The probate process could be expensive and may take a long time to be resolved, taking several months or even years. As it takes longer to get resolved, the costs go up as well. These costs are charged against the estate, therefore reducing the share of the heirs as time passes. These are the reasons why people would want to avoid the probate process as much as they can.
By transferring properties and other assets without going through the probate process, people can save time and effort, and most especially save in expenses. The four most general ways of transferring property and avoid probate are the following:
- Joint Property Ownership
- Death Beneficiaries
- Revocable Living Trusts
Joint Property Ownership
If a property is owned jointly with a right of survivorship, you can avoid probate because the share property is automatically transferred to the surviving co-owner when one of the owners dies. Different states may have varying rules, but they typically require legal documentation that specifies the property as jointly owned and held, and that there is a right of survivorship.
The most common forms are:
Joint Tenancy with a Right of Survivorship — The owners of the property take it as joint tenants wherein the death of one tenant automatically grants to the surviving tenant the ownership of the share of the deceased tenant.
Tenancy by the Entirety — This is available to married couples and to same-sex couples in states where same sex union is recognized. Just like joint tenancy with a right of survivorship, the surviving spouse or partner takes the share of the deceased person.
Community Property — Sometimes, married couples may hold their community property with a right of survivorship. This option is available for couples in community property states. Just like tenancy by the entirety, the share of the decedent spouse is transferred to the surviving spouse.
Many financial instruments and assets give you the option to name a beneficiary upon your death. The ownership of the assets are transferred to your beneficiary when you pass away, automatically removing the assets from your estate and therefore no longer subject to probate. The most common financial assets that allow you to do this are the following:
Payable on Death (POD) Accounts — POD accounts include instruction that the account will be transferred to your designated beneficiary upon your death. Most banks make the process of setting this up as easy and simple as possible, sometimes only requiring you to fill out and sign a form. All your beneficiary needs to do to collect the contents of the account is to go to the bank after your death, and show the bank their valid ID.
Retirement Accounts — The IRA 401(k) account can also be used to avoid probate. When you set up your retirement account, you will be asked to name a beneficiary to the account after your death. Singles may name whomever they choose, but there may be restrictions to married couples because your spouse has a right to the portion or the entire amount in the fund.
Transfer on Death Registrations — Like POD accounts, you can sign a statement to declare a beneficiary who will inherit your securities such as stocks, bonds or brokerage accounts upon your death.
Revocable Living Trusts
Here, you transfer a property the trustee who will hold the property for your benefit, but reserving your right to revoke it. The trustee would also own the property, but they can only use it for your benefit as specified in the terms and conditions of the trust.
By transferring the ownership to a trustee, that property does not belong to your estate anymore and therefore avoid probate process entirely. You can include in the trust’s terms and conditions that the property should be transferred upon your death to a person you chose.
Check your state’s requirements before setting up a trust.
Simply giving your property away prior to your death is another way to avoid probate. Since the ownership is transferred prior to your death, a gift is no longer part of your estate, letting you avoid probate. But you cannot just give away randomly. Consider planning well on how you will go about giving away your property. Since gifts with a value exceeding a certain amount are subject to gift tax, consider the possibility of only giving away properties and assets with lesser value than the exemption cap.