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[Prefer to listen? You can find a podcast version of this article here: E198: How to Avoid Probate on Bank Accounts]

Planning for the future isn't just about retirement and investments – it's also about ensuring that your assets are protected and distributed according to your wishes. One area that often causes confusion and unnecessary delays is estate planning, particularly when it comes to bank accounts.

If you want to simplify your estate planning and bypass the often lengthy and costly probate process, there are strategies you can use to ensure a smooth transition of your bank accounts to your beneficiaries.

By understanding these strategies and incorporating them into your estate plan, you can potentially save your beneficiaries significant time, effort, and expenses in the event of your passing.

Understanding probate and its implications

Probate is the legal process of distributing a deceased person's assets according to their will or state law. It involves validating the will, identifying and appraising assets, paying debts and taxes, and distributing the remaining assets to the beneficiaries.

While probate is an essential part of the legal system, it can be a time-consuming and expensive process, often taking several months or even years to complete.

During probate, the court oversees the administration of the estate, which includes bank accounts. This means that the funds held in your bank accounts cannot be accessed by your beneficiaries until the probate process is completed.

This delay can be a burden for your loved ones and can exacerbate the stress that they are already experiencing from your loss.

Additionally, probate is a public process, which means that anyone can access the court records and find out details about your estate, including the value of your assets and the identities of your beneficiaries. This lack of privacy can be concerning for many individuals who prefer to keep their financial matters confidential.

Why bypassing probate is beneficial for bank accounts

Bypassing probate on your bank accounts offers several advantages for both you and your beneficiaries. First and foremost, it allows for the swift and seamless transfer of funds to your loved ones without the need to go through the probate process. This means your beneficiaries can gain immediate access to the funds they need to cover expenses, pay bills, or fulfill any other financial obligations.

Furthermore, bypassing probate can help reduce costs associated with the probate process. Probate often involves attorney fees, court fees, and other administrative expenses that can quickly add up. By avoiding probate, you can potentially save your estate and beneficiaries significant amounts of money.

Another benefit of bypassing probate is privacy. As mentioned earlier, probate is a public process, which means that your financial affairs become part of the public record. By employing strategies to bypass probate on bank accounts, you can maintain the confidentiality of your financial matters and protect your family's privacy.

Strategies to bypass probate on bank accounts

Now that we understand the importance of bypassing probate on bank accounts, let's explore some effective strategies you can implement in your estate plan.

Joint Ownership

Joint ownership with rights of survivorship (or similar arrangements, depending on the jurisdiction) is a popular strategy for avoiding probate on bank accounts. Here's how it works:

• Automatic Right of Survivorship: When two or more people own a bank account as joint tenants with rights of survivorship (JTWROS) or a similar legal arrangement, the surviving owner(s) automatically inherits the deceased owner's share of the account upon their death. This transfer of ownership happens by operation of law, meaning it's automatic and doesn't require probate.
• Immediate Access: Because the transfer is automatic, the surviving joint owner typically has immediate access to the funds in the account. This can be especially helpful in situations where the surviving family members need funds for immediate expenses, such as funeral costs or ongoing bills.
• Bypassing the Will: Even if a deceased owner's will specifies a different beneficiary for their portion of the bank account, the joint ownership arrangement takes precedence. This means that the account doesn't become part of the deceased's probate estate, and the funds go directly to the surviving joint owner regardless of the terms of the will.
• Ease and Simplicity: Adding a joint owner to a bank account is usually a straightforward process, often requiring just some paperwork provided by the bank.

One of the simplest and most effective ways to bypass probate on bank accounts is by setting up payable-on-death (POD) accounts. A POD account allows you to designate one or more beneficiaries who will automatically inherit the funds in the account upon your passing. The process of setting up a POD account is relatively straightforward and typically involves completing a beneficiary designation form provided by your bank.

By designating beneficiaries on your bank accounts, you ensure that the funds held in those accounts will pass directly to your beneficiaries outside of the probate process. This means that your beneficiaries can access the funds immediately after your passing, without the need for court intervention.

Many bank accounts are POD accounts by default and therefore will let you assign beneficiaries any time you want. It can sometimes even be done online through your online banking portal (so take a look online and see if that's an option for you).

Assigning beneficiaries to bank accounts through a POD designation is especially important in the case of joint accounts in which both account owners pass away. In this case, if both spouses pass away at the same time, the bank account would pass to the beneficiary named on the account. If there is no beneficiary defined, then the account will likely go through probate.

Don't forget about contingent beneficiaries. A contingent beneficiary is an individual, entity, or trust designated to receive assets or benefits if the primary beneficiary cannot or does not wish to claim them. Essentially, a contingent beneficiary is a "backup" beneficiary.

Keep in mind that a beneficiary can be a trust, which can help streamline the process further.

If you don't have the option to assign beneficiaries online, you will need to complete a beneficiary designation form provided by your bank. This form typically requires you to provide the names and contact information of your chosen beneficiaries. It's important to review and update these beneficiary designations periodically to ensure they align with your current estate planning goals and any changes in your personal circumstances.

