Avoiding the Probate Process

Time, cost, and inconvenience are good reasons to avoid the court-supervised probate process. There are several ways to transfer assets so they are not subject to probate proceedings and costly attorney's fees:

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

Deeds for Real Estate Property

In small estates, the family home is often the most valuable asset a couple owns. The surviving spouse will want assurances that they can stay in the home. The property deed and state law determine the legal nature of homeownership. State probate law determines whether property passes without probate.

Depending on the state, there are ways to title a deed for joint ownership. Joint tenancy, a transfer on death deed, and tenancy by the entirety are ownership designations that avoid probate. 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 first spouse's death, the surviving spouse receives immediate ownership of the deceased spouse's interest in the house.

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, other family members could inherit the deceased person's share. The surviving spouse could co-own the home with other family members. Additionally, without the "right of survivorship," the distribution of this asset requires the probate process.

A joint tenant need not be a spouse. For example, 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, subject to any applicable gift tax.

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.

Transfer on Death Deed (TODD)

About half of the U.S. states allow automatic property transfer through the use of a transfer on death deed. Ownership passes to designated beneficiaries by operation of law at the decedent's death. Because the transfer takes place by deed, it avoids 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.

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

What happens to the home in this situation 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 all property acquired during a marriage is community property. If the property was purchased with community funds, it doesn't matter whose name is on the title.

Community property carries a right of survivorship, and all marital property transfers automatically. The following are exceptions to the general rule providing that a person's assets are considered community property passing automatically:

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

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

Talk to a probate attorney about your state's probate laws and how a court process may allow the transfer of real property.

Accounts with Named Beneficiaries

Many financial institutions allow you to name a beneficiary on your account. A beneficiary designation allows the asset to transfer to the beneficiary upon your death. These assets never become part of the estate and thus avoid probate. Below are common financial assets typically transferred to named beneficiaries through a beneficiary designation.

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 brings proper identification and collects account proceeds.

Married couples often set up a joint bank account with rights of survivorship. The spouse will automatically inherit such an account. Retirement accounts, such as a pension, an IRA, a 401(k), or a 403(b), 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 only part of the probate estate if there are no living named beneficiaries. The policy may pay the estate itself when there are no named beneficiaries. In such cases, life insurance proceeds 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:

• The policy's named beneficiary is dead
• The policy does not name a beneficiary

Thus, whether life insurance proceeds become subject to the probate process depends on the circumstances.

Transfer on Death (TOD) Registrations

Many states allow you to transfer particular types of property at death without going through probate. These assets include securities (stocks, bonds, brokerage accounts) and vehicles.

Much like POD accounts, you will sign a designation statement declaring to whom you want your securities or vehicles to pass at your death.

Lifetime Gifting

One of the most obvious but often overlooked ways to avoid probate is to give assets away before death. You can do so through the following 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

• 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 must pay the educational institution or medical provider directly, not the beneficiary.
• Yearly gifting of cash to whomever you choose without paying a gift tax

Yearly gifting works as long as you keep the amount of your gift under the gift tax exclusion amount for that tax year. In 2023, the gift-tax-exclusion amount is $17,000 a year per person. A married couple can give double that amount per recipient. Over your lifetime, you can give up to the gift tax/estate tax exemption amount. In 2023, that is $12.920 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 you gift assets and personal property.

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 to consider.

Revocable Living Trust

A revocable living trust becomes effective during the donor's lifetime. They may keep control of their assets as a trustee of the trust (or another person could be named as trustee). The trustee manages the property transferred into the trust. The trustee must use the trust's property to benefit the donor and the trust's beneficiaries.

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. Property can also remain in the trust. The trustee will manage and distribute the property over time according to the trust's terms. The trustee must follow the instructions in the trust document.

Testamentary Trust

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

A trust can operate for many years, distributing assets according to the terms of the trust. A trust may outlive its original trustee. In that case, a successor trustee named in the trust takes over, or a judge appoints a new trustee to oversee the remaining assets.

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 drafting an estate plan. You can do many things today to maximize your heir's future inheritance.

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