How to Avoid Probate
Probate is the legal process of locating and assessing a deceased person's assets, paying the deceased's financial obligations and then distributing whatever is left over to the deceased's heirs. As a result, probate can be a long and expensive process, taking months and sometimes years, while chipping away at the value of the estate. Accordingly, most people strive to avoid probate, and here are some ways to do it.
Jointly Owned Property
By jointly owning property with someone, when you die the ownership of the property can simply transfer to that person rather than pass through probate. There are several forms of jointly-owned property, here are the most common:
- Joint Tenancy with a Right of Survivorship: as the name suggests, you take property as "joint tenants" and upon the death of a joint tenant, the surviving tenant takes the deceased tenant's portion.
- Tenancy by the Entirety: this is a form of ownership only available to married couples (and some same-sex couples in a few states). It works in much the same way as a joint tenancy with a right of survivorship, in that effectively upon the death of one spouse, the living spouse takes the deceased spouse's portion.
- Community Property: in community property states, married couples can hold property as community property with the right of survivorship. It has the same effect upon the death of one spouse as a tenancy by the entirety, where the surviving spouse takes full ownership of the property.
Revocable Living Trusts
Living trusts avoid probate because you effectively grant the trustee (the person overseeing the trust) the ownership of property. Thus, when you die it is the trustee transferring property, not you. You can instruct the trustee that, upon your death, he or she should transfer the property held in trust to your family and friends. This effectively transfers property but lets you sidestep probate court. Trusts are set up in formal documents, much like a will, so make sure that you comply with your state's requirements for a trust when setting one up.
Payable on Death (POD) Accounts
Like their name suggests, POD accounts are simply accounts with an instruction that, upon your death, the account transfers to a beneficiary that you name. They are extremely simple to set up, with most banks simply requiring that you fill out a form naming the beneficiary. POD accounts are popular because, in addition to being simple to setup, you can spend the money as you see fit during your lifetime and the beneficiary has no right to the money. Similarly, it is extremely easy for a beneficiary to collect on a POD. The beneficiary simply shows up to the bank with the proper identification and collects the account.
An increasingly popular option to avoid probate is the use of retirement accounts, specifically IRA and 401(k) accounts. When you establish these accounts, you will be asked to name a beneficiary of the account upon your death. As a single person, you are free to name whomever you want, but be aware that as a married person, your spouse may inherently have a right to some or all of the money in a retirement account.
Transfer on Death Registrations
Many states allow you to transfer securities (stocks, bonds, brokerage accounts) as well as vehicles and still avoid probate. Much like POD accounts, you will sign a registration statement that declares who you want your securities or vehicles to pass to upon your death.
The most obvious way to avoid probate is to make sure that the property isn't yours when you die. Most people accomplish this by giving away property as gifts during their life. Be aware, however, that gift taxes apply if the gift is in excess of a certain amount, so this is typically a good option only if the asset is below the gift tax threshold. Some assets, like money, can be split into smaller payments and paid over a series of years to avoid the gift tax.