If you ask most people about the purpose of an estate plan, they will tell you avoiding probate is the primary goal. But how many people really understand what this means? There are a few misconceptions regarding what an estate plan does and how it can actually avoid the probate process.
Understanding the probate process
Basically, probate is the process through which the assets of an estate are distributed to beneficiaries when there is no other way to do it. Assets or property that are transferred through a trust or other estate planning tool can be distributed to beneficiaries according to the terms of those documents without the need for a probate judge to oversee the process. Probate is the method of last resort, overseen by a court, for distributing an estate to its beneficiaries.
Why should I try to avoid probate?
There are three primary reasons most people choose to avoid probate. First, the process is a public court proceeding, which means that anyone can have access to the contents of your will, your finances, your debts, and the identity of your beneficiaries. A second reason is that probate can be expensive, depending on the nature of your assets and property. Fees associated with probate include court fees, attorney fees, accounting fees, fees for appraisals, if necessary, and fees for the executor’s services, to name a few. Some reports estimate the overall cost of the probate process between 4% and 10% of the value of the probate estate. Finally, the entire probate process usually takes a significant period of time – months or even years. Although having a will may shorten that time, it can still be a lengthy process. During that time, any decisions about the management of the probate estate (such as the decision to sell stock that is losing value) and any distributions (such as paying for a beneficiary’s medical or educational costs) usually must first be approved by the court, which can cause significant problems for many people.
Ways to keep your assets out of probate
Leaving your property to your heirs basically requires transferring ownership of that property to those individuals. There are several ways this can be accomplished outside of probate. Some of the most common ways to transfer ownership outside of probate include (1) transferring your assets to a revocable living trust, the terms of which will direct a Trustee to distribute the estate according to your wishes, (2) joint ownership of property (such as joint tenancy), which will automatically transfer assets to the surviving co-owner upon your death, and (3) pay-on-death or transfer-on-death designations, which allow certain assets to be transferred directly to named beneficiaries – all of these without court involvement. If done correctly, using any or all of these methods will allow you to avoid the time, expense and publicity of the probate process.
Transfer of an estate through pay-on-death accounts and transfer-on-death instruments
One alternative to leaving your estate to probate is to convert your bank and investment accounts into payable-on-death accounts. The process is very simple. You need only list your beneficiaries on those accounts so that, when you die, the money will be automatically transferred to your named beneficiary without the need for probate.
Basically, the process is the same for securities, vehicle registrations, and real estate for transfer-on-death instruments in Nevada. These legal documents allow you to transfer assets, such as real estate, by identifying a beneficiary in the title itself, such as a deed. This beneficiary provision will not take effect until after your death and these documents can be revoked at any time during your life, and the property is not required to go through probate.
While these tools can be useful in avoiding probate, they may not accomplish your goals of protecting assets for your loved ones, and they may ultimately end up being given to an unintended beneficiary.
Joint ownership of property
Joint ownership is another simple option for avoiding probate. Upon the death of the first owner, the surviving joint owner will retain ownership of that property without going through probate. There are different types of joint ownership available depending on your needs or the type of property you own. Joint Tenancy with Right of Survivorship will allow the property to transfer automatically to the surviving joint owner upon the death of the first owner. Similarly, Community Property with Right of Survivorship will accomplish the same goals, and may also add some tax benefits for your surviving spouse.
Giving a gift of property to your loved ones while you are still alive is another common way to avoid probate. This method words to avoid probate because, obviously, if you no longer own the property when you pass away there is no need for the property to go through probate. Accordingly, the cost of probate is decreased because the expense of probate is connected to the value of the assets passing through probate. Another benefit is that gifts may not be subject to federal gift tax.
Transfer of an estate through a revocable living trust
Living trusts are a very common estate planning tool created to allow individuals to avoid probate while still maintaining control over that property during their lifetime. With a living trust, you transfer assets to your trust during your lifetime and maintain the same rights and responsibilities as to the trust property (i.e. no loss of control). This removes the property from your estate so that the property does not go through the probate process. The only catch is that the property is still considered part of your estate for the purposes of federal estate taxes. Like a will, the trust document allows you to determine how your property will be distributed, however the trust can allow you to add protections for your loved ones to avoid assets being lost to divorce, creditors, lawsuits, and other liabilities. After you death, your trustee has the authority to quickly and simply transfer the trust property to your intended beneficiaries, without the need for probate.
If you have questions regarding avoiding probate, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.