Each year, millions of dollars are spent on soaring attorney and court fees associated with probate proceedings upon the death of a loved one. Avoiding probate in estate planning allows the decedent's property to be distributed to the designated person at a designated time without substantial costs.
- Avoiding probate can help allow the distribution of the estate with fewer costs.
- The probate process involves proving the last will.
- Transferring property to a trust is one way to avoid probate.
Background on the Probate Process
Probate is the process of proving the will is, in fact, the last will, and there are no challenges to it and of adjudicating any claims against the estate under court supervision. Probate usually occurs in the appropriate court in the state and county where the deceased permanently resided at the time of his or her death.
If there is no valid will (called intestacy), the title to the property will pass under state intestacy laws to "heirs at law," normally giving one half to the surviving spouse and dividing the remainder equally among the children. With or without a will, the property must go through the probate proceedings.
Even if a person dies with a will, a court generally must allow others the opportunity to contest the will. Creditors are allowed to step forward; the validity of the will can be scrutinized, and the deceased's mental capacity at the time the will was drafted can be questioned.
These proceedings take time and money, and your heirs are the ones who will have to pay. Since probate proceedings can take up to a year or two, the assets are typically "frozen" until the courts decide on the distribution of the property. Probate can easily cost from 3% to 7% or more of the total estate value.
Simplifying or Avoiding Probate Altogether
Even though probate takes place regardless of whether you made a will, you can look to other tools that help your inheritors.
Transfer Property to a Trust
Revocable living trusts or inter-vivos trusts were invented to help people bypass the probate process. Unlike the property listed in your will, the property in a trust is not probated, so it passes directly to your inheritors. You simply create a trust document and then transfer the property title to the trust. Many people name themselves as the trustee to keep total control of the trust property.
A trust also allows you to name alternate beneficiaries; it does not require a waiting period after death and is much harder to attack in court.
Set Up Payable-on-Death Registrations
Also known as transfer-on-death accounts, these allow you to name one or more beneficiaries of the account to avoid the probate process. It's simple to create and usually free, and the beneficiary can easily claim the money after the owner dies.
The ability to name a beneficiary, however, is a feature that you must add to the account, but most banks, savings and loans, credit unions, and brokerage firms allow you to do so. It requires some extra paperwork and time, so you'll need to be persistent and ask your institution for the required forms.
Make Tax-Free Gifts
Making gifts helps you avoid probate for a very simple reason: you no longer own the property when you die. For calendar year 2022, you can give your heirs up to $16,000 per person without a gift tax penalty. This increases to $17,000 for calendar year 2023, to account for inflation. Giving before you die helps lower your probate costs because, typically, the higher the monetary value of assets going through probate, the higher the probate costs.
Revisit the Beneficiary Designations on Your Stuff
Dust off that old life insurance policy and make sure your beneficiaries are up to date. Too many times, individuals forget to change their beneficiary after their second marriage, and then the ex-spouse gets everything. Call your custodians and update the beneficiaries on your IRAs, 401(k), life insurance policies, annuity contracts, and other retirement accounts.
These types of accounts pass at your death by contractual beneficiary designation, meaning whoever you name in your will is irrelevant to these accounts; beneficiary designation will take precedence in court. Avoid naming your estate as the beneficiary, which will cause your property to go through probate.
Use Joint Ownership
Joint tenancy with right of survivorship, tenancy by the entirety, and community property with right of survivorship are the types of joint ownership that allow your property to bypass the probate process. If you hold your stocks, vehicles, home, and bank accounts in joint ownership, the title of the property automatically passes to the joint survivor upon your death. Remember, once you title your property jointly, you'll be giving up half ownership in the property.
The Bottom Line
Although we've demonstrated some weaknesses of having a will as your sole estate planning tool, don't think that you no longer need one. The guidelines above point out great tools to build a more effective plan. However, you'll want to draft a will to cover property acquired shortly before you die or anything that might have been overlooked.
A good estate plan should distribute a decedent's property when and to whomever the person desired, and with a minimum amount of income, estate, and inheritance taxes, as well as attorney and court fees. Avoiding probate is an important part of achieving these goals.