Living Trust

A revocable living trust is a legal entity that you can create to hold ownership of your assets, including bank accounts, while still maintaining control over them. Using a revocable living trust can help avoid the probate process for the assets held within the trust. Here's how it works in the context of bank accounts:

• Transfer of Ownership: When you establish a revocable living trust, you transfer the ownership of your bank accounts from your individual name to the trust's name. You can do this by retitling the accounts in the name of the trust.
• Grantor as Trustee: Even though the bank accounts are now owned by the trust, you (as the grantor) can act as the trustee, which means you retain full control over the accounts. You can add or withdraw funds, close accounts, or make any other financial decisions just as you did before.
• Successor Trustee: You will designate a successor trustee who will step in and manage the trust's assets upon your incapacity or death. This individual or entity will be responsible for distributing the assets in the trust to your named beneficiaries according to the terms you've set forth in the trust document.
• Avoiding Probate: Upon your death, the assets in the trust—including your bank accounts—will not have to go through probate. Instead, the successor trustee will directly distribute the funds in the bank accounts to the trust's beneficiaries as instructed. This can save time, legal expenses, and maintain privacy since probate is a public process.
• Flexibility: Because the trust is revocable, you can change, modify, or even dissolve the trust at any time during your lifetime, giving you flexibility in managing your assets.
• Additional Benefits: Beyond avoiding probate, a revocable living trust can also provide instructions for managing your assets if you become incapacitated, ensuring that your financial affairs are handled according to your wishes without the need for a court-appointed guardian or conservator.

However, it's important to understand that while a revocable living trust avoids probate, it does not provide protection against creditors, and it does not offer the same kind of tax advantages that some irrevocable trusts might.

Also, there are costs and formalities associated with setting up and maintaining a trust, so it's essential to consult with an estate planning attorney to determine if it's the right strategy for your situation.

Small Estate Affidavits

A Small Estate Affidavit (SEA) is a legal document that can allow the heirs or beneficiaries of a deceased person to collect the decedent's assets without having to go through the formal probate process, provided the estate meets certain conditions. The specific criteria and processes for using a Small Estate Affidavit vary by jurisdiction, but generally, it's intended for smaller estates with limited assets.

Here's how a Small Estate Affidavit can help avoid probate on bank accounts:

• Eligibility: If the total value of the decedent's estate falls below a certain monetary threshold (which varies by state), and if there are no real property assets or the real property assets meet specific conditions, the estate may be eligible to use a Small Estate Affidavit.
• Faster Access to Funds: By using a SEA, beneficiaries can often access the funds in the decedent's bank accounts more quickly than they would if they had to go through the full probate process.
• Simple Process: To use a Small Estate Affidavit, the beneficiary or an interested party typically fills out the affidavit form, which includes details about the deceased, their assets, debts, heirs, and other relevant information. This form usually requires notarization.
• Direct Presentation to the Bank: Once completed, the SEA can be presented directly to the bank (or other financial institutions). Upon verification, the bank can release the funds in the deceased's account to the person presenting the affidavit or distribute the funds as instructed in the affidavit.
• Cost-Effective: Avoiding the formal probate process can save on court costs and attorney fees. This is particularly advantageous for smaller estates where such costs might disproportionately reduce the assets available to heirs or beneficiaries.
• No Executor or Administrator Needed: Because you're bypassing the formal probate process, there's no need to appoint an executor or administrator for the estate.

However, there are important considerations and potential drawbacks:

• Limitations: SEAs are only available for estates below a certain value, and there might be restrictions on the types of assets that can be collected using this method. Real property, for instance, often has specific rules or might be excluded from SEA procedures.
• Liability: Heirs or individuals using the SEA might be personally liable to estate creditors or other heirs if the assets are not distributed correctly or if the estate was not eligible to use the SEA.
• Disputes: If there's a disagreement among heirs or beneficiaries, using a SEA might not be appropriate, as the probate process provides a more structured environment for resolving such disputes.

Because the rules and requirements for Small Estate Affidavits vary by state and can be complex, it's advisable to consult with an attorney or familiarize oneself thoroughly with the local regulations before using this method to collect assets.

Gifts

If you're comfortable doing so, you can gift the money to your intended beneficiaries while you're alive. However, be aware of potential tax implications and the possibility that gifting may affect your financial security.

It's essential to recognize that the above options come with their own benefits, risks, and potential complications. Before making any decisions, consult with a financial advisor and an estate planning attorney to ensure that your choices align with your overall estate plan and objectives.

Misconceptions

Before we wrap up, let's address some common misconceptions about bypassing probate on bank accounts:

• MYTH – Bypassing probate means avoiding taxes: While bypassing probate can help streamline the distribution of funds to your beneficiaries, it does not necessarily mean that you can avoid estate taxes or other tax obligations. It's important to consult with a tax professional to understand the tax implications of your estate plan.
• MYTH – Bypassing probate is only for the wealthy: Bypassing probate is beneficial for individuals of all income levels. Regardless of the size of your estate, bypassing probate can save your beneficiaries time, money, and stress.
• MYTH – Bypassing probate is a one-time decision: Estate planning is an ongoing process, and your circumstances may change over time. It's essential to review and update your estate plan regularly to ensure it continues to reflect your wishes and goals.

Conclusion

Many people often overlook their bank accounts when it comes to estate planning but it's important to include those assets in your estate plan. Even if the accounts are smaller, anything you can do to streamline the process of settling your estate helps make life easier for your loved ones.

By employing strategies to bypass probate on your bank accounts, you can streamline the distribution of funds to your loved ones and potentially save them significant time, effort, and expenses.

Factors to consider when choosing a strategy include the complexity of your financial situation, the size of your estate, the number of beneficiaries, and your desire for control and privacy. An experienced professional can help you evaluate these factors and guide you in selecting the strategy that best meets your needs.

Understanding the implications of probate, the benefits of bypassing probate, and the various strategies available will empower you to make informed decisions and create an estate plan that meets your unique needs. Remember to consult with professionals in the field to guide you through the process and ensure that your estate plan aligns with your goals and wishes.