Death is inevitable. It comes for us all at one point or another. Some sooner than later, but none are able to escape its grasp. Whenever that time comes, your “stuff,” including your financial assets, generally live on, and are still essentially yours until they are legally transferred to another person or entity. That transference of assets can occur in any number of ways, but often includes a process known as probate.
So what exactly is probate? Simply put, it’s a process whereby a deceased person’s will is proved, or validated, by the courts and can then be executed. Assets and other possessions included in the deceased person’s probate estate can then be distributed to the intended recipients.
While probate cannot always be avoided, when possible, it can pay to limit your probate expense. There are several reasons this might be the case including the fact that probate can be a very time-consuming and expensive process. Another big downside to probate is that it’s a very public process. Your will – and the provisions therein – become public record. For some, this loss of privacy, alone, is enough to try and find other means of passing assets to heirs. With that in mind, here are five ways you can avoid the expensive, time-sucking and public process known as probate.
1. Don't Name Your Estate As Your IRA Beneficiary
When it comes to your IRA – or any other retirement account for that matter – it should pass to your heirs by way of beneficiary form. A beneficiary form is a legal document that allows the assets it controls to pass directly to the named recipients, and avoid the perils of probate. These beneficiary forms have so much power, in fact, that if your beneficiary form says “I leave my IRA to my ex-spouse,” but your updated will says “I leave all my assets to my current spouse,” guess who’s getting the money!? That’s right, your ex! (Side note: At that point, it’s probably a good thing you’re already dead.)
Having a beneficiary form should allow you to avoid probate, but it doesn’t always do the trick. If, for instance, you name your will or your estate as the beneficiary on your beneficiary form, you’ve just thrown those assets back into your estate. Similarly, if all of the beneficiaries you’ve named have predeceased you and you don’t update your beneficiary form to name new persons before you pass, then your estate could end up receiving those assets by default. There is absolutely no good reason to turn a non-probate asset into a probate asset like this, so keeping up-to-date and correctly filled out beneficiary forms is a must.
2. Use a Revocable Trust
A revocable trust is a legal document that creates a new legal entity – a trust – that can continue to be changed and/or rescinded after its creation. Here’s the great thing about these entities, they don’t die just because you do. Instead they can live on and just begin to benefit new persons. For example, suppose you create a revocable trust and transfer your bank CD into the trust. The trust is now the owner of that account. Let’s further imagine that each year, that CD pays $5,000 of interest. Your revocable trust can be set up to allow you to enjoy that income while you’re alive, but when you pass, the income will just be diverted to the next-in-line trust beneficiaries. The trust could still exist and still own the CD.
In the above example, your CD would pass outside of probate, and the beneficiary – or beneficiaries – of your trust would remain private, out of the public eye. Of course, like anything else, revocable trusts have downsides of their own. They may cost several thousand dollars to set up and, once you die, they will generally become irrevocable and have to file an annual tax return, which is another added layer of cost.
3. Add a Beneficiary Form to a "Regular" Account
As noted above, IRAs and other retirement accounts generally pass by way of beneficiary form. The same is generally true for annuities and life insurance. But just because your account doesn’t come “standard” with a beneficiary form doesn’t mean you can’t get one for it. Your precise options will vary based on state law and your bank/brokerage’s internal policies, but in many instances, you can take a “regular” account – like one just in your own name – that would otherwise be subject to probate and turn it into a non-probate asset by adding a beneficiary form.
Once a beneficiary form has been added to the account, you’ll probably see the titling of the account change to something like “TOD,” short for “transfer on death” or “POD,” short for “payable on death.” Sometimes you’ll even here these accounts referred to as “poor man’s trusts” because they can accomplish many of the benefits of a revocable trust, but without the expense.
4. Create Joint Accounts with Right of Survivorship
Do you really trust the person you want to leave your assets to? If the answer is yes, then you might consider changing the titling of your asset to a joint account with rights of survivorship. When you die, joint accounts with right of survivorship become the full property of the surviving individual(s) named on the account by operation of law.
So why the need for so much trust to utilize this option? Well, consider the fact that once you create a joint account, the other person(s) on the account have access to the assets in the same way you do. For instance, let’s say you have $100,000 in a bank account that you’d like your daughter to receive when you’re no longer here. You could change the titling on that account to a joint account with right of survivorship with your daughter, in which case any assets remaining in the account would be hers by operation of law upon your passing. However, if you made that change, there would be nothing to stop your daughter from walking into the bank tomorrow and making a $100,000 withdrawal to buy that Ferrari she always wanted. For this reason, the vast majority of joint accounts are established by spouses, but there’s nothing preventing you from creating a joint account with other individuals as well.
5. Give Your Assets Away
If you don’t have any assets left when you die, then there’s generally no reason for your estate to go through probate. With that in mind, one way to avoid probate would be to give your assets away to your would-be heirs before you die. For instance, let’s say you have $100,000 invested in various stocks. There’s nothing stopping you from simply giving that stock to your child or other intended recipient during your life, eliminating the need for that asset to be probated after your death.
Of course, there are a number of downsides to this approach too. For starters, you might actually need that money if you continue to live! But beyond that, there are other concerns as well, such as the loss of any step-up in basis that your heirs might otherwise receive.
If none of the above ways of avoiding probate sound good to you, there is always another option, spend everything. Spend every last dime! Your heirs may not be happy with their inheritance, but hey, at least they won’t have to deal with probate!
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