When planning your estate, you may want to consider a strategy that will avoid probate in your estate plan. The probate process is time-consuming, expensive, and at times, contentious. So, to save money and spare your loved ones from the hassles of probate, avoid probate in your estate plan.
Probate avoidance methods are state specific. Therefore, when planning your estate, understand that some property may have to go through probate if not transferred to a trust. In the book 8 Ways to Avoid Probate(Nolo 2016), Nolo provides, in detail, the common probate avoidance methods and the states in which these methods are available.
Probate Avoidance Methods
The following is an overview of the probate avoidance methods suggested by Nolo:
- Set up payable-on-death bank accounts – This type of bank account allows you to add beneficiaries to your account. When you die, the account goes to the beneficiary and avoids probate.
- Name a beneficiary to your retirement accounts – Upon your death, the asset goes to the beneficiary of the account. If a designated beneficiary is missing on the account, the account becomes income to the estate and is taxed at the higher estate rates.
- Name a beneficiary for stocks and bonds – Every state except Louisiana and Texas allow brokerage accounts a transfer-on-death registration. The registration allows the owner of the account to name a beneficiary. Upon your death, the assets go directly to the beneficiary avoiding probate.
- Name a beneficiary for your vehicles – This method is only available in ten states. The method allows a transfer-on-death registration on your car listing the beneficiary on your title. Upon your death, the car goes directly to the designated beneficiary.
- Name a beneficiary for your real estate – 17 states allow a transfer-on-death deed. A specially prepared deed, specific to the laws of your state, is created with a statement added to the deed listing a beneficiary. Upon your death, the beneficiary receives the property as long as all other owners are deceased.
- Hold property in joint ownership – Joint tenancy automatically passes property, without probate, to the surviving owner upon your death.
- Create a Living Trust – Living trusts have many advantages. However, all property transferred to the trust must be transferred, in writing, to the trustee. So, if you put your entire estate into a living trust, you may incur large legal expenses. Transfer taxes may apply as well. In general, all property put in a living trust will avoid probate upon your death since all property goes directly to the trust beneficiaries.
- Make gifts – Give property away while you’re still alive. You can give up to $14,000.00 to an individual. If you exceed $14,000 to any individual, you must file a gift tax return. Read more about gift taxes in the article The Estate Tax and the Gift Tax: The Impact on your Estate.
- A complementary method is to take advantage of special procedures for small estates – If you are able to move enough property from your estate at the time of your death, you may achieve small estate status for your state. Some states have special procedures to transfer property in estates worth very little. In general, if the property that has to go through probate is of little worth, then the state may waive probate in favor of an affidavit to transfer property.
Avoiding Probate Reduces Exposure to Taxes
The above methods are great for avoiding probate, but they also reduce exposure to the estate income tax. The more property you move to your beneficiaries the less property available to earn income for the estate after death. So, avoiding probate not only saves on expenses and hassles, it also reduces the income tax exposure for the estate.
Use Common Sense
In the end, when creating your estate plan, use common sense. For common estates, estates that don’t qualify for the estate tax, a little probate doesn’t hurt. Fight the urge to create a trust just to hide a couple of assets from probate. The cost of creating a trust will far exceed the cost of a probate attorney putting a couple of items through probate. So, use common sense and apply beneficiaries to any account your state allows to avoid probate in your estate plan.
There is much more detail provided by Nolo in relation to the probate avoidance methods summarized above. The information provided above only scratches the surface but will give you ideas on how to save your inheritors from a lengthy probate process.
8 Ways to Avoid Probate– Nolo provides thorough details on probate avoidance methods. The pros and cons of each method are explained as well as instructions on how to collect the assets. In addition, Nolo will offer state specific information on each method. This book will remain a good reference after your initial read. And, of course, Nolo provides free legal updates on their website.
Tips to Minimize the Estate Income Tax – The article will help you understand how avoiding probate will also reduce the income tax liability of the estate as both strategies use similar methods.
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