Probate is the process of proving that a will is valid. Estate administration is the court-supervised process of gathering, documenting, and distributing a deceased person's estate if they have any property and it is not held in a trust. Even if the deceased person does not have a will, their estate will still need to go through the estate administration process (or, for small estates, a simplified process).
Most of the time, the probate court process is straightforward. It takes some time and effort, but an executor or administrator and eventually a personal representative can complete the process without much difficulty. Sometimes, though, probate court process can become a nightmare.
Example situations could be:
- Expecting to inherit grandma's lake cabin at no cost turns into a court battle with a brother who wants the cash
- Mom needs to move into a care facility after the death of her second husband, but his children want “their share" of the property
There are several ways to avoid, or at least minimize, what has to go through the probate court process. The most common way to avoid probate court is to set up trusts. You can also designate a beneficiary or own property jointly with the person or people with whom you want to inherit your property. Another easy way to avoid probate is to simply gift money and property while you're still alive.
In this section on avoiding probate, you will find information on payable on death accounts, transfer on death deeds, Roth IRAs, other accounts with named beneficiaries, and more.
Accounts That Transfer to Beneficiaries
There are several kinds of assets that can transfer automatically upon the death of the account holder because the accounts have a named beneficiary. These accounts are called POD (payable on death) accounts and TOD (transfer on death) accounts.
POD Accounts are typically bank accounts:
- Checking accounts
- Savings accounts
- Certificates of Deposit
- IRAs, 401k's, Roth IRAs: A Roth IRA is a type of Individual Retirement Account. While all retirement accounts allow the account holder to designate a beneficiary, traditional retirement accounts require the account holder to start withdrawing from the account at the age of 70 ½. Roth IRAs don't have withdrawal requirements, which means that the money can continue to grow regardless of your age.
- Life insurance policies are also payable directly to designated beneficiaries. Proceeds from a life insurance policy do not become part of the estate and do not need to go through the probate process.
TOD Accounts are usually investment accounts:
- Brokerage accounts
- Stocks and bonds
- Retirement plans
These assets can transfer directly to the beneficiary and do not need to go through the probate process.
Who Can Be a Beneficiary?
Any person can be a beneficiary. An IRS-recognized nonprofit can be a beneficiary. A corporation, partnership, or LLC cannot be a beneficiary.
Do Beneficiaries Pay Taxes on an Inheritance?
No, at least not initially. An inheritance is not considered income to the receiver for federal tax purposes. If you inherit a bank account or investment account and it appreciates, then you would pay taxes on the earnings.
What About Estate Taxes?
Estate taxes are paid by the estate, not by the receiver. Since the type of assets discussed on this page transfer directly to a beneficiary or co-owner, it is not part of the estate. It is not subject to estate tax.
Accounts That Transfer by Deed
Real property, like homes, real estate, cars, and boats, can also be transferred outside of probate. This can be done at the time the property is purchased by the way the deed or title is written.
It's not uncommon for a home or vacation home or lake cabin to have joint ownership. It could be jointly owned by married couples, family members, or even friends. When the property is purchased, the deed is drafted to show this joint ownership as:
- Joint tenants
- Joint tenancy with rights of survivorship
- Tenants in common
The difference between these different types of joint ownership is who inherits upon the death of one of the joint owners. Does the interest in the property pass to the surviving owners (or surviving spouse), or does it pass to other heirs of the deceased?
State laws differ on joint ownership so check the laws of your state before deciding how the deed for your property should be transferred. Inheritance rights of a surviving spouse will also be affected depending on whether the couple lives in a community property state.
Ownership of a vehicle is determined based on who is listed on the title and how they are listed. Vehicles can also have more than one owner. Married couples are typically listed as joint tenants with the right of survivorship. Again, tenants in common do not inherit from one another.
Some states offer a simple Transfer on Death form that car owners can file with the state to transfer the title of a vehicle to another person upon their death.
When Probate Isn't Necessary
Probate isn't always necessary for very small estates. Even modest to moderate estates can avoid a full probate process if they qualify for a small estate simplified probate process.
Estates that transfer through the use of a trust — a revocable living trust, an irrevocable trust, or a testamentary trust — also do not go through probate.
Will I Need the Help of an Attorney to Avoid Probate?
An attorney is not always necessary in estate planning -- simpler estate documents can be created with DIY forms.
But it can be helpful to consult an estate planning attorney so you understand all of the ways you can protect your assets from taxation. They can also help enable the timely transfer of property after your death. A small amount of advance planning may be able to help your estate avoid probate entirely.
Can I Solve This on My Own or Do I Need an Attorney?
- Complex probate situations usually require a lawyer
- A lawyer will take these matters seriously and enforce protections
- Get tailored advice and ask your legal questions
- Many attorneys offer free consultations