Estate planning enables you to specify what happens with your assets after death or incapacitation. While every situation is unique, individuals often create estate plans that minimize the need for probate.
Probate is the legal process of validating a will and administering an estate. Depending on the complexity of the estate and the state probate laws, the process can be costly for beneficiaries and time-consuming for executors.
In addition to time and cost issues, probate records are part of the public record. A probate record typically includes the petition for probate, the will, estate inventories, letters of administration, and the final accounting. Therefore, the general public may access details such as the names of beneficiaries, where they live, and how much they inherited.
Fortunately, property can be left to your desired beneficiaries with no probate required using various estate planning techniques.
Five techniques to avoid probate
Assets placed in a living trust are not subject to probate. However, assets must be transferred to the trust before the grantor’s death. Then after death, the trust assets are distributed to beneficiaries according to the terms of the trust.
Sometimes individuals fail to transfer all of their assets to a trust before death. A “pour-over will” can be used to automatically transfer assets to a trust after an individual’s death. However, assets transferred to a trust via a pour-over will are still subject to probate but eventually gain the other benefits of being held by the trust.
The proceeds from a life insurance policy owned outside of a trust or will are typically distributed directly to beneficiaries and not subject to probate. However, if the beneficiaries are not alive, cannot be located, or no beneficiaries are listed, the proceeds may be subject to probate or the state’s intestacy laws.
Jointly Owned Assets
When a couple owns an asset together, and both names are on titles/accounts or they have similar ownership rights in the asset held in joint tenancy, the asset will pass directly to the surviving owner without going through probate. However, the specific tenancy type matters – “joint tenants with rights of survivorship” and “tenants by the entirety” enable the asset to bypass probate.
Payable-on-Death (POD) Accounts
An individual can add a “Payable-on-Death” designation to a bank account that specifies a beneficiary. A POD enables the beneficiary to claim the funds directly from the bank upon an individual’s death, thus bypassing probate. A POD does not entitle the beneficiary to any control or ownership over the account while the individual is still alive.
Transfer-on-Death (TOD) Accounts
Individuals can add a “Transfer-on-Death” designation to securities, real estate, and vehicles in most states.
A TOD designation for a financial institution account can specify one or more beneficiaries who will become the owners of the assets in the account upon the individual’s death. With a TOD, assets are transferred directly to beneficiaries and are not subject to probate.
For real estate, a transfer on death deed enables an individual to transfer property to a beneficiary upon death. Likewise, a transfer on death designation for a vehicle enables the individual to transfer a car to a beneficiary upon death. Both TOD for real estate and vehicles bypass the probate process.
Like a payable-on-death, a transfer-on-death does not entitle the beneficiary to any control or ownership over the account, property, or vehicle while the individual is still alive. Also, not all states allow for TOD designations.
A Few Key Takeaways
It’s possible even with proper planning that not all property and assets will be held in one of the above types of accounts at death, so creating a will to specify the distribution of any residual assets is still a key part of estate planning.
POD and TOD accounts are a simple way to avoid probate. It’s important to remember that the beneficiary designation listed on life insurance and POD/TOD accounts will determine how these assets are ultimately distributed, so a good review of all account beneficiaries as part of estate planning is recommended.
Every situation is unique, and your estate plan may or may not benefit from these specific tools and techniques, so it’s important to consult your estate planning advisor.
These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. Consult your legal and business advisors prior to making financial decisions. This is intended for illustrative and discussion purposes only.
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