How to Avoid Probate

My post yesterday focused on when probate is necessary. As I discussed, probate is required whenever a person dies owning property in his or her name alone. There are several downsides to probate, namely, the time and expense to your heirs and the potential for creditor claims and disputes by disgruntled family members. Therefore, when planning your estate, trying to avoid probate is something that makes a lot of sense in most cases. How you do that is the subject of today’s post.

There are a few primary mechanisms for avoiding probate. Each has its advantages and disadvantages. It’s best to consult with a knowledgable estate planning attorney to determine which strategy is right for you based on your goals as well as your personal and financial circumstances.

One way of avoiding probate is through the use of beneficiary designations and transfer-on-death deeds. Beneficiary designations refer to naming one or more individuals who receive the proceeds of your life insurance policies, bank accounts, 401(k) or IRAs and pensions upon your death. Typically, this costs nothing and is accomplished by filling out a simple form provided by the financial institution. A relatively new phenomenon, transfer-on-death deeds are used to pass down your house or other real property without going through probate. Transfer-on-death deeds are recorded in the county land records like a normal deed; however, as the name implies, the deed does not take effect until after your death. All your heirs have to do is file a short affidavit within 9 months after you pass away. The advantage of beneficiary designations and transfer-on-death deeds is their simplicity. Yet, this method of avoiding probate may only work well for small, simple estates — as it does not give you the ability to minimize or eliminate estate taxes or to control the manner in which your heirs receive their inheritance (meaning they are free to spend it however they choose).

Another method of avoiding probate is owning your property and assets in joint tenancy. If you are married, it’s likely that you own your house this way. Title to property or accounts owned in joint tenancy usually reads, “A and B, as joint tenants with right of survivorship.” Like beneficiary designations and transfer-on-death deeds, the value of joint tenancy is its simplicity; you just need to make sure the wording shown above is on your deeds, policy forms and account signature cards. That said, there are significant drawbacks to joint tenancy. First, joint tenancy only avoids probate on the death of the first joint tenant to die; whenever the surviving joint tenant dies, their estate will go through probate. Second, and perhaps more importantly, joint tenancy can entail negative tax consequences in the form of increased capital gains taxes.

Finally, you can avoid probate by setting up a revocable living trust. Although more expensive than the other options, a revocable living trust affords the most flexibility in your estate planning. You retain full control of your property and assets while you are alive. Furthermore, if you ever become incapacitated due to Alzheimer’s disease, stroke or other illness, a successor trustee can take over and manage your finances on your behalf. Best of all, a revocable living trust permits you to decide what your heirs do with the inheritance you leave them and to protect that inheritance from lawsuits, creditors or your heirs’ ex-spouses. For instance, you could give your successor trustee full discretion in making distributions from the trust and direct that distributions be made for specific purposes, such as education or down payment on a first home.

Beneficiary designations and transfer-on-death deeds, joint tenancy and a revocable living trust all avoid probate. There is no one-size-fits-all in estate planning. A combination of these options might be used. Estate planning is highly individualized, so a knowledgable estate planning attorney can help you create an estate plan that will give you peace of mind.

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