If you’ve ever dealt with probate you know firsthand how frustrating it can be. The frustration can be avoided but it takes a little planning. Fortunately there are many options to pass assets to your intended beneficiaries.
Revocable living trusts remain a key player in avoiding probate. There are other methods to avoid probate to consider as well. But why worry about probate in the first place?
There are two big reasons you want to avoid probate: time and cost. The probate process in some states is relatively simple, especially if the state has adopted the uniform probate code. In states such as Nevada the process is long and expensive.
In Nevada probate may take six months to a year to complete. It can be quite costly as well, running $7,000 – $9,000 before it’s all done, and that’s if there are no problems such as a will contest.
Probate issues become public knowledge, they’re costly, and frustrating. You should avoid probate at all costs. But how exactly can you avoid probate?
6 ways to avoid probate
Here are six ways you can avoid probate:
#1 Joint tenancy
Joint tenancy ownership is created by a written instrument which indicates that the asset or account is held as joint tenants. In the case of real property, the deed would provide, “John Smith and Mary Smith” as joint tenants.
Upon the death of John or Mary, the survivor of them would take title solely in his or her individual name. Joint tenancy may be created in numerous assets, including automobiles, stock certificates, brokerage accounts, bank accounts, etc.
CAVEAT – I hesitate to include joint tenancy because this does not really avoid probate. Rather it defers it to the death of the surviving joint tenant. If both joint tenants die together the asset may be subject to two probates – one-half in the estate of each person.
#2 Life insurance
The proceeds from life insurance are paid directly to the designated beneficiary. Since they’re paid to the beneficiary directly they are not subject to probate.
Remember to include a contingent or secondary beneficiary as well. If the insured fails to designate a beneficiary, the proceeds would typically be payable to his estate. This subjects the proceeds to probate.
#3 Retirement accounts
Provided a designation of beneficiary form is in place, proceeds from retirement plans, such as IRAs, 401k, profit sharing, pension and non-qualified plans are not be subject to probate. The proceeds are automatically paid to the named beneficiary outside of the probate estate.
Again, make sure you have your beneficiaries listed properly on your retirement accounts. Always include a contingent beneficiary, because if the primary predeceases you the funds will be forced into the probate process
#4 POD, TOD and ITF accounts
Beneficiaries can normally be added to bank accounts and securities accounts. Doing so will allow the account funds to pass free of probate. Depending upon the financial institution, this beneficiary designation may be referred to as a “pay on death,” “transfer on death,” or “in-trust-for” account.
#5 Transfer on death deed
A few states, such as Nevada and Arizona, allow you to place a beneficiary on real estate by recording a “transfer on death” deed. Although the deed is recorded, it does not transfer any rights in the property until the current owner dies.
#6 Revocable living trusts
Placing assets in trust is one of the most common probate avoidance methods. A typical revocable living trust allows you to retain full control of your assets and designate to whom the assets pass upon your death.
Trusts are also very flexible. They allow you to plan for many different contingencies. You can even build into the trust either restrictions on or incentives for different beneficiaries.
If asset protection for your heirs is a goal, a trust may be ideal. The benefits of trusts can even continue for many generations if you desire. Just make sure you use a reputable estate planning attorney. Your legacy is worth it!
As you can imagine living trusts continue to be the primary tool for avoiding probate and securing your legacy. However, as discussed above, you can also avoid the probate process by properly placing beneficiaries directly on different assets.
Avoiding probate in summary
Which method is right for you depends upon your situation and estate planning goals. There are pros and cons to each. To understand how to properly structure your estate to bypass probate, I recommend that you discuss the options with your advisor.
Jay R. Larsen, Esq. is a RetireWire guest contributor and an estate planning attorney in Las Vegas. He’s a partner of the Firm Gerrard Cox Larsen, and practices primarily in the area of estate planning, tax problem resolution, asset protection, business formation, and probate. Mr. Larsen received his undergraduate degree in finance from the University of Utah (Summa Cum Laude) and his law degree from Brigham Young University (Magna Cum Laude). He went on to receive an L.L.M. in Taxation from the Washington School of Law, Washington Institute for Graduate Studies.