How to Avoid Probate: Tools for Avoiding Probate
Avoiding probate has become a popular topic in recent years. The probate process can be time-consuming and expensive. Because the probate process involves court supervision and the services of a probate attorney, probate proceedings may last for a year or more. This delays the transfer of property to your heirs after your death. Because probate proceedings are private records, some people prefer to avoid probate proceedings for privacy concerns. Because of these drawbacks, many clients want to know how to avoid probate.
Although there are benefits to avoiding probate, it is important to note that probate avoidance is not for everyone. In recent years, unscrupulous marketers have travelled about touting the benefits of a one-size-fits-all estate plan. These marketers often use scare tactics that over-emphasize the perils of probate, intimidating clients into buying their prepackaged plans. Some of these plans cost more than a probate proceeding would cost, especially if probate could be avoided through other means. And because the marketers don’t focus on the client’s specific factual circumstances, probate is often still required. Although we recommend probate avoidance for some clients, we do not try to force it on everyone. Whether you need to avoid probate (and, if so, how to avoid probate) depends on your specific situation.
Although it is usually impossible to avoid probate once the decedent has died, probate costs can often be avoided with proper estate planning prior to death. The devices that an estate planning attorney can use to avoid probate include joint tenancies, beneficiary designations, and revocable (living) trusts.
How to Avoid Probate through Revocable Living Trusts
A living trust is a legal entity that is created during your life to hold title to your assets. Because you retain full control over the trust, including the right to revoke the trust and “undo” the transfers of assets, living trusts are commonly known as revocable trusts.
Living trusts are a great way to avoid probate. Under the typical probate avoidance arrangement, all of your assets are transferred into the living trust during your lifetime. You serve as trustee of the trust, giving you complete control over your assets as though you owned them outright. When you die, there is no need to probate your estate since the trust owns all of your assets. This avoids probate without sacrificing control of your assets – a win-win situation for many clients.
Living trusts have benefits in addition to avoiding probate, such as incapacity planning. You can read more about these great tools in our section on Revocable Living Trusts.
How to Avoid Probate through Joint Tenancies
Most assets can be held in a joint tenancy with right of survivorship. These arrangements avoid probate because the property passes automatically to the joint tenant at the death of the first tenant to die. At the moment of death, the deceased tenant ceases to have an interest in the asset and it is immediately vested in the surviving tenant. Although the joint tenant may need to file something in the land records or provide a death certificate to third parties, the jointly-titled asset does not pass through the probate estate of the deceased tenant. The jointly-titled asset passes to the surviving beneficiary outside of the deceased tenant’s will or revocable trust. Retirement plans and IRAs are governed by beneficiary designations and cannot be held in joint tenancy.
Joint tenancies can be a dangerous estate planning device for avoiding probate. The person named as a joint tenant becomes an immediate co-owner with immediate rights to the jointly-titled assets. For bank accounts, one joint tenant usually has the right to withdraw the entire account. If the joint tenant is untrustworthy or is a poor asset manager, the property titled in the joint tenancy is placed at risk. Joint tenancies do not provide an opportunity to plan for coordination of a person’s affairs at their death, such as paying taxes on the property and debts of the estate.
Joint tenancies can also cause adverse tax consequences. The act of naming a joint tenant is often considered a gift if the tenancy is not revocable (as is usually the case). Unless the joint tenant is a spouse, this can result in gift tax if the joint-tenant’s share of the property exceeds the annual exclusion amount. For personal residences, non-spousal joint tenancy interests can cause the loss of income tax exclusions that are available upon the sale of the home if the joint tenants do not meet the age requirements or reside in the residence.
Joint tenancies are also risky from an asset protection point of view. Titling the assets jointly opens the door to claims of co-owners, their creditors, and, in the event of a divorce, spouses of the co-owners. Because the signature of all joint tenants are generally required under state law, your ability to deal with the property could be thwarted by an uncooperative joint tenant. This can be especially risky if the property is held by multiple joint tenants.
Although these disadvantages make joint tenancies unsuitable as a primary estate planning devise, joint tenancies can play an important role in an overall estate plan. When used in combination with a more flexible tool for avoiding probate, such as a revocable trust, joint tenancies can be an effective tool to achieve your goals.
How to Avoid Probate through Beneficiary Designations
Beneficiary designations allow you to determine who will benefit from life insurance policies, retirement plans (including pension-sharing, profit, and 401(k) plans), and IRAs at your death. These designations avoid probate because they are contractual obligations that do not pass under the terms of your will. For example, if you have named a beneficiary under your insurance policy, there is no need for the probate court to validate the transfer to the beneficiary because you have already expressed your desires in the insurance contract.
Many states allow the designation of “payable on death” (POD) beneficiaries a banking, savings and loan, and other financial accounts. You may change the POD designations at any time and name alternate beneficiaries in case you are predeceased by a beneficiary.
Beneficiary designations can be a better alternative to joint tenancies for some financial accounts because they do not subject the property to the intended beneficiary’s immediate control. However, beneficiary designations are only available for certain type of assets, such as financial accounts. For example, beneficiary designations cannot effectively dispose of real estate and many other types of assets. This limits the benefit of beneficiary designations in your overall estate plan.
It is important to note that although these devises may avoid probate costs, they do not avoid estate and inheritance taxes simply because they avoid probate. This is because your taxable estate does not always coincide with your probate estate. For example, giving a family member survivorship rights on a $500,000 parcel of land may take it out of your probate estate, but it will be included in your taxable estate if the family did not purchase his or her interest. It is important to consult with a Mississippi estate and trust attorney to determine the best strategy for accomplishing your overall estate planning goals.
If you want to know how to avoid probate in your estate, contact one of our estate planning attorneys today.