Probate is the process of proving that the will is, in fact, the last will. A will is a legal document that distributes a person’s assets upon that person’s death. The testator is the person who writes and executes a last will and testament allocating his assets which are to be transferred upon his death. Wills are important because they give you the power to determine what will happen to your property. Generally, the probate process will assess if there are any challenges to the will and adjudicate 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. With so many disadvantages to the court system, many people seek to avoid the probate process altogether. Here are several of the ways:
- Donating Assets and Tax-Free Gifts
- Make Property Transfer-On-Death and Payable-On-Death
- Joint Ownership of Property
- Place Assets in a Revocable or Irrevocable Trust
Donating Assets and Tax-Free Gifts
First, though sometimes extreme, you may sell or donate all of your property, leaving yourself nothing to pass along to your decedents. However, you may elect to make-tax free gifts, which would in turn allow you to give your heirs up to a certain amount ($15,000 annually) in tax free-gifts. You are also permitted to pay a family member’s full medical expenses so long as it is paid directly to the treating facility. This method of allocating gifts gives you control of your assets, and limits almost any court involvement. Additionally, tax-free gifts can help lower probate costs since the higher the monetary value of assets assessed during probate, the higher the probate costs. Review the IRS FAQs for more information or contact a qualified CPA.
Transfer-On-Death and Payable-On-Death
Second, you may designate beneficiaries for your bank accounts and non-retirement investment accounts. These two designations are respectfully referred to as POD (payable on death) and TOD (transfer on death). These accounts are created by the bank and include a contractual clause that specifies who the account is given to at the time of death. These accounts allow you to name one or more beneficiaries of the account to avoid the probate process since the beneficiary can claim the money right after the owner dies. Generally, the beneficiary will sometimes only need to provide the grantor’s original death certificate to receive the money or control of the account. Additionally, account assets will receive a step-up in bases when the original owner dies. This means that the beneficiary will owe no capital gains tax if the investments are liquidated for proper transfer.
Joint Ownership of Property
Next, joint tenancy with right of survivorship, tenancy by the entirety, and community property with right of survivorship are types of joint ownership that allow your property to avoid the probate process. This means that any title to assets such as stocks, homes, and bank accounts in joint ownership, automatically passes to the joint survivor upon your death. Once you title your property jointly, you’ll be giving up half ownership in the property.
Generally, transferring property to a trust, be it a revocable or irrevocable trust, is sometimes likely the best way to avoid probate. Generally, if the assets are titled in the name of the trust settlor’s revocable living trust prior to his death, then the trust agreement will determine the asset distribution. However, if the assets are not conveyed to the living trust prior to the settlor’s death, then probate will not be avoided. Irrevocable trusts also avoid probate but should be used sparingly since the terms are permanent. In an irrevocable trust, the grantor no longer owns the assets, and instead, the trustee is responsible for distributing all assets, while altogether avoiding the court’s involvement. In addition to avoiding the probate process, irrevocable trusts protect assets from creditors and remove the property from personal income tax, awarding the beneficiary a chance to avoid estate taxes on any property. Unlike in a will, the property in your trust passes directly to your inheritors. A trust does not require any court interference and it is harder for others to contest. This process is also private, faster, and more trusted because unlike a will, it usually does not require court involvement due to the property needing to be legally transferred from one person to another. The living trust avoids this because it is already established as the legal owner of the property and the beneficiary is already established as a legal recipient of those assets.
In conclusion, though the probate process can be difficult and stressful, it is sometimes needed to prove the legitimacy of a will. Anyone who is able to contest a will should be able to verify that the will was not executed under the pretense of fraud, undue influence, or any defenses the contestant claims. Thus, it is best to seek legal advice from a trusted attorney to determine whether you should execute a will, create a trust, or do both. Working closely with an attorney you trust, maybe the best way to assure your wishes are granted upon your death.
If you have questions or want to discuss your options, contact us right away to schedule a free consultation.