PROBATE—a word that strikes terror in the hearts of people planning the distribution of their estates. They worry that the probate process can drag on for months or years, that probate costs will eat up a chunk of what they want to leave their heirs, or that people will find out how the assets get distributed because probate is a public record. Those are all legitimate concerns.
Using a Living Trust is probably the most well-known way to avoid probate. The trust is created and then all your assets are re-titled making the trust the owner and you the trustee. But, if you don’t want to go through the process or expense of creating a trust, there are still ways to avoid probate.
Retirement Assets
When you set up your IRAs and 401(k)s, you named a beneficiary(s). At your death, the retirement money goes directly to the people you named and does not go through probate.
Life Insurance Proceeds and Annuities
The same is true for life insurance and annuities. When the insurance company receives your death certificate, the proceeds will be paid to the beneficiaries you named in the contract and the money does not go through probate. The only exception is if your estate is the beneficiary. Then the money will go through probate.
Transfer on Death (TOD) / Pay on Death (POD)
TOD and POD accounts work much like retirement assets and insurance money. You name beneficiaries and upon your death the money is distributed to those beneficiaries. As owner of the account, you can change beneficiaries at any time without anyone’s approval or knowledge.
While TOD and POD assets don’t go through probate, in most states, the money can be claimed by creditors.
Joint Ownership
Joint accounts and joint title are commonly used methods of avoiding probate. Married couples can own real estate or financial accounts using joint tenancy with right of survivorship, or in some cases, tenancy in the entirety. Both spouses own the property while both are alive. At the first death, the surviving spouse automatically receives full title to the account, property, etc.
Accounts can also be set up with non-spouses. An older person may set up a joint checking account with a younger person, for example, an adult child, so the bills can be paid if the older parent becomes incapacitated. In that case there is no need for a Power of Attorney. When mom or dad die, the adult child inherits the account and the money doesn’t go through probate.
But… you have to go into joint ownership with your eyes open. All joint owners have equal rights to the account. One joint owner can withdraw funds or change how investments are made without the consent of the other owner. Once joint ownership is established, you can’t sell, give or dispose of property without the consent of the other owner. And the person who inherits full title at the death of the other owner may not receive a step-up in cost basis, as would occur if joint ownership did not exist.
Life Estate / Remainder Estate
There are two other ways to keep property from going through probate. The first allows a property owner to split the title into a Life estate and Remainder estate.
The life estate holder is usually the current owner and retains unlimited use of the property during their lifetime, but they can’t sell, give or encumber the property without the consent of the remainder owner. And the life estate owner can’t change the remainder owner’s rights without the consent of the remainder owner.
When the life estate owner dies, the remainder interest owner gets full title to the property without going to probate court.
Ladybird Deed
The Ladybird Deed is much like Transfer on Death for real estate. The current owner has complete control of the property. Unlike a Remainder Estate, the owner can sell, give, or encumber the property and can also terminate the rights of the remainder owner without anyone’s consent. If the owner sells the property, the owner doesn’t have to share the sale proceeds with the remainder owner.
Inheritance Agreement
The inheritance Agreement is most often used when a business is involved. A contract is created stating who will inherit the business after the owner’s death. The business doesn’t go through probate; however, a court will get involved if there is a disagreement about the contract. The idea sounds simple enough, but Inheritance Agreements aren’t used often because they can be extremely cumbersome, especially when business co-owners are not involved.
A Warning
One last thing to keep in mind. Just because you keep assets out of probate doesn’t mean they get excluded from your taxable estate. The assets you have lifetime ownership or use of will likely be included in your estate for tax purposes.
This article is for informational purposes only and should not be considered tax, legal or financial advice.