Avoiding the Probate Process

Time, cost, and inconvenience are good reasons to try to avoid the probate process. There are several ways to transfer assets outside of probate proceedings:

• Deeds for real estate
• Accounts with named beneficiaries
• Gifting
• Trust documents (revocable and irrevocable testamentary trusts and living trusts)

Deeds for Real Estate Property

The family home is often the most valuable asset that a couple owns. The surviving spouse will want assurances that they do not need to leave their home, at the very least. Homeownership is determined by the property deed and state law.

Depending on the state, there are ways a deed may be titled for joint ownership. Three of these avoid probate: joint tenancy, transfer on death deed, and tenancy by the entirety. Tenants in common do not avoid probate.

Joint Tenancy With a Right of Survivorship

As the name suggests, both spouses own a 50% interest in the home as "joint tenants." Upon the death of the first spouse, the surviving spouse receives immediate ownership of the deceased spouse's interest in the home.

Even if the deceased's will says differently, the deed supersedes the will. A deed that lists joint tenants with the "right of survivorship" avoids the probate process.

Without a “right of survivorship" clause, the deceased person's share could be inherited by other family members, and the surviving spouse would be co-owning the home with them. Without the “right of survivorship," a probate process would be required to distribute this asset.

A joint tenant need not be a spouse, though. Three children may have inherited a home together. They could all be on the deed as joint tenants holding an equal 1/3 share. If non-spouses are joint owners when one dies, their share of the property is split evenly between the surviving owners. The law considers this transfer a gift, and gift tax applies.

Tenancy by the Entirety

This form of ownership is only available to married couples. In a tenancy by the entirety, each spouse owns 100% of the property. When the first spouse dies, their interest ends. The remaining spouse continues to own 100% of the property. There is no need for probate.

Tenants in Common

Tenants in common may own different shares of a property. Tenants in common can sell their share of a property or pass it on as an inheritance. This form of joint ownership does not avoid the probate process.

Transfer on Death Deed (TODD)

As of 2021, about half of the states in the U.S. allowed property to be automatically transferred to a beneficiary through the use of a transfer on death deed. Because the transfer takes place by deed, it avoids probate.

What Happens if Only One Spouse Owned the Home and the Other Is Not Listed on the Deed?

What happens with the home depends on the laws of your state and whether:

• It is a community property state or a separate property state
• The home was purchased before or during the marriage
• The home was a gift or inheritance

A community property state like California assumes that all property acquired during a marriage is community property. It doesn't matter whose name is on the title if community funds were used to purchase it.

It is community property with the right of survivorship and all marital property transfers automatically. Unless...

• The property was purchased before the marriage
• The property was received as a gift or inheritance by only one spouse
• The property was in only one spouse's name and they paid for it with separate funds

Even in a community property state, one spouse may own property to which the other spouse has no inheritance right. If ownership is complicated, it's likely to go to a court proceeding.

Talk to a probate attorney about your state's probate laws and how real property can be transferred.

Accounts with Named Beneficiaries

Many financial institutions allow you to designate a beneficiary on your account who will receive the assets in your account upon your death. These assets never become part of the estate and thus avoid probate. Below are some of the most common financial assets that allow you to do this.

Payable on Death (POD) Accounts

Bank accounts, savings accounts, and retirement accounts are usually POD accounts. When you open the account, you are asked to name a beneficiary. If you did not name a beneficiary when you set up the account, you can do so at any time in the future, so long as you are considered mentally competent.

After the account holder's death, the beneficiary simply shows up at the bank with proper identification and collects the account.

Married couples often set up a joint bank account with rights of survivorship. The spouse will automatically inherit such an account. Retirement accounts like a pension, an IRA, a 401k, or a 403b, are generally considered shared assets in community property states.

A spouse may have a right to inherit some or all of the money in a retirement account. If you are single, you can name whomever you want as the beneficiary.

Life Insurance Policies

Life insurance policies pay named beneficiaries upon the death of the insured. The payout is not part of probate unless there are no living named beneficiaries. Then the policy may pay the estate itself and then would become an asset of the estate, subject to estate taxes. In some states, the insurance payout will be distributed according to the intestacy laws of the state if:

• A named beneficiary has died
• No beneficiary was named

If so, it will not go through the probate process.

Transfer on Death (TOD) Registrations

Many states allow you to transfer securities (stocks, bonds, brokerage accounts) as well as vehicles without going through probate.

Much like POD accounts, you will sign a registration statement that declares who you want your securities or vehicles to pass to after your death.

Lifetime Gifting

One of the most obvious but often overlooked ways to avoid probate is to give assets away before your death. You can do many of these options:

• Transfer the deed of your home to an adult child or list them as a joint tenant with the right of survivorship
• Gift a car to a child or grandchild
• Yearly gifting of cash to whomever you choose without paying a gift tax. This works as long as you keep the amount of your gift under the gift tax exclusion amount for that tax year. The amount you can gift varies each year. In 2022, the gift-tax-exclusion amount is $16,000 a year per person. A married couple can give double that amount per recipient.
• You can make a gift to pay certain education and medical expenses, even if the amount exceeds the annual gift tax exclusion amount. But you need to make the payment directly to the educational institution or medical provider, not to the beneficiary.

Over your lifetime, you can give up to the gift tax/estate tax exemption amount. In 2022, that is $12.06 million. That will drop down to $6.2 million at the end of 2025.

It would be wise to get legal advice if you consider this strategy. There can be unintended consequences when one gifts assets and personal property one is using, like a home. There may be a better way to make a gift that doesn't become a threat to solvency during your lifetime.

Trusts

Trusts are an excellent way to gift money or items -- both during one's lifetime and after death. There are many types of trusts that achieve different purposes.

Revocable Living Trust

A revocable living trust becomes effective during the donor's lifetime. They may retain control of their assets as a trustee of the trust (or another person could be named as trustee). The trustee manages the property that has been transferred into the trust but must use it for the benefit of the donor, and later, of the beneficiaries of the trust.

Any property placed in the trust is no longer part of your estate and avoids the probate process entirely. After the trust donor's death, property in the trust can transfer immediately to the named beneficiaries. Or, it can remain in the trust where it will be managed by the trustee and distributed over time. The trustee will follow the instructions in the trust document.

Testamentary Trust

A testamentary trust is created by a will after a person's death. The decedent gets no benefit from the trust during their lifetime, but their beneficiaries enjoy the benefits of inheritance. A testamentary trust is an irrevocable trust. The terms of the trust cannot be changed because the person who created the trust has died.

A trust can operate for many years, distributing assets according to the terms of the trust document. A trust may outlive its original trustee. In that case, a successor trustee named in the trust would take over, or a new trustee would be named by a judge.

Other Relevant Topics:

• Avoiding Probate FAQs
• The Advantages of an Inherited Roth IRA

Learn More About Probate Avoidance. Talk with an Attorney.

The best time to think about what will happen during probate is when you are drafting an overall estate plan. There are many things you can do today to maximize your heir's inheritance in the future.

Talk to a local estate planning attorney about what makes sense for you, your estate, and your heirs.