How to Avoid Probate
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A good estate plan should distribute an individual’s property to whom he or she wishes the minimum delay after a decedent’s death. The plan should also minimize income and estate taxes, attorney’s fees, and other administrative costs. Avoiding probate can be an important component in achieving these goals. Keep in mind, however, that even though an individual may avoid having to have his or her estate “probated”, that does not mean the estate will not still owe Federal or Massachusetts estate tax. Below is an explanation in layman’s terms of how to accomplish avoiding probate of your estate.
Why Do You Want to Avoid Probate?
The three pitfalls usually cited are – time, cost, and lack of privacy. The settlement time frame for many estates is one year. Complex or contested estates take longer. With few exceptions, your heirs will have to wait until probate is concluded to receive their inheritance.
Probate can also be expensive. Depending on the size and complexity of your estate, attorney and probate fees may consume on an average 3 – 6 percent of your estate. The proceedings of the probate court are a matter of public record. Anyone with the time and inclination can go to the county courthouse and find out exactly how much you left to each heir and to whom you owed money. This leaves your estate with little or no privacy.
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If you die with a Will (“testate”), the probate court determines if the Will is valid, hears any objections to the Will, orders that creditors be paid, and supervises the process to assure that remaining property is distributed in accordance with the terms and conditions of the Will. If you die without a Will (“intestate”), the probate court appoints a person to receive and to distribute all remaining property, after repayment of all debts, in accordance with the laws of the state.
What Are the Different Ways You Can Avoid Probate?
No one probate-avoidance method is right for all people. Which method, if any, an individual should use depends on the type of assets he or she holds, to whom the individual wishes to distribute those assets, and the individual’s personal and financial situation. Here are some probate-avoidance techniques for assets most commonly held.
Bank Accounts
One way for an individual to avoid probate for bank savings and checking accounts is to name a beneficiary to inherit the account upon his or her death. The individual should have the bank add the words “in trust for” to the account followed by the name of the person or persons to take over ownership of the account upon the individual’s death. Another way is for the individual to add the intended beneficiary to the account as a joint owner, then upon the death of the first joint owner, the surviving joint owner inherits without the need to probate. Such joint ownership should not be entered into lightly since it makes the jointly held property available to the joint owner and subjects all of the jointly held property to creditor claims of either owner.
Certificates of Deposit (CDs)
An alternative to a regular savings account is a savings certificate, also known as a certificate of deposit (CD) from a bank, savings and loan association, brokerage firm or a credit union. Institutions that issue CDs generally allow a beneficiary designation to effect non-probate transfers, which means the money in the CD is distributed directly to the beneficiary without a court procedure when an owner or last surviving joint tenant of the CD dies. Beneficiaries have no right to the money in the CD during the owner’s lifetime.
Government Bonds, Notes and Treasury Bills
The way an individual’s Treasury bill, note, or bond is registered establishes who owns the security and who has survivorship rights. For any of these assets, the owner is designated followed by the words “payable on death” or “POD” to a named beneficiary or beneficiaries. Bonds bearing the name of a beneficiary are registered, for example, “John Smith Payable on Death (POD) to Jane Smith.” “Jane Smith” is the beneficiary. Transaction requests are only signed by the owner and do not require the consent of the beneficiary. Ownership rights are transferred to the beneficiary only after the death of the owner.
Stocks, Bonds and Other Securities
If securities are being held by a brokerage firm, the securities may be held in a “transfer on death account” with a designated beneficiary. The beneficiary will inherit the securities upon the account owner’s death. If, however, an individual is in possession of stock certificates himself, or if a financial or bank holding company hold the stock, a “transfer on death account” is not possible. In such cases, to avoid having to probate the securities, the individual may consider transferring the securities to a brokerage firm to be placed in a “transfer on death account.”
Insurance, Annuity and Individual Retirement Accounts (IRAs)
If an individual buys life insurance or an annuity, or establishes IRAs or 401ks, the individual can designate a specific beneficiary in the policy or contract. The proceeds of the policy or contract will pass to the named beneficiary or beneficiaries by operation of law upon the death of the owner and this account will not go through probate.
Gifts
Anything an individual gives away during life does not have to go through the probate process. Making nontaxable gifts (up to $15,000.00 per recipient per year, or unlimited transfers to a tax exempt entity) can also reduce eventual federal estate taxes.
Your Home
The asset that poses the biggest challenge to avoiding probate is an individual’s home. If an individual owns a home as joint tenants with rights of survivorship or as tenants by the entirety with a spouse, probate is avoided only upon the death of the first joint owner to die. When the surviving owner passes away, the property will have to be probated. One way to avoid probate and maintain full ownership of the property, is to transfer the property into a revocable or “living” trust before the surviving owner passes away.
What Is A Living Trust?
Think of a trust as a corporation. It is an entity that exists only on paper but is legally capable of owning property. A flesh-and-blood person, however, must actually be in charge of the property; that person is called the trustee. An individual can be the trustee of his or her own living trust, and the sole beneficiary, keeping full control over all property legally owned by the trust.
A “living trust” (also sometimes called a “revocable” trust) is simply a trust an individual creates while he or she is alive and which he or she retains the right to revoke or amend. All living trusts are designed to avoid probate. Some may help the surviving spouse’s estate save on death taxes, and others enable the individual to set up long-term property management.
How Does A Living Trust Avoid Probate?
Property an individual transfers into a living trust before his or her death does not go through probate. The successor trustee, the person appointed to handle the trust after the individual’s death or incapacity, simply transfers ownership to the successor beneficiaries named in the trust. There are minimum attorney’s fees and no probate costs. When all the property has been transferred to the beneficiaries, the living trust ceases to exist.
In conclusion, if an individual owns various assets excluding, real estate, and designates beneficiaries to whom the assets should be distributed upon the individual’s death, probate can generally be avoided. There may be certain circumstances where the probate-avoidance techniques described above will not be effective or allowed, if the individual wants to name minor children or disabled or multiple beneficiaries. If an individual does own real estate individually, conveying the property into a living trust may be the only viable probate-avoidance technique.
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Information provided by: Patricia Mello & Associates, P.C., Attorneys at Law
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Consult an elder law attorney knowledgeable in Medicaid law for detailed
information on these and other asset protection strategies.
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What is Probate?
Probate is the term used to describe the judicial process in which a probate court determines the beneficiaries of assets that are left in the decedent’s name individually at death, i.e. those assets that do not have a named joint or successor owner on the “title page”. The probate process establishes the true owner of such assets. Without probate, title to the property would remain in the decedent’s name making it impossible to sell or otherwise transfer such assets.
