You may have heard people say you should “avoid probate” in your estate and wondered: What does that mean? This article discusses probate issues and ways to avoid them.
Probate is when the executor named in the will petitions the court to accept the will as valid. In the probate proceeding, the executor collects the deceased’s assets to pay debts, estate or income taxes, administrative expenses such as funeral bills and attorney’s fees, and distributes the remaining assets among the beneficiaries named in the will.
The entire process is a matter of public record, as well as the executor’s accounting, if filed. The process can take several years depending on the complexity of the estate. If the will is contested or the accounting is contested, there could be expensive litigation.
Reasons for avoiding probate include privacy, time, and costs. Most people want to privately distribute assets, decrease the time involved and cost of distribution.
Ways to Avoid Probate
There are various estate planning tools to avoid the probate process. The process may not completely be avoided; however, it may limit the amount of assets that go through probate. This is accomplished by having “non probate” assets in your estate or removing assets from your estate while living.
Gift Giving Tax Basics
Under the annual gift tax exclusion, you can give gifts of cash or property up to a specified value to as many recipients as you would like with no gift tax consequences. The annual threshold for the exclusion is $14,000 for 2015 and 2016.
The exclusion amount doubles for joint gifts made by a married couple.
For recipients, the amount received as a gift does not count as income for tax purposes.
There are six ways to accomplish these goals:
1. Form a living trust. Living trusts allow you to avoid probate by listing the trustee as the owner of the assets. With a revocable living trust, you remain in control of the assets. Upon death, instead of the assets going through probate, your successor trustee can distribute them pursuant to your wishes according to the trust. This allows for privacy because a living trust is not a public record in the majority of cases. Also, the whole process is less expensive.
Various assets can be held in a trust such as real estate and bank accounts. It is important that a professional draft the trust and assist with transferring the assets to the named trustee.
2. Jointly own real estate or bank accounts. Putting another name on assets so you own them jointly is also a way to avoid probate. You can form bank accounts with a joint holder or even real estate with rights of survivorship. Upon either of your deaths, the assets transfer directly to the survivor without the need for probate.
3. Bank accounts with “payable on death” designated beneficiaries. There are some bank accounts that allow you to list a beneficiary. Upon your death, the beneficiary will simply receive the assets.
4. Own securities that are transferable upon death to designated beneficiaries. Similarly, it may be possible to list a beneficiary for your stocks and bonds accounts.
5. Beneficiaries for IRAs, 401(k)s, or pension plans. By listing beneficiaries for IRAs, 401ks and pension plans, you can keep those assets from going into probate. Once you designate a beneficiary or beneficiaries, it is important to keep designations up-to-date. There have been many cases where a person names their spouse as a beneficiary and then divorce. If they die without updating the IRA, 401(k) or pension plan, the ex-spouse may receive the money regardless of what the will states.
6. Engage in gift giving using trusts and/or a limited partnership. For complicated estates, you can create various gift giving trusts that allow gift assets at a discounted value. This removes more assets from your estate in order to avoid estate taxes. Similarly, a larger estate may use techniques such as a limited partnership to remove assets from the estate, not only to limit estate taxes, but to lessen probate assets.
Consult Jerry Miles or Michelle Flynn regarding questions about probate.