The bad news: When a person dies owning property in their sole name without a beneficiary, their loved ones will have to go through a court-supervised process called probate to transfer the property out of the deceased person’s name and into the name of intended beneficiaries or heirs at law. Going through probate court may lead to various expenses, including fees for attorneys, executors, appraisers, accountants, court filings, and other costs required by state law. Depending on the probate’s complexity and the estate’s value, fees can easily run up to tens of thousands of dollars in some states.
The good news: Many costs can be reduced by avoiding probate altogether. It is that simple. Here are three ways to avoid probate and its related costs.
- Name a beneficiary. The probate process applies only to accounts and property in a person’s sole name that do not have a beneficiary, payable-on-death (POD), or transfer-on-death (TOD) designation at the time of their death. Accounts and property with a beneficiary designation will be transferred to the designated individual immediately upon the owner’s death without any probate court involvement. It is common to designate beneficiaries on these types of accounts and property:
- Life insurance policies
- Annuities
- Retirement plans
- Real estate (if available in your state)
Caution: When someone is named as a beneficiary of an account or piece of property through a beneficiary designation, they will receive that account or property outright and without any strings attached. This means it could be exposed to claims by the beneficiary’s creditors, judgments, or a divorcing spouse. Naming a beneficiary also means giving up the ability to put restrictions on how the beneficiary uses the account or property they receive. Lastly, naming a beneficiary does not help if you become unable to manage your affairs. The named beneficiary will only have access to the account or property at your death and not during your incapacity. You will have to rely on a financial power of attorney or a court-appointed conservatorship or guardianship to manage the account or property if you are unable to.
- Own accounts and property jointly. Probate can also be avoided for accounts or property you own if they are held jointly. Similar to a beneficiary designation, joint ownership automatically transfers the deceased co-owner’s share to the surviving co-owners immediately upon the person’s death without the need for probate court. There are several types of joint ownership that you can set up to avoid having to go to probate court to transfer a co-owner’s interest:
- Joint tenancy with rights of survivorship. With this type of joint ownership, a deceased co-owner’s interest in the property simply transfers to the remaining joint tenants (co-owners) upon the deceased co-owner’s death.
- Tenancy by the entirety. This is a special form of joint tenancy with a right of survivorship only available to married couples in some states.
- Community property with rights of survivorship. This form of ownership is used with property owned by a married couple in a community property state. At the first spouse’s death, the surviving spouse receives 100 percent ownership of the accounts and property determined to be community property.
State laws play an important role here. We can help you determine which form of joint ownership, if any, is a good fit for you.
Caution: As with beneficiary designations, adding a joint owner to your accounts or property can subject the accounts or property to claims asserted by the new joint owner’s creditors, judgments, or divorcing spouse. This vulnerability begins the moment they are added to the account or property, rather than after your death, which means that your new joint owner’s creditors could seize your accounts or property while you are still alive. (One exception is when property is jointly owned by spouses as tenants by the entirety. This type of ownership can protect the property from creditors trying to collect on just one of the spouse’s debts.)
- Create and fund a revocable living trust. A final method (and one estate planners recommend most often) to avoid probate and all its expenses is to create and fund a revocable living trust. When you create a trust, you will need to transfer the ownership of all your accounts and property to the trust or name the trust as the beneficiary. The process of transferring assets to a trust is called trust funding. The accounts and property owned by the trust (or that become owned by the trust by beneficiary designation) are not probate assets and do not require probate court involvement. While you are alive, you remain in control of all legal decisions pertaining to the accounts and property owned by the trust as the trustee and retain the enjoyment of those accounts and property as the current beneficiary. After your death or if you become unable to manage your affairs, your named successor trustee will step in to manage and distribute the trust’s accounts and property according to your wishes. A trust works well if it is properly created and funded by an experienced estate planning attorney.
We Have the Tools to Help You
If you are interested in creating a plan for you and your loved ones that keeps you out of probate court and avoids all the expenses that go with it, contact our office today to schedule your appointment. As an added convenience for our clients, we can hold our meetings through video conferencing or by phone if you prefer. We are here to help you decide whether it makes sense to avoid probate in your particular case and, if so, the best way to do so.
