How to Avoid Probate — Potential Legal Strategies
The most common way to avoid probate is to create a trust to hold your assets instead of a will. You can also reduce the amount of property that goes through probate by making gifts to your family members or other beneficiaries before you die. However, you may have additional strategies available to you that would lead to the same consequences and may be better adapted to a specific type of asset or situation.
Pay-on-Death Bank Accounts
If you want to transfer cash at your death, you may want to consider a pay-on-death bank account, also known as a Totten trust. For any savings or checking account, you can provide the bank with a form naming the people who should receive the money remaining in the account when you pass away. This does not give a beneficiary any rights to the contents of the account during your life, and it does not prevent you from withdrawing funds from the account.
In some states, you may need to notify a beneficiary about the account to make the transfer valid. Also, there may be a delay in transferring the money to your beneficiaries during the process of collecting state estate tax upon your death. The state will need to verify that your estate can pay the taxes without using the money from the account.
Transfer-on-Death Accounts and Deeds
Unless you live in Texas, you can transfer securities or securities accounts to a beneficiary or beneficiaries of your choice without going through probate after your death. You can get a form from your broker to arrange for transfer-on-death registration of an entire account. If you are seeking to transfer individual securities, you can get assistance from a transfer agent of the company that issued them.
You may be able to arrange for the transfer of your car upon your death, although this option is not available in the majority of states. Your state’s motor vehicle agency can provide the paperwork.
Over half of all states, including California, New York, and Illinois, allow property owners to record a deed to transfer real estate upon their death. These deeds must follow the same requirements as any other type of deed, and they must specifically state that they do not take effect until the property owner’s death. You can revoke the deed if you change your mind later.
Joint Tenancy and Tenancy by the Entirety
You can choose to own your property in a joint tenancy, which creates a right of survivorship and allows it to transfer to the other owners upon your death without going through probate. While a joint tenancy technically is available for any type of property, it is most often used for real estate. Owners can start a joint tenancy by simply calling themselves joint tenants with rights of survivorship on the document that shows their ownership of the property. You cannot give your share of the property to anyone except the other joint tenants. If you do, this will end the joint tenancy with respect to the new tenant, although the joint tenancy will remain in effect among the other joint tenants with respect to one another.
A joint tenancy may sound like a useful tool, but you should be aware of potential pitfalls. For example, you cannot undo a joint tenancy. If you make someone else a joint tenant and give them a share of a property that you formerly held on your own, you cannot take back the share, and they have the right to sell or mortgage it. You also may face tax obligations or lose tax breaks in some situations. In the event that the other joint tenant lacks the ability to make decisions due to incapacity, you may need to go to court to get someone appointed to make these decisions.
If you are holding title as a married couple, you may want to consider a tenancy by the entirety, which is similar to a joint tenancy in most respects. It may provide useful protections against creditors and in bankruptcy. However, neither spouse can transfer the property while the other spouse still lives without getting the other spouse’s consent, and the property will go automatically to the surviving spouse upon death. Only some states permit a tenancy by the entirety because it is perceived to be a highly restrictive form of property ownership.
Special Options in Community Property States
If you live in a community property state, you may be able to make an agreement with your spouse that any community property will be transferred automatically to the surviving spouse. You may need to include a phrase referring to community property with right of survivorship on a deed or other document, although the process varies by state.
About five states, including Texas, allow spouses to create a community property agreement that covers all of their property, including their separate property. They can use the agreement to designate all of their property as community property and ensure that it passes to the surviving spouse without probate. You cannot easily revoke this type of agreement.
Life Insurance
You name the beneficiary of your life insurance policy through the policy rather than an estate planning document, so these funds do not go through probate unless the beneficiary is the estate. Instead of your estate, you should name your spouse, children, or other loved ones as beneficiaries. The money from your life insurance proceeds can help your family cover estate taxes, debts, and living expenses in the immediate future while probate unfolds.
Shortcuts for Small Estates
Estates below a certain value, which varies from state to state, can qualify for simplified probate proceedings. This usually requires a beneficiary to submit an affidavit and proof of their right to inherit, which may include the death certificate and the will. The person holding the decedent’s property then can transfer it to the beneficiary without a formal probate process.
