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[Prefer to listen? You can find a podcast version of this article here: E183: How to Avoid Probate]

Estate planning is an essential component of securing your financial legacy and ensuring that your loved ones are well taken care of in the event of your passing. It encompasses the strategic organization of your assets, properties, and wealth distribution to minimize the financial burden on your family and to maximize the benefits they receive.

A well-crafted estate plan not only provides peace of mind, but it also helps to safeguard your hard-earned wealth from potential legal disputes and taxation pitfalls.

There are a number of estate documents that everyone should have. This can include a will, a trust, power of attorney, health care directives, and other relevant documents depending on individual situations.

One consideration in estate planning is probate.

What is probate?

Probate is the legal process through which a deceased person's estate is administered, ensuring the proper distribution of assets and the settlement of any outstanding debts or taxes. When an individual passes away, their assets, which may include real estate, bank accounts, investments, and personal property, become part of their estate. The probate process is overseen by a court and typically involves the following steps:

• Validation of the deceased person's will (if one exists): The court reviews the will to ensure it is valid and reflects the testator's (the person who wrote the will) true intentions.
• Appointment of an executor or personal representative: The court assigns an individual, often named in the will or appointed by the court, to manage the estate and carry out the terms of the will.
• Inventory and appraisal of the estate's assets: The executor must identify, gather, and appraise all the deceased person's assets.
• Payment of outstanding debts, taxes, and expenses: The executor uses the estate's assets to pay off any outstanding liabilities, including taxes and funeral expenses.
• Distribution of the remaining assets: Once debts and expenses are paid, the executor distributes the remaining assets to the beneficiaries specified in the will, or according to the state's intestacy laws if there is no will.

There are downsides to the probate process, which is why many individuals look for ways to avoid probate.

Why avoid probate?

Avoiding probate is often a desirable goal for several reasons, which include:

• Cost: Probate can be expensive, with fees associated with court filings, attorney representation, and executor compensation. These costs can consume a significant portion of the estate's value, reducing the amount available to beneficiaries.
• Time: Probate can be a lengthy process, sometimes taking months or even years to complete. During this period, assets may be frozen, leaving beneficiaries without access to the funds or property they are due to inherit. Avoiding probate can expedite the distribution of assets to the intended recipients.
• Privacy: Probate is a public process, meaning that the details of the deceased person's estate, including the value of assets, outstanding debts, and the identity of beneficiaries, become part of the public record. Avoiding probate can help maintain privacy by keeping sensitive financial information and family dynamics confidential.
• Family conflict: The probate process may increase the likelihood of disputes among family members, as it can provide an opportunity for contesting the will or challenging the executor's actions. By avoiding probate, you can reduce the potential for conflict and ensure a smoother transition of assets to your beneficiaries.
• Asset protection: Bypassing probate can provide added protection for your assets, as it may shield them from creditors or legal claims against the estate.

To avoid or minimize the impact of probate, individuals often engage in estate planning strategies. There are a number of ways to accomplish this.

How to avoid probate

There are several strategies you can employ to avoid or minimize the probate process.

Living Trust

A revocable living trust is an estate planning tool that helps avoid probate by transferring the ownership and management of your assets to a trust during your lifetime. Here's how a revocable living trust works to bypass the probate process:

• Creation of the trust: You create a revocable living trust by drafting a legal document called a trust agreement. This document specifies the terms of the trust, names a trustee (usually yourself during your lifetime), and designates successor trustees and beneficiaries.
• Funding the trust: You transfer ownership of your assets, such as real estate, bank accounts, investments, and personal property, to the trust. This is accomplished by changing the title or ownership documents of the assets to the name of the trust. Once the assets are in the trust, they are considered trust property and are no longer part of your personal estate.
• Control and management: As the trustee, you retain full control over the trust assets during your lifetime. You can buy, sell, or modify the assets, as well as revoke or amend the terms of the trust at any time.
• Successor trustee: Upon your death or incapacity, the designated successor trustee takes over the management of the trust. This person is responsible for carrying out the terms of the trust agreement, which may include distributing assets to the beneficiaries or managing the trust on their behalf.
• Avoiding probate: Since the assets in a revocable living trust are legally owned by the trust and not by you as an individual, they do not form part of your personal estate and are not subject to probate. The successor trustee can distribute the assets directly to the named beneficiaries according to the terms of the trust, bypassing the probate process altogether.

