Probate is relatively easy to avoid, yet many people fail to take steps to do so when they plan their estates. Mechanisms exist, from joint ownership to living trusts. What will work in your situation will depend on how your assets are titled and who you want to inherit your estate when you die.
When and Why Is Probate Required?
Probate—or another means by which property can legally pass from a deceased individual to a beneficiary—is necessary because deceased individuals can't own property. Ownership of each asset at the time of death must have some way of passing to a living individual. Probate is required when no other mechanism is in place.
# 1 Get Rid of All of Your Property
The most extreme way to avoid probate of your estate is to get rid of your property. You won't have an estate that require probate if you don't own anything to transfer to living beneficiaries after your death.
Of course, this isn't practical because you'll need money to live on until your death, but giving most of your assets away through the use of a special type of trust can work in some cases. The key is to name yourself as a beneficiary of the trust.
Using this type of trust combined with one or more other techniques for any assets that aren't transferred into the trust means no probate assets. And no probate assets means no probate estate.
# 2 Take Advantage of Joint Ownership
Adding a joint owner to a bank account, an investment account, or to a real estate deed will also avoid probate, provided that it's clear that the account is owned as joint tenants with rights of survivorship and not as tenants in common.
That word "survivorship" makes all the difference. Rights of survivorship guarantee that when one owner dies, their share of an asset automatically transfers to the survivor or survivors.
You and your spouse can own property with rights of survivorship in the form of tenancy by the entirety in certain states. This is a similar type of deed reserved for married couples and it also avoids probate.
Disadvantages of Joint Ownership
There are several drawbacks to relying on joint ownership with rights of survivorship to avoid probate, however.
Adding a joint owner to an account or a deed can be a taxable gift that must be reported to the IRS on Form 709, the federal gift tax return. A gift tax can be incurred if the value of the joint owner's share exceeds $15,000 per person per year as of 2021. Many states additionally impose a gift tax.
Additionally, judgment creditor or divorcing spouse might be able to take some or even all of the assets in a joint account if the co-owner is sued or divorces.
As much as 50% or even 100% of the joint account could be included in the deceased owner's estate for estate tax purposes if the joint owner dies before you do.
Loss of Control
Leaving your property to your spouse by right of survivorship or tenancy by the entirety means that your spouse will be free to do whatever they want with your property after you die. This may not be what you want if you're in a second or later marriage.
You might want your spouse to have the use of your property after your death, but then you want it to go to your own children after your spouse's death. Joint ownership with right of survivorship or tenancy by the entirety won't accomplish your final wishes in this situation.
Your spouse can freely choose to leave your property to their children instead of your own, or even to a new spouse.
# 3 Use Beneficiary Designations
You're probably already taking advantage of probate avoidance through the use of beneficiary designations if you own life insurance or assets held in a retirement account, such as an IRA, 401(k), or annuity.
Most states also allow you to designate beneficiaries for your bank accounts, referred to as a "payable on death" or "POD" accounts, and also for non-retirement investment accounts, known as "transfer on death" or "TOD" accounts. A number of states allow you to designate beneficiaries for your real estate through the use of transfer on death deeds, or beneficiary deeds or affidavits as well.
You can use a life estate deed to retain ownership of real estate during your lifetime in some states, then pass the property on to the beneficiaries of your choice after you die. This also avoids probate of real estate.
# 4 Use a Revocable Living Trust
A revocable living trust is a written agreement that covers three phases of your life:
- While you're alive and well
- If you become mentally incapacitated
- After you die
Signing a revocable living trust agreement by itself isn't enough to avoid probate of your property. You must then title your assets in the name of your trust. Your assets will only avoid probate after your revocable living trust has become the record owner of your assets instead of you.
This process is known as "funding" your trust. Think of your trust as a bucket. You have to fill the bucket with your assets to ensure that they'll avoid probate. Any that remain outside the bucket will require probate to transfer to a living beneficiary at the time of your death unless they have a beneficiary designation or they're owned with rights of survivorship.
The Bottom Line on Avoiding Probate
What works for you will depend on your own unique family dynamics and your financial situation. The bottom line is that you'll create peace of mind for yourself, as well as for your loved ones during a difficult time, if you use one or more techniques to avoid the probate of your property.