint owner who dies passes to his or her heirs, and must be probated. If it is not clear that survivorship rights were intended, it will be assumed that a tenancy in common exists.
If property is not properly titled, it would be necessary to execute and record a new deed that states the survivorship intention.
For example: “James Smith and Robert Jones, as joint tenants with rights of survivorship,” or “James Smith and Rachel Smith, as tenants by the entireties,” or “James Smith and Rachel Smith, as community property with rights of survivorship.”
In South Carolina, the phrase “as joint tenants with rights of survivorship, and not as tenants in common” must be used.
One drawback to joint ownership is that a joint owner acquires certain rights. For example, if you make your son a joint owner of your house, your son must agree to the sale or mortgage of the property. Other drawbacks include:
Half (or all) of the property may be considered part of a deceased owner’s estate for estate tax purposes.
Adding another person as an owner may trigger the federal gift tax, if the value of the property exceeds a certain amount.
The property may be subject to judgment creditors, or the claim of a divorcing spouse.
3. Joint Ownership for Other Property
Sometimes “joint tenants with rights of survivorship” is abbreviated “JTWROS.”
Any property can be held jointly, such as motor vehicles, boats, financial accounts and securities. Just like jointly owned real estate, if one owner dies, title passes automatically to the remaining owner.
Again, it must be clear that survivorship rights were intended. Motor vehicles, boats, and other items that have a title document can indicate ownership in the same manner as real estate. Financial accounts (banks, brokerage accounts, etc.) can also be set up in the same way.
As with real estate, a joint owner acquires certain rights in the property. For example, if you make your daughter a joint owner of your bank account, she has the right to withdraw money, even without your permission.
4. Pay-On-Death Financial Accounts
For bank and similar financial accounts (including IRAs), it is usually possible to designate someone as a beneficiary in the event of death. This is called Pay-On-Death (POD).
This is preferable to joint ownership of the account, since the POD beneficiary has no rights in the property until death occurs.
Designating a beneficiary is simply a matter of filling out a form provided by the bank or other financial institution. Upon death, the funds are paid to the beneficiary and the account is closed.
You may designate two or more joint beneficiaries (upon death the funds are divided between them), but you may not designate successor beneficiaries (where the funds go to A, but if she is dead then they go to B).
5. Transfer-on-Death Securities
A beneficiary designation for property other than funds in financial accounts is called Transfer on Death (TOD), since title is transferred. All states except Louisiana and Texas have adopted the Uniform Transfer-on-Death Securities Registration Act for stocks, bonds and other securities. As with POD designations, TOD designations may provide for joint beneficiaries, but not successor beneficiaries.
6. Transfer on Death for Motor Vehicles
A TOD beneficiary designation for motor vehicles is allowed in Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Indiana, Kansas, Missouri, Nebraska, Nevada, Ohio, Vermont and Virginia. The department that handles vehicle titles in your state can provide you with the necessary information and forms to designate a TOD beneficiary.
7. Transfer on Death for Real Estate
A TOD beneficiary designation is provided for real estate in Alaska, Arizona, Arkansas, Colorado, the District of Columbia, Hawaii, Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Virginia, Washington, West Virginia, Wisconsin and Wyoming. This requires the execution and recording of a transfer-on-death deed.
8. Living Trusts
A living trust is often the best choice for a large estate or if there are many beneficiaries. To avoid probate, most people create a living trust commonly called a revocable living trust. It is “revocable” because you may revoke it at any time. An irrevocable living trust (most often used for Medicaid planning) also avoids probate, but requires the person creating it to give up the right to revoke it.
To create a revocable living trust you execute a document creating a living trust as a separate entity from you. Property title is transferred from you to the trust, and you become the trustee. You fully control the property while you are alive. Upon death, a person you appoint as your successor trustee assures that the property is transferred to those you designate as trust beneficiaries. This transfer does not require probate. The successor trustee would also manage the trust if you become mentally incapacitated.
Attorney’s fees for setting up a trust are substantially more than for drafting a will. However, depending upon the value and complexity of your property, the legal fees in setting up a living trust can be less than the cost of probate.
9. Make a Will
A will does not avoid probate, but it is an important part of a plan to minimize the cost of probate.
Although it is possible to avoid probate for much of one’s property, and especially items of large value, it is difficult to make all property out of the reach of probate.
For items that can’t be kept out of a probate estate, a will is advisable.
10. Take Advantage of Small Estate Provisions in the Law
Many states have a simplified procedure for estates under a certain value, for certain types of property, or if everything is left to a surviving spouse.
Special Considerations. All of these techniques have the potential for complications.
For example, there can be various tax considerations, and spouses have rights in some property which may prevent their transfer to others.