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. So how can you avoid it? The short answer: estate planning. But as we have written before, estate planning is a very broad topic. So here are five ways you can use estate planning to avoid probate:
1. Give away your entire estate.
This might seem like the most logical solution and, sadly, many people do it without thinking of the consequences. If you give away your assets, you also give away control over them. If, for example, you give your home to your child, 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 trigger a federal gift tax. What's more, if you give your child your home as a gift during your lifetime, they cannot take advantage of a concept known as stepped-up basis and could instead be forced to pay large capital gains taxes in the future.
2. 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, if you and your spouse own property as joint tenants and both of you die together, the property is still subject to probate. 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 all joint tenants. To sell or encumber joint tenancy property, ALL joint tenants (and their spouses, in some 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; 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, however, such as a personal residence, creating a joint tenancy could 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.
3. Designate Pay-on-Death beneficiaries.
This is possibly the easiest method of probate avoidance, although not the most thorough. Banks and other financial institutions allow you to designate a particular account or investment to pay out to a named beneficiary after your death. Regardless of what you have provided in your last will and testament or your living trust or other estate planning document, this pay-on-death designation will control the disposition of that property after your death. Similarly, if your state allows it, you can sign a transfer-on-death deed to pass real estate after your death.
Unfortunately, you cannot put restrictions on the use of your account or real estate after your death; it simply becomes the property of your named beneficiary. If the beneficiary dies before you, and you have not named any other living beneficiaries, the pay-on-death designation may not be effective to convey that asset after your death, which means the asset may be subject to probate in your estate.
4. Designate contractual beneficiaries.
This concept is most commonly used with life insurance. Your life insurance policy names a beneficiary to whom the policy proceeds are paid at your death. As with the pay-on-death designation, you usually cannot put restrictions on the distribution. Also, as with the pay-on-death designation, the death of the beneficiary still leaves the insurance proceeds subject to probate. Life insurance policies are a good part of many estate plans, but it is important to understand their limitations.
5. Create a Living Trust.
Finally, you can avoid probate by creating a living trust. A living trust involves transferring all your titled assets (real estate, bank accounts, motor vehicles, etc.) into the name of the trust. You can be the trustee of your trust and, in order to allow the trust to function after your death or incapacity, you can also list successor trustees to manage the trust for you and distribute your estate at your death. When you die, the trust lives on and can transfer those titled assets without the necessity of probate. You can also put restrictions on the use and/or distribution of the trust assets, which can be particularly important if you have any young, irresponsible, or special-needs beneficiaries.
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 whether your estate will be subject to probate at your death, contact the Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation. And for more information about probate avoidance and estate planning, download our FREE Estate Planning Guide by clicking below.
[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]