Avoiding Probate

A major estate planning concern for many individuals and households is the cost of probate at death.  The good news is with proper planning, probate can be reduced to a minimum and even eliminated.  There are a number of ways the owner of property can avoid probate at death. Following is a brief review of primary means of avoiding probate.  

Joint Tenancy with Rights of Survivorship
This is a very common means of owning property for a couple.  It means a couple  essentially own 100% of the property together.  In the event of death, the survivor continues to own the property and there is no probate.

Designated Beneficiary
With life insurance, annuities, and qualified retirement plans [IRA, 401-K, 403(b), pension, profit sharing plans, etc] the account holder can name both a primary beneficiary and contingent beneficiary.  In the event of the account owner's death, the account passes directly to the primary beneficiary or beneficiaries.  In the event the primary beneficiary or beneficiaries are deceased when the account owner dies, the proceeds go to the contingent beneficiaries.  

It is important to note the following:

  • Most custodians allow for multiple beneficiaries normally requiring a percentage for each listed beneficiary. Beneficiaries can include qualified charities.   
  • If an account owner names his/her children as equal beneficiaries, if the children have children [account holder's grandchildren], the account holder should add the phrase "per stirpes" behind each child's name. This means if the child is not living at the account holder death's, this child's share goes to his/her children, again the account holder's grandchildren.  If this is not done, in the event of the account holder's death and one of the children is deceased at this time, the deceased child's share would be allocated to other primary beneficiaries essentially disinheriting the deceased child's share and account holder's grandchildren from this child.  
  • Designated beneficiaries supersede a will and are not governed by a trust unless the trust is one of the beneficiaries.  This can be very important.  For example, assume the account holder is remarried and has children by a previous marriage.  Also assume the account holder's children are named as equal beneficiaries in the account holder's will.  However, the account holder names the current spouse as primary beneficiary and children as contingent in a specific account.  in the event of the account holder's death, the account will be distributed to spouse named as primary beneficiary regardless of what the will or trust says.  Going a step farther, in the event of the spouse's subsequent death, the inherited account will go to the spouse's beneficiaries which may not be the original account holder's children.  In essence, the original account holder could unintentionally disinherit his/her children without realize it.  This can be avoided with proper estate estate using an estate planning attorney.  

Payable on Death
Payable on Death [POD] accounts are normally associated with bank accounts and work the same as a designated beneficiary.  In the event of the account holder's death, the proceeds are transferred to the named beneficiary or beneficiaries on the account. Again POD designations supersede wills or trust.

A POD account can be held in joint tenancy with a partner and a beneficiary designation in the event of death of both owners.  

Transfer on Death
Transfer on Death [TOD] designations are associated with brokerage accounts.   In the event of the account owner's death, the account is transferred to the TOD beneficiary or beneficiaries "in kind".  [In kind means the account is transferred as is with no sale of account assets.]  Of course, once the TOD beneficiary has received the account, he/she can do whatever they want with the account.  

  • Many custodians allow the account holder to have multiple beneficiaries including qualified nonprofits. They can also have contingent beneficiaries.  There normally is no fee for registering the account as a TOD account.    

For many households, this is an efficient means of avoiding probate and does not involve the costs of establishing a trust. 

A TOD account can also be held in joint tenancy with a partner and a TOD beneficiary designation in the event of death of both owners.  

Revocable Living Trust
A revocable living trust has multiple estate planning advantages with one being avoiding  probate.  This is especially true if the trust grantor [can be an individual or couple] own real estate in more than one state.  All types of assets can placed into trust and once in the trust, among other benefits, these assets pass to trust beneficiaries outside of probate.  

Again, a trust supersedes a will.  Often a will called a pour-over will is drafted in joint with the trust.  The pour-over will addresses any property that is not in the trust.

A revocable living trust is a sophisticated and often complex estate planning document and should be drafted by a qualified estate planning document.  

  • [Note:  Over the years I saw different attorneys and law firms charge significantly different amounts for drafting a similar trust.  It is important to inquire about fees before hiring an estate planning attorney and have an understanding of the going rate in your community for preparing estate planning documents.  Also, it is important to understand your estate planning objectives and avoid having the estate planning attorney draft a trust more complex than needed which will likely increase the total fees.  A fee based financial planner with credentials and experience can help you in this area.  

There are other means of avoiding probate, but the above are the most common.  Specific states may have regulations governing certain types of property at death, motor vehicles for example.   
Depending on property, type of assets, size of the estate and estate objectives, avoiding probate may be as simply as joint tenancy and appropriate beneficiary designations.  Or a complex process with a sophisticated and complex trust. But in either case, it is possible to reduce probate to minimal amount and in some situations eliminate probate fees.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.