When a loved one passes, hopefully there's a will to determine how to distribute their estate. It isn't a pleasant thought, but one we need to plan for ourselves. One term usually strikes fear in your executor's ears, however: Probate.
However, not everything has to go through probate. There are many ways to avoid probate, the legal process of administering an estate, so your property passes directly to your heirs.
What is Probate?
Some of the activities that occur in probate are:
- Appraising property
- Paying debts and taxes
- Proving in court that a deceased person's will is valid
- Identifying and inventorying the deceased person's property
- Distributing property as directed by a will
- Transferring title and ownership of assets to the person's receiving the deceased person's property
While individually these aren't necessarily a burden, when an estate is large or there are many people involved or odd requests, it may be needed.
Probate may be avoided by using many different strategies such as a setting up types of accounts that many states allow when estates are small or aren't very complicated. A few of these strategies are listed for informational purposes.
Avoiding Probate Court
Gifts
Giving away property while you're alive helps avoid probate since anything that one doesn't own when they die, doesn't go through probate. There are limits on the gifts you may give to people and charities so they won't have to pay taxes on them, and the limits may change each year.
Joint Accounts
Another way to avoid probate is to have joint accounts. If an account is owned in the names of two or more people and it's designated "with right of survivorship," (WROS) then when one account owner dies, the surviving owners continue to own the account. Probate of this type of joint account isn't necessary.
The surviving owners will need to show the bank or investment company a death certificate for the deceased owner and then the deceased owner's name can be removed from the account.
Joint Ownership of Property
Whether or not property that is owned at the time of death will need to be probated depends upon how it's titled. Owning joint property with right of survivorship (JTWROS), can allow probate to be avoided.
Joint tenants with right of survivorship means that if there are two or more owners on the asset and one owner dies, then the surviving owner or owners continue to own the asset and the deceased owner's estate and heirs of the deceased owner receive nothing. The surviving owners need remove the deceased owner's name from the asset by showing a death certificate. No probate proceeding is involved.
A special type of joint tenancy with right of survivorship that is recognized between married couples in some states is called tenants by the entirety. This also avoids probate.
If you live in a community property state, you may title your property as community property with right of survivorship to avoid probate.
Payable on Death or Transfer on Death Accounts
One way to avoid probate is to have payable on death (POD) or transfer on death (TOD) accounts. Many states have laws allowing you to designate a beneficiary on bank and investment accounts - such as bank accounts, retirement accounts, including IRAs and 401(k)s. The money in these accounts is given directly to the chosen beneficiary without going through probate court upon the owner's death.
Most states permit securities held by brokerages to pass to beneficiaries without going through probate as well.