Probate is the process of settling the affairs of the deceased in a court of law. The mention of probate generally causes people to cringe, but it does not necessarily have to be that way.
The probate process varies somewhat by state, but in all cases, a person, typically called an executor, will be appointed to settle the affairs.
Once recognized as the executor by the court, this person will inventory and care for the decedent's assets (having them appraised if necessary), take care of notifications to all interested parties (heirs, creditors, etc.), and distribute the property according to the will, along with paying debts of the estate, if any. They will then close out the estate with the court.
As you can imagine, this takes time and ties up the estate's assets for an indefinite period of time – which is the main reason people try to avoid probate, or at least minimize the effects.
Methods to avoid probate include the following:
- Pay-on-Death (POD) – You can set up many assets like checking/savings accounts and retirement plans to be POD accounts, just like a traditional life insurance policy. You will need to fill out a form designating the account as POD and selecting a beneficiary. In some states, real estate can be transferred this way.
- Revocable Living Trust – By transferring some of your property to a revocable living trust, the trustee will be able to transfer the property to your beneficiaries without probate, according to your wishes in the trust document. You can retain control of your assets by naming yourself as the trustee and naming a successor trustee to distribute your assets after death – and you can revoke the trust at any time while you are still capable.
It is important to remember to transfer your assets to the trust if you use this method. Some people forget this step, and then everything goes through probate as if the trust never existed. Assets that are not covered under the trust will still go through the probate process.
- Joint Ownership – There are a series of joint ownership methods; the most obvious is literal joint ownership of an asset such as a jointly titled property deed or jointly held savings account.
- Gifts – The simplest way to avoid probate of possessions is to gift those possessions before you pass away. While you would not give away all of your assets, gifting them strategically can lower the headaches of probate, and lower the probate costs for the remaining items. In 2014, the IRS raised the Tax-Free Gift Limit to $14,000, which means you can give any individual a gift valued up to $14,000 without that gift being taxable to the individual. This limit is raised periodically, so check back when you are ready to gift to determine the current tax-free limit.
Joint tenancy with the right of survivorship and tenancy by the entirety are similar methods of joint ownership that transfer assets directly to the co-owner upon death, and community property states allow community property with the right of survivorship. Check the laws in your state for the options available where you live and how to execute them.
If your estate is small enough, most states have simplified probate procedures or affidavit methods that can shortcut the probate process. This is especially true for simple transfer of assets to a surviving spouse.
Definitions of small estates can vary drastically by state because of different exclusionary laws on real estate and other valuable assets. An estate nearing half a million dollars can still be considered small in certain states under certain situations.
With proper planning, you can make the probate process as easy as possible for your heirs, or bypass it entirely. Of course, you won't care, as you will have moved on to whatever you believe awaits on the other side; we're pretty sure it will not be probate.