How to Avoid Probate
Probate is a court-supervised process in which a deceased person’s assets are located, debts and final monetary obligations are paid, and the individual’s final wishes and assets are distributed to any heirs. Generally, the process can be very expense and time consuming, often lasting months or sometimes years to finally assess and administer an estate. Below are a number of ways in which probate can be avoided:
Jointly Owned Property
If you jointly own property with another person, upon your death the ownership of the property can transfer to the other person instead of having the property go through probate. There are a few types of jointly-owned property:
A Joint Tenancy with a Right of Survivorship: You obtain the property as “joint tenants” and after the death of one joint tenant, the surviving tenant gets the deceased tenant’s share of the property.
Tenancy by the Entirety: This form is only available to married couples (and depending on the state you live in, it may apply to same-sex couples). This form of joint tenancy is similar to a right of survivorship, in that upon one spouse’s death, the surviving spouse gets full ownership of the of the property.
Community Property: If you live in a community property state, married couples may possess property as community property with the right of survivorship. This works much in the same way and has the same effect as a tenancy by the entirety.
Revocable Living Trusts
In essence, a living trusts is when one grants a trustee (an individual chosen to oversee the trust) the ownership of their property. This is an effective way to avoid probate, because upon your death is will be the trustee transferring the property, not you.
Instructions can be given to the trustee that upon your death they transfer to the family members and loved ones you have designated the property that is held in trust. This allows the property to be transferred whilst avoiding probate.
Trusts may be arranged through formal documents (similar to a will), therefore make certain that you follow the proper requirements for your state when setting up a trust.
Payable on Death (POD) Accounts
A POD account is an account with instructions that upon your death the account will transfer to beneficiary that you have named. POD accounts are easy to create, with many banks only requiring you to fill out a form that names the chosen beneficiary.
This type of account is popular due to it’s uncomplicated set up, the ability to spend the account funds during one’s lifetime, and that the beneficiary holds no right to access the funds. Also, upon the creator’s passing, the beneficiary can collect on a POD with ease – normally a beneficiary simply has to show the bank proper identification to collect from the account.
Retirement Accounts
Retirement accounts, particularly IRA and 401(k) accounts, are also a common alternative to probate. When creating a retirement account, you will be required to name a beneficiary for the account upon your death. If you are single, you can name anyone as your beneficiary. However, if married, your spouse may hold an inherent right to a portion or to all of the funds in your retirement account.
Transfer on Death Registrations
Some states will allow the transfer of various securities (bonds, stocks, brokerage accounts) and property such as vehicles without going through the probate process. Similar to a POD account, you must sign a registration statement that asserts who the securities and/or vehicles will pass to upon your passing.
Gifts
The best method to avoid probate is to assure that the property you wish to transfer is not actually yours when you pass. Many accomplish this by offering property as gifts while still alive. However, be aware that if the gift is greater than a particular amount, then a gift tax will apply. Therefore, gifting something is only a good option if the gift amount below the gift tax limit. Assets such as money may be divided into smaller amounts and paid over time in order to avoid paying a gift tax.