Avoiding probate can offer the person who plans many possible rewards. They can include savings of time and money and stress. There are, as with many things in estate planning, multiple ways to achieve a particular objective. Some ways of avoiding probate may accomplish the goal, but may do so by creating potential pitfalls in terms of negative tax implications or exposure from civil lawsuits. By planning properly and carefully, you can effectively avoid probate and do so with opening yourself up to unnecessary risks.
At its most fundamental level, avoiding probate involves making sure that you do not have assets in your probate estate when you die or, if you do, they are small enough to be distributed using one of your state's highly simplistic and abbreviated procedures for very small estates. One of the many relatively simple ways to make sure an asset isn't in your probate estate is to make sure that you aren't the last living co-owner left. If your asset is co-owned and one or more co-owners (often called “joint tenants” in technical legal verbiage) survive you, then the asset goes to that person or people without requiring probate administration.
To achieve that end, some people take the step of “adding” someone to an asset (or assets) to create this sort of joint tenancy and method for avoiding probate. While this technique may well avoid probate, it carries with it a series of potential problems that can befall you or your loved ones. For one thing, “adding” someone as a co-owner (joint tenant) of an asset that you currently own by yourself is that, in the eyes of the IRS, you have made a gift unless your new co-owner paid you. By just “adding” someone with no money changing hands, the tax authorities consider what you did as giving 50% of that asset to that other person. This could potentially create gift tax issues for you and income tax issues for the other person (among other things).
Another potential issue is that the person you're adding as a co-owner immediately takes full rights to one-half of the property. That means that, after you add him/her, he/she has all the same power and authority over the asset that you do. Want to sell the asset? He/she has to approve it. Want to refinance that asset? He/she has to sign off.
An additional thing to keep in mind is that adding someone means additional exposure from potential legal judgments. Perhaps you trust your daughter implicitly and think that she is a safe person to add to the title on your home. But even the most upright and trustworthy of people can find themselves facing civil lawsuits related to their business ventures, a divorce or an auto accident. If your child is a defendant in any such case and the court enters a judgment against her, that asset that you and she now co-own could potentially be used to satisfy that legal obligation of hers.
Other methods of avoiding probate may be much safer. For example, avoiding probate with a revocable living trust allows you to reap all the same benefits of probate avoidance as adding someone to your asset(s), but will allow you (if you choose) to maintain sole and complete control over that asset(s) during your lifetime, and will not subject your wealth to civil lawsuit exposure the same way that adding someone to a deed/title would. To be sure, avoiding probate with a living trust is not as simple as avoiding probate by adding a co-owner to your assets, but it is safer. And anything worth doing is worth doing well.