Paying it Forward: Making Probate Easier for Your Estate and Beneficiaries

No matter your age, income or marital status, your assets will be distributed to someone else when you die. If you have a last will and testament (and everyone should), you’ve taken a big first step by putting your wishes in writing.

The next step is to refine your wishes so your beneficiaries receive the assets more quickly, easily and with as few probate court costs and attorney fees as possible.

Probate is the process of transferring assets from a deceased individual’s name to the names of living beneficiaries.

Probate courts oversee the settlement of an estate with a will, including authentication of the will, approval of the named personal representative (formerly called an executor) and the means to settle debt with creditors. The process can take months, and in some cases years, from start to finish. The total cost varies by state but can be significant, depending on the value of your assets passing through the probate administration. Depending on the size of your estate, and the state in which you reside, you may also be subject to federal or state death and inheritance tax considerations.

Here are some steps you can take now to help your loved ones avoid headaches and unnecessary fees after your death:

• Complete all beneficiary designations on every possible account. Include primary and contingent beneficiaries. These include life insurance, 401(k)s, annuities, IRAs and HSAs. You can name individuals, a charity or a trust, but naming an estate makes the account assets subject to probate and can cause negative tax consequences with certain types of retirement accounts.
• For bank and investment accounts, consider payable-on-death (P.O.D.) and transfer-on-death (T.O.D.) accounts. This allows your financial institution to pay or transfer the account assets directly to a designated person upon your death. T.O.D. accounts are for stocks, bonds, and brokerage accounts; P.O.D. accounts are for bank assets.
  • Considerations: These are simple to open, free to both the account owner and the beneficiary, and there is no limit to how much money can be in the account. However, if you have a minor, incapacitated or irresponsible beneficiary, a trust or conservator account may be needed to protect the beneficiary’s inheritance from themselves or their creditors. Additionally, your estate may encounter difficulty paying your taxes, debts and other expenses of administration.
• Create joint ownership of property. Jointly held property passes directly on to the surviving owner. You have several options for setting this up:
  • Joint tenancy with right of survivorship. As indicated by the name, the property passes with a right of survivorship between joint owners and avoids probate.
  • Tenancy by entirety. This option is only available to married couples in states that recognize this form of ownership. Property goes directly to the surviving spouse.
  • Community property. Nine states currently offer this option, in which married couples own property acquired during the marriage in equal shares, 50/50. Each spouse can designate who will receive their half upon death.
    • Considerations: The property will go through probate when all title holders are deceased. The above structures are typically only recommended for couples. It is rarely a good idea to add a child, parent or sibling to the title of your home for probate avoidance. You run into significant liability issues when multiple individuals own property jointly, and the desire to avoid probate can result in unintended consequences such as the loss of a homestead exemption or resulting capital gains.
• Give away property while you’re still alive. This concept is simple but effective. Whatever you give to someone else within your lifetime can’t and won’t be part of your estate when you die.
  • Considerations: Giving-while-living works for jewelry and heirlooms, but always consult a tax professional before transferring cash, accounts or real estate, as those types of gifts can result in taxes or disqualification from benefits.

• Create a revocable living trust. This is a legal arrangement whereby a grantor sets the terms of the trust, a trustee manages the assets held in trust and a beneficiary spends the assets. Typically, you would occupy all three positions while you are living. You, as the grantor, can add property and remove property from the trust and can change the trustees and beneficiaries of the trust at any time. The trust uses the grantor’s social security number and has no effect on how you file income taxes. An incapacity successor trustee is named to take control of your assets if you are no longer able to manage your own finances, and a death successor trustee distributes the assets upon your death, per the terms of the trust. All assets titled in the name of a trust or beneficiary designated to a trust bypass the probate court.
  • Considerations: Most assets will be re-titled to indicate ownership by the trust, and title transfers may incur filing fees. You also pay attorney fees for setting up a living trust to ensure it is properly established.
  • Caution: You shouldn't put a 401(k) or IRA in a living trust because if you change the ownership structure (e.g., your employer-sponsored retirement plan), the IRS will see it as an early withdrawal, resulting in a taxable event. In addition, the S.E.C.U.R.E. act governs how retirement accounts are taxed after your death. Naming your trust or estate as the beneficiary of a retirement account may result in the account being subject to higher income tax rates.

Lastly, a living trust cannot designate a personal representative (executor) for a will or name guardians for minor children. Therefore, individuals with living trusts have a will, too. Language in the will can stipulate that any remaining assets be transferred to the trust upon your death.

In summary, you have many options and many steps – some simple, some complex – to reduce stress, delays and costs to your beneficiaries following your death. You should work with experienced estate planning professionals to determine what documents you should have in place to accomplish your personal goals and set your family members up for success in the event of your death or disability. A trusted advisor can be invaluable in helping you determine the best approach for your specific situation and can connect you with qualified professionals.