The cost of probate, not to mention the time involved, can be extensive. In addition, probate presents a loss of control and privacy as it is left in the hands of a judge in court to decide how assets will be distributed. These are all aspects of probate you should try to avoid completely or, if nothing else, reduce for your heirs.
You can do this during the estate planning process with a number of different tools and tactics.
Revocable Living Trusts
This estate-planning tool was created to avoid probate by allowing the creator to hold their assets in a trust that can be easily transferred to heirs upon death. This avoids high probate costs by those inheriting the assets due to the fact the assets were appraised as well as had taxes paid by the creator of the trust when they were still alive. This is a proactive way to reduce the amount your heirs will have to pay upon your passing. (For related reading, see: Establishing a Revocable Living Trust.)
Having joint ownership is a simple way to avoid probate when the first owner dies. In this scenario, the property goes directly to the joint owner upon death without the need for probate.
- Joint tenancy with right of survivorship: Property automatically passes to the surviving owner(s) upon the passing of one owner.
- Tenancy by the entirety: The same as joint tenancy but can only be utilized by married couples.
- Community property with right of survivorship: If you are married (or in California, if you have registered with the state as domestic partners) and live or own property in Alaska, Arizona, California, Idaho, Nevada, Texas or Wisconsin, another way to co-own property with your spouse is available to you: community property with the right of survivorship. If you hold property in this way, when one spouse dies, the other automatically owns the asset.
Probably one of the easiest ways to avoid probate is in the way of gifts while you’re still alive. This follows the simple logic that if you don’t own it while you’re alive, it doesn’t have to go through probate. A general rule of thumb to keep in mind while gifting is that the higher the value of the asset, the higher the probate costs will be. Also, keep in mind the limitations and gift taxes when gifting. (For related reading, see: What Are Gift Taxes?)
This tactic to avoid probate is as easy as filling out a simple form. The form itself allows assets such as bank accounts and retirement accounts. In some states, you have the option of a transfer-on-death for securities, vehicle registration and even real estate.
Update Your Beneficiaries
It is crucial to double check and update your beneficiaries to guarantee that your intended heirs are the actual beneficiaries you have listed on all of your accounts.
Probate can take years and more than just a couple thousand dollars, but both can be reduced if not avoided completely with proper planning. As you can see, there are different options available to you. By using one or even a few of the aforementioned tools you will create a smooth transition in a difficult time for your loved ones.
(For more from this author, see: Are You Prepared for Your Parents' Retirement?)