Happy New Year!
A few months ago on the pages of Retirement Watch Weekly, I shared a story called: What You Need To Know about the Probate Process.
This was a very popular topic with my readers, so I decided to expand on it. Let’s begin with a recap of exactly what probate is.
In short, probate is the legal process that ensures your debts are paid and legal title of your assets is transferred to the appropriate heirs and beneficiaries.
If you have a will, the probate process will determine whether the will is authentic and valid.
No matter how big or how small the estate, probate is necessary in all cases.
While having a last will and testament allows the process to be sped up and avoid complications, probate is definitely required when the document is not available.
Probate without a written last will and testament can be significantly longer and more expensive than probate when there is a will.
Although the probate process is required, there are certain assets in an estate that do not need to go through probate, such as 401(k) plans, living trusts, individual retirement arrangements (IRAs) and pensions with designated beneficiaries.
Smaller estates sometimes can qualify for an informal probate process, which involves minimal court hearings and proceedings.
However, more valuable estates will have to go through a formal probate process and have greater involvement from the probate court.
The costs of probate can range between 1% to 7% of the entire estate with the court fees, attorney fees, appraisal fees, etc., that are involved in the closing of an estate.
The longer the probate process drags on, the more expensive the costs of probate will be.
Costs vary depending on the state and locality where the estate is probate, value of the estate, types of assets in the estate, and whether there are challenges to the will or other aspects of the probate process.
So it’s no surprise that people with more valuable estates would prefer to avoid probate whenever possible.
Here are 10 legal, legitimate and accepted ways to avoid probate:
- Take advantage of exemptions given for a smaller estate. As mentioned earlier, smaller estates can often qualify for a faster probate process and generally have less assets in a probate estate, so it will be an advantage to keep the estate under the state’s limits for simplified or fast probate.
- Give away assets as gifts. The owner of the estate should consider giving away some assets before death. If the owner already has a beneficiary in mind and the assets are able to be gifted without formal processes, it will help avoid probate costs and possibly estate taxes. Of course, retain enough assets to comfortably maintain your standard of living.
- Establish a revocable living trust. All property owned by the revocable living trust will belong to the living trust and not the estate. These assets are no longer part of the probate estate, even though the creator of the trust still retains control. Upon death or the creator and initial trustee, the named successor trustee will take control of the living trust automatically.
- Have a payable on death (POD) account. Many financial accounts can be set up with a payable on death (POD) provision. The account owner names a beneficiary. The payable on death provision transfers the property to the listed beneficiary upon the death of the account owner. The beneficiary has no access to the account prior to the death of the owner.
- Hold real estate as joint tenants with rights of survivorship. Title to real estate that is owned with survivorship rights automatically passes to the surviving joint tenant when one owner dies. The property avoids probate.
- Hold other property in joint ownership. Bank accounts, motor vehicles and other assets can be owned jointly with survivorship rights as well. This method can help avoid costly probate since the title of the ownership will be automatically transferred. However, any joint tenants have the authority to take and sell the asset at any time.
- Have transfer on death (TOD) accounts. A TOD is similar to a payment on death provision, and transfers the ownership to the listed beneficiary upon the original owner’s death. Although not allowed in all states, TOD accounts are allowed in many states.
- Consider an irrevocable living trust. Unlike the revocable living trust, the terms of an irrevocable living trust cannot be altered once the trust is set up. The original owner loses all control of the assets even before death and cannot change the terms of the trust. However, it does help reduce the probate estate because the irrevocable living trust does not go through probate.
- Donate to charity or create a charitable trust. Instead of making a testamentary donation through the will, the owner of the estate avoids probate with some assets by donating to charity or creating a charitable trust during his or her lifetime.
- Create a family limited partnership or family limited liability company. This method is the most complicated way to avoid probate, but it also can be useful to reduce estate taxes in some cases. The owners of the partnership or company are all members of a single family and shares of the business are transferred from the older to younger generation. The ownership shares of the organization go through probate when the owner dies. But the partnership or company agreement often dictates what happens when partners of the business die.
There are both advantages and disadvantages to avoiding probate. Consider how probate would affect the estate, and then use these applicable tips to avoid probate with some assets.
In the next issue of Retirement Watch Weekly, I’ll review the most commonly used probate forms.