As many of you know that follow this blog my father recently passed away and I’ve been called upon to settle his financial affairs. My biggest fear is probate and after studying the tax code I have grown to be of the opinion that it is best to be avoided when possible. This short post on the basics of how to avoid probate was meant to help codify my thoughts. Hopefully you find it helpful.
Probate is essentially the legal process of transferring assets you own at your death to your heirs. It can last up to two years in some states, and involve court costs, attorneys’ and executors’ fees often fixed as a percentage of the assets probated (attorneys can be vultures), as well as unwanted publicity (mainstream media is evil).
From what I have experienced with other files probate cases can get ugly and tend to bring out the worst in people. Fortunately probate can be minimized if not avoided entirely by titling assets with beneficiary designations or sheltering assets outside your name entirely with the following arrangements.
• Joint tenancy is an arrangement between two people (usually spouses, but sometimes a parent and child) that automatically passes title at the first death to the survivor. Joint tenancy is easy and inexpensive to establish. But it subjects each owner to the other’s personal liability. And it dissolves at the first death, leaving the asset subject to probate at the second.
• Qualified plans, IRAs, life insurance, and annuities pass automatically to your designated beneficiaries. These bypass probate unless you designate your estate as your beneficiary.
• State transfer-on-death (“TOD”) laws may let you pass real estate and financial accounts to designated beneficiaries.
Simple beneficiary designations are not necessarily enough particularly for children who are not ready to manage their inheritance or assets such as closely-held businesses, investment real estate, and family limited partnership interests. In those cases, the revocable living trust is usually the estate-planning vehicle of choice. Here’s how it typically works:
• First, you’ll establish the trust. This involves designating a trustee to manage trust assets and beneficiaries who enjoy the benefit of the property. Typically, you’ll designate yourself as both trustee and beneficiary during your lifetime. You’ll also designate a successor trustee or trustees to take over at your death or disability.
• Next, transfer assets from yourself to the trustee. You’ll enjoy the same freedom and flexibility to manage trust assets as if you owned them personally. The trust is ignored for tax purposes, and you’ll report trust income on your personal return.
• At your death, your designated successor steps into your shoes to manage trust assets. Your successor can terminate the trust and distribute the assets (such as with adult children) or continue to manage them (such as for minor children).
• The trust bypasses the delays, expense, and publicity of probate because trust assets are no longer titled in your name.
• The “Durable Power of Attorney for Health Care” designates someone to make medical decisions on your behalf should you become unable to make those decisions yourself.
• The “Durable Power of Attorney for Finances“ designates someone to manage non-trust assets such as retirement and annuity accounts should you become unable to manage them yourself.
• It becomes irrevocable at your death.
• It has only people as beneficiaries — not corporations, estates, other trusts, or charities.
• The individual beneficiaries are specifically identifiable from the trust document.
• You give the IRA sponsor a copy of the document before your required beginning date for distributions.
2 comments on “Basic Steps To Avoid Probate”
My condolences for your fathers passing John! Let me tell you he must be so proud to have a son who writes valuable blog posts like this that help so many. Great job!
Readers should be aware that the person with the Medical Power of Attorney can override the wishes of the Living Will. But possibly that is on a state by state basis. Regardless, choose wisely. And thank you for this very informative article. Also Mr. Dundon, if you would like a little more information on this subject, please email me. My father died recently too. And I had some very “interesting” experiences.
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