When life ends, we leave what we own behind. Yet, what we own cannot easily be distributed without a legal documented plan behind where it must go. The law provides several ways in which to help predetermine how we would like to pass on our property and our belongings – but some ways may be a little better than others, depending on the circumstances.
A Last Will and Testament is commonly the method through which people first think to ensure that what they own will be passed on in a manner they so choose – yet most last wills will involve probate, costing you and your loved ones and ultimately taking away from your hard-earned life earnings. Choosing the best path to pass down what you own can allow you to bypass this process.
What Is Probate?
Probate is succinctly defined as the process by which a court proves a will valid or invalid. The length of the process depends on the will to will. Typically, when a person dies, their estate will go to a probate court, wherein it will be decided whether their will should be given legal effect.
In the case that no will or alternative method of inheritance exists, the probate court exists to distribute property and other belongings according to the letter of the law, through a personal representative. Exactly how a person’s belongings may be distributed after death depends upon local state laws. Typically, the inheritance of the estate.
While probate has its uses, its costs – such as filing fees – may make it the least attractive option for passing on your belongings. In some cases, probate may cost as much as ten percent of what you own, and at least around 2 to 4 percent. Thankfully, there are plenty of alternatives to help you avoid probate.
Establish a Revocable Living Trust
Known as an estate planning tool, a living trust is one of the most common ways for avoiding probate. It is revocable in the sense that you can change the terms or circumstances of the trust as you please. Like a will, the trust depends on a very important document establishing exactly what property you put in the trust, and to whom that property should go when you, the grantor, die.
To set up a trust, you will also need a trustee – while you’re alive, you are typically both grantor and trustee, yet after your passing, another person must be chosen as an successor trustee.
When trying to understand a trust in the context of a will, you must think of a will as a document detailing where you want your belongings to go after death, and a trust as a legally-defined process by which you bind your belongings and property and put them “in trust”, to be managed by you or a succeeding trustee, for distribution to your beneficiaries.
Because a trust means your property will be under the trust’s name instead of your own name – and thus already distributed to the trust – you can entirely bypass the probate process.
Establish Joint Ownership for Property
Joint ownership of a property allows you to determine survivorship right, meaning you can determine under whose name the property will continue to exist once you have died, all while avoiding probate. Joint ownership with survivorship is typical:
- Tenancy by the entireties: This is property owned jointly by a married couple in some states.
- Community property: Like tenancy by the entireties, this applies only to married couples, in other states (including California).
- Joint tenancy with rights of survivorship: In this case, the property passes to the other owner.
Property that can be jointly-owned includes real estate, motor vehicles (such as cars, boats, etc.), financial accounts and securities. However, joint ownership may in some cases mean half of the property will still be accredited to your estate after you have passed, or your property may be subject to the claim of a divorcing spouse.
Payable-on-Death Financial Accounts
A payable-on-death or pay-on-death (POD) is a way to designate a beneficiary for your accounts when you pass away. What this entails is that the contents of a bank account will be given to a designated inheritor after you die – all it typically takes is a form provided by the bank or institution at which you have your account.
This includes individual retirement accounts, checking accounts, money markets, savings accounts, certificates of deposit and US savings bonds. There are some financial instruments (such as securities) that cannot be designated POD – these, however, are transferable in another manner.
While payable-on-death financial accounts help you ensure that the contents of your bank accounts will be transferred over to your loved ones in the event of your death, there are similar methods to doing so with most of your significant property, specifically your financial securities, all property, and your motor vehicles.
Joint ownership of accounts and property is still an option, yet the benefit to instead assigning a beneficiary to your property is that you continue to exercise all control over what you own until your death. However, because you’re not simply emptying out an account’s financial contents into another, this is called a transfer-on-death.
You may assign more than one beneficiary to any given piece of property. Note that TODs on real estate and motor vehicles may not be a valid option in all 50 states – in California, you have had the option to pass on your motor vehicles via TOD, yet it is only since 2016 that real estate could also be passed on via TOD.
Determining how best to avoid probate for your own property and belongings entails understanding how the ownership of what you currently own is set up, and in some cases, this may require you to make some changes to that setup. Tax considerations are also on the table – for example, adding a person as an owner of thejointly-owned property may trigger the federal gift tax, if your property’s value exceeds the warranted amount.
At the end of the day, this is not a straightforward process. Getting some legal help to efficiently and more safely navigate state and federal law can help you save both time and money, and ensure that what you own will find its way to the right people when you pass away.