Probate is a dirty word to most people.
It's time-consuming, expensive, public, and brings with it the possibility of infighting and costly litigation — which means paying attorneys, and no one likes that.
So how can you avoid probate?
The short answer: estate planning. But as I have written before, estate planning is a very broad topic. So here are four ways you can use estate planning to avoid probate:
1. Create a Living Trust
There is (unfortunately) a widespread belief that having a last will and testament means your family won’t need to probate your estate.
However, a will must be probated after your death in order to be effective.
I’ll say that again in bold italics for emphasis:
A will must be probated after your death in order to be effective.
So if you want to keep your estate out of probate, you need something other than a will.
A living trust, on the other hand, can eliminate the need for your family to go to court before getting their inheritance. This means that having a trust can actually save you money.
Related post: What is the Difference Between a Will and a Trust?
But this only works if you properly “fund” your trust with your assets. The process of funding a trust involves transferring titled assets (e.g., real estate, bank accounts, vehicles) into the name of the trust.
Any assets owned by your trust at the time of your death can avoid probate.
There are a lot of other great benefits to creating a trust, such as naming someone to serve as guardian of your minor children after your death or placing conditions or restrictions of inheritance to incentivize certain behavior in your beneficiaries.
However, the most popular (and arguably best) advantage of a trust is being able to avoid probate.
Related post: 8 Reasons You Should Have a Living Trust
2. Give Away Your Estate
This might seem like the easiest and most logical solution and, sadly, many people do it without thinking of the consequences.
For instance, if you give away your assets, you also give away control over them.
Suppose you give your home to your child. Because you no longer own the property, you cannot control who lives there or if it is sold or mortgaged or seized by your child's creditors — even if you're living there.
Giving away your estate may also have severe tax consequences.
Making a gift of certain assets could trigger a federal gift tax; however, because the estate and gift tax exemption is so high, this will likely not be an issue for many people.
The bigger problem is capital gains taxes. By giving away your house during your lifetime, your children or other beneficiaries will not be able to take advantage of a concept known as stepped-up basis and could instead be stuck with a massive tax bill.
Related post: What is Stepped-Up Basis?
3. Create a Joint Tenancy
Joint tenancy has been called "the poor man’s will" because it can effectively avoid probate on the death of the first joint tenant. However, the property is still subject to probate when the survivor dies.
Joint tenancy property is also subject to estate taxes and may actually cause an increase in overall estate taxes, since the property may be fully taxable in the estates of both joint tenants.
Some people decide to make their children joint tenants on a house or a bank account. But beware: property held in joint tenancy can be reached by the creditors of any owner. Furthermore, to sell or mortgage joint tenancy property, ALL joint tenants (and their spouses, in most cases) must agree and sign the necessary documents.
There are also potential tax consequences of naming a joint tenant. For some assets, such as bank accounts or most brokerage accounts, merely adding someone as a joint tenant does not trigger a gift tax; however, they could incur gift tax liability if the joint tenant starts drawing funds or income from the joint tenancy asset for personal use.
For other assets, such as real estate, creating a joint tenancy can result in gift tax liability immediately. And like giving away your property during your lifetime, naming a joint tenant means that person cannot take advantage of stepped-up basis after your death.
4. Designate POD/TOD Beneficiaries
Possibly the easiest method of avoiding probate is naming pay-on-death (POD) or transfer-on-death (TOD) beneficiaries for each of your assets.
People are most familiar with this concept through life insurance policies. The beneficiaries designated by the policy owner get the proceeds upon the insured’s death without having to go through probate.
Banks and other financial institutions let you do the same thing with any other financial account, paying the account or investment to the named beneficiary after your death. Similarly, Oklahoma and other states allow you to designate beneficiaries for motor vehicles.
Oklahoma also has a legal document called a transfer on death deed that lets you designate beneficiaries for your real estate, though it is not a sure-fire way to avoid probate.
Related post: What is a Transfer on Death Deed?
A key limitation with POD/TOD designations is that you cannot place restrictions or conditions on the use of an asset. It simply becomes the property of the named beneficiary upon your death.
Additionally, if the beneficiary dies and you have not named any alternate beneficiaries (who survive you), the asset may still be subject to probate.
It is also important to understand that beneficiary designations override your estate planning documents. If, for example, you have a will that says your estate will be divided equally between your two children, but you designate only one of them as the POD beneficiary of your bank accounts, those accounts will go only to that child.
Beneficiary designations control the disposition of property over the terms of your will or trust. They can be a good way to avoid probate, but, without careful planning, they can cause your estate to be distributed differently than you intended.
Avoid Probate Through Estate Planning
Most of these methods of avoiding probate are more complex and nuanced that they appear. Therefore, we highly recommend consulting an attorney before taking any of these actions.
To visit with an qualified attorney about avoiding the need for probate, contact the Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation.
David M. Postic is a shareholder at Postic & Bates, P.C. His practice focuses on estate planning, asset protection, probate and trust administration, business planning, and real estate transactions.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our blog posts and other publications and resources, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]