By using a revocable living trust, you can avoid the time-consuming, expensive, and public nature of probate, allowing for a more efficient and private distribution of your assets to your beneficiaries. Additionally, a living trust can provide added benefits such as asset management during your lifetime, incapacity planning, and potential tax advantages.

Beneficiary designations on retirement accounts

Beneficiary designations on retirement accounts, such as 401(k)s, IRAs, and other qualified retirement plans, are an effective way to avoid probate for these assets. When you name a beneficiary for your retirement accounts, you create a legally binding agreement with the financial institution that ensures the funds will be distributed directly to the designated beneficiary upon your death, bypassing the probate process. Here's how beneficiary designations on retirement accounts work to avoid probate:

• Designation of beneficiary: When setting up your retirement account or at any point during the account's existence, you can designate one or more beneficiaries to inherit the account assets upon your death. The financial institution managing your account will provide the necessary forms and instructions for naming your beneficiaries.
• Retention of ownership and control: While you are alive, you maintain full ownership and control over your retirement account. The designated beneficiary has no legal claim or control over the account, and you can change the beneficiary, withdraw funds, or make any other modifications to the account without the beneficiary's consent.
• Automatic transfer upon death: When you pass away, the retirement account assets transfer directly to the designated beneficiary without the need for probate. The beneficiary will need to contact the financial institution managing the account, provide a copy of your death certificate, and follow the institution's procedures for claiming the assets.
• Streamlined process: The direct transfer of retirement account assets to the designated beneficiary is generally faster and more straightforward than the probate process. This can help ensure that your loved ones receive financial support without the delays, costs, and public nature associated with probate.

It's essential to keep your beneficiary designations on retirement accounts up-to-date and aligned with your overall estate planning goals. Be sure to review and update these designations periodically, especially after major life events like marriage, divorce, or the birth of a child. Additionally, consult with an estate planning attorney and a financial advisor to address any potential tax implications or other issues that may arise from the distribution of retirement account assets upon your death.

Joint Ownership with Rights of Survivorship

Joint Ownership with Rights of Survivorship (JTWROS) is a type of property ownership arrangement in which two or more individuals jointly own an asset, such as real estate, bank accounts, or personal property. It is an effective method to avoid probate for the jointly owned assets because of the following characteristics:

• Automatic transfer of ownership: When one of the joint owners passes away, their share of the property automatically transfers to the surviving owner(s) without the need for probate. This transfer of ownership occurs by operation of law, meaning it is a legal process that takes place without requiring any additional action or court intervention.
• Undivided interest: In a JTWROS arrangement, each owner holds an undivided interest in the entire property, meaning they do not have separate, divisible shares. This undivided interest is what allows the property to pass seamlessly to the surviving owner(s) without going through probate.
• Simplicity: JTWROS is a straightforward way to bypass probate for certain assets. By specifying joint ownership with rights of survivorship in the title or ownership documents, you create a legally binding arrangement that ensures the surviving owner(s) will inherit the property upon the death of a co-owner.

It is important to note that Joint Ownership with Rights of Survivorship may not be suitable for all situations, as it can have tax implications, affect eligibility for certain benefits, and may not align with your overall estate planning goals. Additionally, JTWROS does not provide protection in cases where all joint owners pass away simultaneously, such as in an accident. In such cases, the property would still be subject to probate unless additional beneficiaries are assigned.

Payable-on-Death (POD) Accounts

Payable-on-Death (POD) accounts, also known as Totten Trusts, are a simple and effective way to avoid probate for certain financial assets like bank accounts, certificates of deposit, and savings bonds. These accounts often allow you to designate a beneficiary who will inherit the account funds upon your death, bypassing the probate process. Here's how POD accounts work to avoid probate:

• Designation of beneficiary: When you set up a POD account, you name a beneficiary who will inherit the funds in the account upon your death. You retain complete control over the account during your lifetime and can change the beneficiary, withdraw funds, or close the account at any time without the beneficiary's consent.
• No impact on ownership: The beneficiary of a POD account has no legal claim or control over the funds while you are alive. The account remains solely in your name, and you maintain full ownership and control over the assets.
• Automatic transfer upon death: When you pass away, the funds in the POD account automatically transfer to the designated beneficiary without the need for probate. The beneficiary simply needs to provide the financial institution with a copy of your death certificate and proof of their identity to claim the funds.
• Simplicity and cost-effectiveness: Establishing a POD account is a straightforward and cost-effective way to avoid probate for certain assets. Most financial institutions offer this option at no additional cost, making it an accessible method for passing on assets directly to your chosen beneficiary.

