When an individual dies owning property solely in his or her name, without a beneficiary designation, a formal procedure (“probate”) is usually needed to determine to whom the property should pass. If there is a valid will, the property will pass according to its terms. If there is no will, the property will pass to the individual’s heirs at law. The intestacy laws of your state will determine who the individual’s heirs are and what they receive.
However, it is possible to legally pass property to another person without going through probate. The following are examples of some probate avoidance devices. Keep in mind that although it is often beneficial to avoid probate, because it can be costly and time consuming, these devices have pitfalls. Additionally, probate is sometimes the best option depending on the situation. The following are examples of probate avoidance devices:
Joint Tenancy – Adding another person to your assets as a joint owner of “joint tenant with rights of survivorship” will allow your property to pass to the other individual upon your death without the need for a probate proceeding. The obvious pitfall is that while you are alive the other owner has access to 100% of that asset and the asset is subject to any claims of the co-owner and/or creditor of the coowner.
Beneficiary Designations – Adding Transfer on Death (TOD) Beneficiary to your motor vehicle; Pay on Death beneficiaries (POD) on bank accounts; and Transfer on Death Deeds to real estate: Unlike joint tenancy, adding beneficiary designations to your property allows you to name an individual to inherit your property at your death without giving them any current ownership. The property will pass to the individual of your choice without going through a probate proceeding. One of the problems associated with beneficiary designations is that often times, the estate is not divided equally among the family as intended by the individual.
Revocable Living Trust – Revocable trusts are documents wherein an individual “Grantor” creates a trust instrument and names an individual (usually themselves) or a bank “Trustee.” The Grantor then transfers property into the trust and the Trustee manages the property and distributes the property according to the terms of the trust. Unlike the addition of joint tenants or beneficiaries on your accounts, which may lead to conflict among family members, a Revocable Living Trust allows you to specify how you wish your property to pass. A Revocable Living Trust also avoids some of the adverse tax consequences associated with joint titling with a beneficiary.
Last Will and Testament: It is VERY important to understand that if you have beneficiaries listed on your assets, upon your death your assets will be distributed to those beneficiaries you have listed. They WILL NOT be distributed according to your Last Will and Testament.
Incompetency: What happens if an individual is incompetent? If you have a well drafted power of attorney in place that specifically states you can create a trust or add/change a beneficiary on the individual’s account, you may do so. Keep in mind, the power of attorney has a fiduciary duty to act in the principal’s best interest, which includes following their testamentary wishes.
Spousal Elective Share: If you are married, before titling/adding beneficiaries to your assets, you need to take into account your husband or wife’s spousal elective share (the amount they are entitled to inherit from you by law). Additionally, if you or your spouse are applying for/receiving Medicaid, the state may consider the applicant’s/recipient’s failure to receive the spousal elective share as a transfer of assets which will disqualify your spouse for benefits.
Leave enough money: Now you have used various tools to avoid probate, but where is the money to bury you? Be sure that you have not so avoided probate that there is no one responsible for your funeral expenses and expenses of last illness. Yo may want to have a separate insurance policy for such purpose.
Last Word on Avoiding Probate – Make a will. One of the most difficult cases I have ever had was when someone died without a will or immediate family. With a will, the probate would have been over in nine months or less. As it was, it took over three years to complete the probate.
Even though you may think you have titled everything so that it will pass without a probate being necessary, please make a will just in case you forgot to title something properly or some other property is discovered at a later time.
The above information is general. Before taking action to avoid probate, you should consult an estate planning attorney who can examine your specific situation and advise you accordingly.