Avoiding probate is possible with proper planning. Many people can use the simple and effective strategies described in this article to ensure that all, or most, of their hard-earned assets pass directly to their loved ones without having to go through a probate court.
A question frequently asked by people looking into an estate plan is whether they can simply give away all of their possessions while they are still alive in order to avoid the probate process and even the need to have a detailed estate plan. It is prudent to consider to strategies that would help your loved ones avoid the costly and inefficient probate process, but simply giving away all of your possessions prior to your death is not a realistic or reasonable course of action. Why? Because if you are still living, you will likely need a roof over your head and access to money in order to cover basic living expenses until you pass on.
Nevertheless, if turning over ownership of your assets interests you, there are other strategies to consider. For example, it is possible to give away the majority of your assets through the use of revocable living trust. If you set up this trust and combine it with one or more estate planning techniques described below, you could effectively transfer all of your assets in a way that allows your loved ones to avoid probate altogether.
| Estate Planning Strategy | Helps Avoid Probate | Does Not Help Avoid Probate |
|---|---|---|
| Giving away all of your property | ✓ | |
| Creating a revocable living trust and re-titling assets so the trust is the owner | ✓ | |
| Creating a revocable living trust and neglecting to re-title your assets | ✓ | |
| Establishing and maintained beneficiary designations | ✓ | |
| Writing in your will that "nothing shall pass through probate" | ✓ | |
| Designating a joint owner with right of survivorship on your checking account(s), investment account(s), etc. | ✓ |
Overview of a revocable living trust
As mentioned, one of the best ways to transfer assets and avoid probate is by establishing a revocable living trust. This type of trust entails drafting a written agreement that will effectively cover three key phases in your life:
- Management and ownership of your assets while you are alive.
- Management of your assets if you become incapacitated.
- Management and ownership of your assets after you pass away.
Once a trust agreement is signed, you will need to re-title your assets in the name of your trust. Only after your revocable living trust has been funded (i.e. the trust becomes the recorded owner of your assets) will the assets be transferable to your loved ones outside of the probate process. This is extremely important since any assets not owned by the trust at the time of your death will need to be probated, unless the asset is subject to a beneficiary designation or owned with rights of survivorship by someone who survives you. Let's discuss each of these issues.
Set up and maintain beneficiary designations
Extremely valuable estate assets like life insurance policies, IRAs, 401(k)s, annuities, etc., are governed by beneficiary designations when the account holder passes away. For example, if you draft a simple Last Will and Testament that leaves all of your assets to your current spouse, but your beneficiary designation lists your ex-spouse as the beneficiary, then your ex-spouse will receive the life insurance proceeds or gain access to the funds in your retirement accounts. This is why it is so important to properly designate your beneficiaries and review them on a regular basis, especially if you have a major life event such as a divorce or your designated beneficiary pre-deceases you.
Utilizing joint ownership with rights of survivorship or tenancy by the entirety
In addition to living trusts and beneficiary designations, it is important to consider adding a joint owner to your bank accounts, investment accounts, and/or the deed for real estate. If it is clear that the account is jointly owned with rights of survivorship and not as tenants in common, then the funds in these accounts can be transferred outside of probate. However, there are some notable drawbacks to utilizing joint ownership with rights of survivorship. For example, there are instances when adding a joint owner to an account or deed for a piece of property is construed as a taxable gift that needs to be reported to the IRS on a federal gift tax return.
Another drawback is if a joint owner is sued or gets divorced. In these situations, a judgment creditor or divorcing spouse may be able to take some, or potentially all, of the assets in the joint account.
Additionally, if a joint owner passes away before you do, then 50% of the joint account could be included in the deceased joint owner's estate for purposes of calculating any potential estate tax.
Avoiding probate is possible, with proper planning
As you can see, there are certainly ways you can effectively avoid probate without attempting to time your death so that you give away everything to your loved ones while you are still alive. However, utilizing the strategies described above requires proper planning, which is why you should not try avoid creating an estate plan. Having a detailed, accurate and personalized estate plan will provide you with more control over what happens to your assets after you pass on and provide peace of mind to your loved ones.