By using a Payable-on-Death account, you can ensure that your designated beneficiary receives the funds in the account quickly and without the delays, costs, and public nature associated with the probate process.

Transfer-on-Death (TOD) Deeds and Registrations

A Transfer-on-Death (TOD) deed, also known as a beneficiary deed, is an estate planning tool that allows you to pass real property directly to your designated beneficiary upon your death, without going through probate. The following explains how a TOD deed works to avoid probate and the types of property it can be used for:

• Execution of the TOD deed: To create a TOD deed, you prepare a legal document that specifies the property to be transferred and names the beneficiary who will inherit the property upon your death. The deed must meet the specific requirements and formalities of your state, which may include notarization and witness signatures.
• Recording the deed: Once the TOD deed is properly executed, it must be recorded with the appropriate county or land records office where the property is located. Recording the deed ensures its legal validity and provides public notice of the intended transfer.
• Retention of ownership and control: During your lifetime, you maintain full ownership and control over the property. You can sell, mortgage, or change the beneficiary designation on the TOD deed without the consent of the beneficiary.
• Automatic transfer upon death: When you pass away, the property transfers directly to the beneficiary named in the TOD deed without the need for probate. The beneficiary is required to provide a copy of your death certificate and may need to complete a few administrative steps to claim the property, but the overall process is more streamlined than probate.

TOD deeds can be used for various types of real property, such as single-family homes, condominiums, or parcels of land. However, it's essential to check your state's laws, as not all states allow TOD deeds, and the types of property that can be transferred using this method may vary.

A Transfer-on-Death (TOD) deed is specifically designed for real property, such as homes, condominiums, and land. For non-real estate assets like vehicles, a similar concept called a Transfer-on-Death (TOD) registration or beneficiary designation can be used to transfer ownership upon the owner's death without going through probate.

Many states in the U.S. have adopted laws that allow vehicle owners to designate a beneficiary for their vehicles using a Transfer-on-Death registration or title. This process involves completing the necessary paperwork with the state's motor vehicle department, which typically includes naming the beneficiary on the vehicle's title or registration form.

Similar to a TOD deed for real estate, the vehicle owner retains full ownership and control over the vehicle during their lifetime and can change the beneficiary or sell the vehicle without the beneficiary's consent. Upon the owner's death, the beneficiary can claim ownership of the vehicle by providing the required documentation, such as a copy of the owner's death certificate and an application for a new title, to the motor vehicle department.

Keep in mind that the rules and availability of TOD registrations for vehicles may vary from state to state.

What about a business? While a TOD deed itself is not directly applicable to a business, there are other mechanisms that can be used to transfer ownership of a business upon the owner's death, bypassing the probate process.

For example, if the business is structured as a sole proprietorship, the business assets (real estate, equipment, inventory, etc.) can be transferred using appropriate estate planning tools, such as TOD deeds for real property, beneficiary designations for bank accounts, or a revocable living trust that includes all the business assets.

If the business is a corporation, partnership, or limited liability company (LLC), the ownership is usually represented by shares or membership interests. In such cases, you can use a Transfer-on-Death (TOD) registration or beneficiary designation for these ownership interests, similar to how it's done for stocks and bonds. This allows the business ownership to pass directly to the designated beneficiary upon the owner's death without going through probate.

Another option for transferring a business is to create a buy-sell agreement. This is a legally binding contract between co-owners or between the owner and a designated buyer, which stipulates the terms and conditions under which the business interest will be bought and sold upon the occurrence of a triggering event, such as the owner's death. A buy-sell agreement can help ensure a smooth transfer of the business and avoid disputes among surviving owners or family members.

