How can I avoid probate of my estate?
There are several ways to avoid probate of your estate. Probate applies to the property you own at the time of your death that does not pass automatically to someone else. Avoiding probate can be done by either removing property from your estate before you die or arranging for it to transfer to someone else on your death by operation of law.
Removing Property From Your Estate
One way to remove property from your estate is to give it away while you are still alive to the people who would ultimately inherit from you. You can give gifts of up to $12,000 per person per year without having to pay federal gift tax on that money. Some people give their children or grandchildren annual gifts of up to $14,000 each.
Another way to remove property from your estate is to put it in one or more trusts. A trust is a legal arrangement where the trustee (person managing the trust) holds title to the trust assets on behalf of the beneficiaries (people intended to benefit from the trust). Because the assets have been transferred to the trust and no longer belong to you, they are not part of your estate for probate purposes.
Some trusts are irrevocable, which means that you can’t take the trust assets back once the trust has been set up. These are often set up to care for someone, such as someone who is disabled or someone who in unable to deal with money. If you want to leave your money to charity, you can also set up a charitable remainder trust (CRT), where you will be paid an income during your life based on a percentage of the trust assets and your chosen charity will get the rest of the trust assets after your death.
The most common type of trust used to avoid probate is a form of revocable trust, often called a living trust. You can undo a revocable trust any time you want, and you can act as both trustee and beneficiary of the trust during your life. The trust assets will not be part of your estate and will not have to go through probate.
Life Insurance & Beneficiaries
There are also several different ways to arrange for property to pass directly to someone else without going through probate. One of these is something many people already have: life insurance. If you have a life insurance policy with a named beneficiary, the proceeds from the policy go directly to the beneficiary and are not counted as part of your estate for probate (though they may be included for tax purposes). Assets from various kinds of pension plans and retirement accounts like IRAs, Keoghs, and 401(k)s with named beneficiaries, are excluded from the estate, as are U.S Savings Bonds with named beneficiaries.
Using a Totten Trust
If you want to transfer money in a bank or other account to someone else outside of probate, you can use a Totten trust, also called a pay-on-death account. You set this up with the institution where your account is located and sign a document naming a beneficiary for the money that is in the account when you die. While you live you can undo or modify a Totten trust as long as you are competent to make financial decisions. So, you can change your mind about who gets the money or change the beneficiary if the original one dies. You can also close the account.
Right of Survivorship
The last option for transferring property outside of probate is through ownership of property with a right of survivorship. This kind of joint tenancy can apply to many forms of property such as accounts, vehicles, stocks and bonds, and real property.
You should be aware that there are several potential problems with this approach. One is that some states don’t favor a right of survivorship, which means that if you make the smallest mistake, a court can rule that there is no right of survivorship, and the property may be distributed differently than you wanted. So using this strategy has an element of risk, and if you decide to use it, it would be good to have the language setting up the right of survivorship checked by an experienced probate lawyer in your state.
Transfer of a joint interest in property during your lifetime to your beneficiary may also create problems with local taxes, such as triggering property tax reassessments, and can have different federal estate tax consequences than you might expect. An attorney can advise you on potential tax consequences.
Finally, if the person who becomes the joint owner of your property has debts, his or her creditors could try and collect from your property while you’re still alive.
Getting Legal Help
Since the laws on probate differ from state to state, there may be other ways of avoiding probate in your state. For example, community property belonging to spouses or domestic partners may not have to go through probate when one spouse or partner dies, or property given to a spouse or partner in a will may be exempted. Check the laws in your state or talk with a local attorney to find out about these options. Even if you don’t avoid probate all together by using these techniques, you might make your estate eligible for low-cost summary probate procedures.