Life is busy. If you’re like most people, you have a long list of things to do. However, it’s critical to make time regularly to consider whether you’ve set up your estate in a way that will result in your wishes being eventually fulfilled.
You may have heard people say you should “avoid probate” in your estate and wondered: What does that mean? How can I go about accomplishing it? This article will discuss some of the issues and show you six ways you may be able to avoid probate.
Probate is when the executor named in the will petitions the court to accept the will as valid. In the probate proceeding, the executor collects the assets of the deceased, pays the debts, pays estate or income taxes if owed, pays administrative expenses such as funeral bills and attorneys fees, and distributes the remaining assets among the beneficiaries named in the will.
The whole process is a matter of public record. The will is public as well as the accounting of what the executor does if filed. The process can take up to two years or more depending on the complexity of the estate. The more complicated, the more expensive and time-consuming. Further, if the will is contested or the accounting is contested, there could be expensive litigation.
Some people want to avoid probate for two reasons:
- They want the distribution of their assets to be as private as possible; and
- They want to lessen the time and cost of distributing their assets.
Ways to Avoid Probate
There are various estate planning tools that you can use to avoid the probate process. You may not be able to completely avoid the process, but you may be able to limit the number of assets that are necessary to go through probate. How? By having non-probate assets in your estate or by removing assets from your estate while you are alive.
Here is a list of six ways to accomplish these goals:
1. Form a living trust. Living trusts allow you to avoid probate by listing the trustee as the owner of the assets. With a revocable living trust, you remain in control of the assets, but upon death instead of the assets going through probate, your successor trustee can distribute them pursuant to your wishes set forth in the terms of the trust. This allows for privacy because a living trust is not a public record in the majority of cases. And the whole process is generally less expensive.
You can hold various assets in a trust such as real estate and bank accounts. It is important that you have a professional draft the trust for you and help you transfer the assets to the name of the trustee.
Gift Giving Tax Basics
Under the annual gift tax exclusion, you can give gifts of cash or property up to a specified value to as many recipients as you would like with no gift tax consequences. The annual threshold for the exclusion is $17,000 for 2023 (up from $16,000 in 2022).
This exclusion amount doubles for joint gifts made by a married couple.
For recipients, the amount received as a gift doesn’t count as income for tax purposes.
2. Jointly own real estate or bank accounts. Putting another name on your assets so you own them jointly is also a way to avoid probate. You can form bank accounts with a joint holder or even real estate with rights of survivorship. Upon either of your deaths, the assets transfer directly to the survivor without the need for probate.
3. Have bank accounts with “payable on death” designated beneficiaries. There are some bank accounts that allow you to list a beneficiary. Upon your death, the beneficiary will simply receive the assets.
4. Own securities that are transferable upon death to designated beneficiaries. Similarly, it may be possible to list a beneficiary for your stocks and bonds accounts.
5. List beneficiaries for your IRAs, 401(k)s, or pension plans. By listing beneficiaries for your IRAs, 401ks and pension plans, you can keep those assets from going into probate. Once you designate a beneficiary (or beneficiaries), it is important to keep the designations up-to-date. There have been many cases in which a person names his or her spouse as a beneficiary and then gets divorced. If he or she dies without updating the IRA, 401(k) or pension plan, the ex-spouse may get the money — regardless of what the will states.
6. Engage in gift giving using trusts and/or a limited partnership. For more complicated estates, you can create various gift giving trusts that allow for you to gift assets at a discounted value. That way, you can remove more assets from your estate in order to avoid estate taxes. Similarly, a larger estate may use techniques such as a limited partnership to remove assets from the estate — not only to limit estate taxes, but to lessen probate assets. For the basic tax rules involved in gift giving, see the right-hand box.
If you are interested in any of these options or have questions about probate, consult with your estate planning advisor.