Life Insurance Policies and Annuities

Life insurance policies and annuities are financial products designed to provide financial security to beneficiaries upon the death of the policyholder or annuitant. Both products can effectively avoid probate when set up correctly, as they are considered contractual arrangements between the policyholder or annuitant and the insurance company. Here's how these products avoid probate:

• Beneficiary designations: When purchasing a life insurance policy or an annuity, you are required to name one or more beneficiaries who will receive the policy proceeds or annuity payments upon your death. These beneficiary designations create a legally binding contract between you and the insurance company, ensuring the funds are paid directly to the named beneficiaries.
• Direct payment to beneficiaries: Upon your death, the insurance company pays the policy proceeds or annuity benefits directly to the designated beneficiaries, bypassing the probate process. The funds are not considered part of your estate and are not subject to probate court administration.
• No impact on ownership: The designated beneficiaries have no legal claim or control over the life insurance policy or annuity while you are alive. You maintain full ownership and control, and you can change the beneficiary designations, policy terms, or annuity options at any time without the beneficiaries' consent.
• Speed and privacy: Life insurance proceeds and annuity benefits can be paid out relatively quickly after your death, providing financial support to your beneficiaries when they may need it the most. Additionally, these funds are paid privately, meaning the details of the payouts are not part of the public probate records.

It is essential to ensure that your beneficiary designations on life insurance policies and annuities are up-to-date and aligned with your overall estate planning goals.

Gifts

Gifting is a strategy that involves transferring ownership of assets to another person or entity during your lifetime, effectively removing these assets from your estate. By doing so, you can avoid probate for the gifted assets, as they are no longer considered part of your estate when you pass away. Here's how gifting works to bypass probate:

• Transfer of ownership: When you gift an asset, you transfer its legal ownership to the recipient, whether it's cash, property, or other types of assets. The recipient becomes the new legal owner, and the asset is no longer part of your personal estate.
• Reduced estate size: Gifting assets during your lifetime can reduce the overall size of your estate, which may simplify the probate process, reduce potential estate taxes, and expedite the distribution of remaining assets to your heirs.
• Control and timing: You can decide when and to whom you gift assets, allowing you to have some control over how your assets are distributed during your lifetime. This flexibility may help you achieve your estate planning goals more effectively.
• Immediate benefit to the recipient: Gifting allows the recipient to benefit from the assets immediately, without having to wait for the probate process to conclude. This can be particularly helpful in cases where the recipient may need financial support or where the asset is time-sensitive, such as a business opportunity.

However, there are some important considerations to keep in mind when using gifting as an estate planning strategy:

• Gift tax implications: The IRS imposes gift tax on certain gifts, depending on their value and the relationship between the donor and recipient. You need to be aware of the current gift tax laws and any potential tax consequences that may arise from your gifting strategy.
• Loss of control: Once you gift an asset, you lose control over it, and the recipient can use it as they see fit. Make sure you are comfortable with the loss of control before gifting assets.
• Irrevocability: Gifts are typically irrevocable, meaning you cannot take the assets back once they have been given away. It's crucial to think carefully about the long-term implications of gifting assets, as your financial circumstances may change in the future.

It's advisable to consult with an estate planning attorney or financial advisor to ensure that gifting is an appropriate strategy for your specific situation and to address any potential issues or complications that may arise.

Avoiding probate: a summary

To avoid probate, consider taking the following action steps:

• Create a revocable living trust: Transfer your assets into a trust, with you as the trustee, and designate a successor trustee to manage and distribute the assets upon your death without going through probate.
• Use Joint Ownership with Rights of Survivorship: Hold property jointly with another person, so that when one owner passes away, their share automatically transfers to the surviving owner(s) without the need for probate.
• Establish Payable-on-Death (POD) accounts: Designate a beneficiary for your bank accounts, certificates of deposit, and savings bonds, so that the funds transfer directly to the beneficiary upon your death without going through probate.
• Use Transfer-on-Death (TOD) deeds or registrations: Utilize TOD deeds for real property and TOD registrations for assets like vehicles, stocks, and bonds, allowing these assets to transfer directly to your designated beneficiaries upon your death without probate.
• Set up life insurance policies and annuities: Name beneficiaries for your life insurance policies and annuities, ensuring that the proceeds are paid directly to the beneficiaries without going through probate.
• Consider gifting assets during your lifetime: Transfer ownership of assets to others while you are alive, thereby reducing the size of your estate and avoiding probate for those gifted assets.
• Keep your beneficiary designations updated: Regularly review and update the beneficiaries named in your estate planning documents, insurance policies, and financial accounts to ensure they align with your current wishes and estate planning goals.

Before implementing any of these strategies, it's important to consult with an estate planning attorney to ensure they are appropriate for your specific situation and to address any potential issues or complications that may arise. Proper planning and execution of these steps can help you avoid probate and provide a smoother transfer of assets to your loved ones.