Helping Loved Ones Avoid Probate

Most people want to do everything they can to care for their loved ones after they die. They want to pass their personal property and other assets as seamlessly as possible.

That means it's critical to do proper planning. Many folks with the best intentions fail to complete this step. They don't realize that beneficiaries must often deal with a lengthy process known as probate. Luckily, estate planning helps ensure your heirs and beneficiaries avoid probate when possible.

What Is Probate?

Probate is a legal process proving that a last will and testament is valid. Estate administration is the court-supervised process of gathering, documenting, and distributing a deceased person's estate.

The process distributes the decedent's probate estate. In most cases, the estate administration process must occur whether the decedent died with or without a will.

Estate administration takes some time and effort. But an executor or administrator and, eventually, a personal representative can complete the process easily. Sometimes, though, the probate court process can become a nightmare.

Most of the time, the estate administration process is straightforward. It typically results in the distribution of your probate estate. The court proceedings are a matter of public record, though. If privacy is a concern, you should make a plan for your probate assets that doesn't involve probate.

Minimizing or Eliminating Probate

There are several ways to avoid — or at least minimize — what goes through probate. Common ways to avoid probate include:

• Setting up trusts
• Designating a beneficiary
• Owning property jointly
• Lifetime gifting of money and property

This section provides information on the following topics:

• Payable on death accounts
• Transfer on death deeds
• Roth IRAs
• Other accounts with named beneficiaries

There are several ways to transfer property outside probate. Planning may make it possible to structure your estate to ensure that you own little to no probate property at death.

Accounts That Transfer to Beneficiaries

Several kinds of assets can transfer automatically upon the account holder's death. Such accounts must have a named beneficiary to benefit from this automatic transfer at death. These accounts use beneficiary designations.

Such accounts are POD (payable on death) accounts and TOD (transfer on death) accounts.

POD Accounts

POD accounts are typically bank accounts. These accounts can include the following:

• Checking accounts
• Savings accounts
• Certificates of Deposit (CDs)
• IRAs, 401(k)s, Roth IRAs: A Roth IRA is a type of Individual Retirement Account. 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 70½. Roth IRAs don't have withdrawal requirements. This 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. Thus, life insurance policies do not need to go through the probate process when the beneficiary is anyone other than the estate itself.

TOD Accounts

TOD accounts are usually investment accounts. These accounts can include the following:

• 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. Federal tax law does not consider an inheritance as income to the receiver. If you inherit a bank account or investment account that appreciates, you will pay taxes on the earnings.

What About Estate Taxes?

Estate taxes are paid by the estate, not by the receiver. The gross estate does not include assets passed directly to a beneficiary. Thus, they are 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. You can do this when the property is purchased. You must write the deed in a way that results in the ownership type you seek.

Property Deeds

It's not uncommon for a home, vacation home, or lake cabin to have joint ownership. It could be jointly owned by married couples, family members, or 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 types of joint ownership is who inherits upon the death of a joint owner. 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 vary regarding joint ownership. Check the laws of your state before deciding how to title your property. Inheritance rights of a surviving spouse will also be affected depending on whether the couple lives in a community property state.

Vehicle Titles

Ownership of a vehicle is determined based on the title. Who is listed on the title and how they are listed matters. Vehicles can also have more than one owner. Vehicle titles typically list married couples 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 vehicle owners can file with the state to transfer the title of a vehicle to another person upon their death.

When Probate Isn't Necessary

Sometimes avoiding probate is easy. For example, 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. In some states, the small estate process involves transferring property by affidavit.

Estates that transfer through a trust also do not go through probate. Trusts can include any of the following types:

• A revocable living trust
• An irrevocable trust
• A testamentary trust

A testamentary trust does not transfer the assets to the trust before the grantor's death. Thus, using a testamentary trust does not avoid probate.

Will I Need the Help of an Attorney To Avoid Probate?

An attorney is not always necessary in estate planning, depending on how large or complex the estate is. You can use DIY forms and save money on attorney's fees for small estates. But you may find it helpful to get legal advice as you explore ways to avoid probate.

An estate planning attorney can explain ways to transfer property after death. They can help you with tax planning and enable timely property transfer after your death. Planning today may allow your estate to avoid probate entirely.