Recent strategies for avoiding the lengthy and expensive probate process
Contrary to popular opinion, avoiding probate does not have to be difficult. Many people can use the following simple and effective ways to ensure that all, or some, of their property passes directly to their heirs, without going through the lengthy and expensive probate court process.
What is Probate?
Probate is a legal process that takes place after someone passes away. It includes:
- Proving in court that a deceased person’s will is valid
- Identifying and inventorying the deceased person’s property
- Having the property appraised
- Paying debts and taxes of the estate, and
- Distributing the remaining property as the will (or state law, if there is no will) directs.
You have heard that you should avoid probate, but why?
Typically, probate involves paperwork, court appearances, accounting work and various tax filings, often with the involvement of attorneys and accountants. Any professionals’ and applicable court fees are paid from estate property, which would otherwise go to the people who inherit the deceased person’s property. In some cases, the probate court may supervise the administration of probate, adding to the complexity and expense. Additionally, if real estate is owned in more than one state, probate proceedings will be necessary in each state — unless probate-avoidance mechanisms such as those described below, or more detailed estate planning techniques, are used. Apart from expense, the other major drawback of probate is that it can be time-consuming, delaying the time at which one’s beneficiaries inherit the estate’s property by up to a year or more in some cases.
Revocable Living Trust
Living trusts have become popular as a means to let people make an end-run around probate. The advantage of holding your valuable property in trust is that after your death, the trust property is not part of your probate estate (it is, however, counted as part of your estate for federal estate tax purposes. That is because a trustee — not you as an individual — owns the trust property. After your death, the trustee can easily and quickly transfer the trust property to the family or friends you left it to, without going through the probate process. You specify in the trust document, which is similar to a will, who you want to inherit the property, and on what terms.
Pay-on-Death Registration
You can convert your bank accounts and retirement accounts to payable-on-death accounts. You accomplish this by filling out a simple form in which you name a beneficiary. When you pass away, the money goes directly to your beneficiary without going through probate. You can do the same for brokerage accounts, annuities, and stocks. Some states provide for a similar mechanism for vehicle and boat registrations, through the use of “beneficiary deeds” that get recorded at the state level.
Joint Ownership of Property
Properly done, joint ownership can provide a simple and easy way to avoid probate when the first owner passes. To take title with someone else in a way that will avoid probate, you state, on the paper that shows your ownership (e.g., a real estate deed or a bank account), how you want to hold title. Usually, no additional documents are needed. The following are three common methods of joint ownership, but only two of them are successful probate-avoidance mechanisms.
- Joint tenancy with right of survivorship: Since each joint tenant owns an undivided interest in the entire asset, when one owner passes away the other joint owner remains as the sole owner, thereby avoiding probate
- Tenancy by the entirety: In most states, married couples can take title in “tenancy by the entirety” rather than in joint tenancy. This is very similar to joint tenancy, but can be used only by married couples (or in a few states, by same-sex partners who have registered with the state). Both avoid probate in exactly the same way. However, unlike joint tenancy with right of survivorship, tenancy by the entirety affords a level of creditor protection: a creditor of only one spouse will have no claim against property owned by husband and wife and cannot force the sale of such property as long as both spouses are alive and the marriage is intact.
- *Tenancy in Common – A trap for the unwary: When two or more people own property as tenants in common the property does not automatically go to the surviving joint tenant(s) on death. Rather, each owner holds a partial interest in the property. For example, if Bill and Mary own a home as tenants in common, upon Bill’s death his interest in the home would go to his estate and be distributed either by the terms of his will or as determined by the probate court. Tenancy in common also permits co-owners to own different percentages whereas joint tenancy requires each joint tenant to own an undivided and equal share with all other joint tenants.
Gifts
Giving away property while you are alive helps you avoid probate for a very simple reason: if you do not own an asset when you pass away, it does not have to go through probate. That lowers probate costs because, as a general rule, the higher the monetary value of the assets that go through probate, the higher the expense (typically 5% of the probate assets).
Simplified Procedures for Small Estates
Almost every state now offers shortcuts through probate (or a way around it completely) for “small estates.” Each state defines the term “small estates” differently.
To discuss how best to implement one, or a combination, of these probate avoidance strategies contact one of the knowledgeable attorneys via email at jared@freedlawllc.com or see our website for further information (www.freedlawllc.com).
