How Can Probate be Avoided?

There are some types of property that don’t have to go through the probate process. Some types of joint ownership in real estate and bank accounts will avoid probate, but are usually accompanied with their own unique tax and control drawbacks.
Likewise, retirement accounts, life insurance, and investment accounts with designated beneficiaries will also avoid probate, but need special consideration in proper estate planning.
Each of the above methods to avoid probate come with their own particular risks, inconveniences, and potential tax disadvantages.

Living Trusts

By far, the most widely used and advantageous way to avoid probate is to have an effective living trust as the cornerstone of your estate planning.
Assets of all kinds can be transferred to a trust including bank accounts, real estate, stocks, mutual fund shares, cars, jewelry, and business or farm interests. With a living trust, you can accomplish all of the following goals:

  • Maintain full control of your assets and manage your investments during your lifetime;
  • Provide for management of your assets should you become incapacitated or not wish to manage them;
  • Provide for the management of trust investments at your death if beneficiaries are minors or are inexperienced;
  • Arrange for your spouse to receive income for life;
  • Arrange for trust principal to be distributed to your children at the death of your spouse;
  • Specify the circumstances under which distributions are to be made, when and in what amount; and
  • You can change the terms of your trust or revoke it entirely if at any time your financial circumstances or family relationships change.

Most importantly, all assets in a valid living trust are beyond the reach of the probate system. A living trust is revocable and you have complete control over its assets during your lifetime. There are no adverse tax consequences to transferring property into a living trust. You can always add, subtract, and modify any assets held in your trust as well as change the beneficiaries or the amounts they receive. You can even revoke the trust in its entirety at any time. You, as the trustee, are charged with the duty of managing the estate property and seeing that all the terms of the trust are carried out – much like the way you currently manage your property. As such, living trusts are favored by individuals who want to create a flexible estate plan, retain control of their assets, plan to minimize estate taxes, and avoid probate at death.

Joint Tenancy

As mentioned above, the most commonly attempted shortcut to proper estate planning is joint ownership of property. Real estate, bank accounts, and automobiles are examples of assets which can be jointly owned. In the case of real estate, the terms “joint tenancy” or “joint tenants” is a description of joint property ownership. To a lawyer, the term “joint tenancy” has a specific meaning along with its own unique characteristics. Property held in joint tenancy will avoid probate in most cases, but there are some distinct disadvantages in using joint ownership of assets.

Disadvantages to Joint Ownership:

Loss of Control

Once you transfer an asset into joint ownership, you will need your joint owner’s approval and signature to sell it or transfer the asset. If your joint owner were to become incapacitated, you would need to petition the court to regain control of your property.

Risk of Lawsuits

In today’s litigious society, assets and insurance are the name of the game. If you place another person’s name on your property in joint ownership, your property is now exposed to the potential lawsuits of that joint owner. A car accident is a good example. If your co-joint-owner is involved in an accident and the insurance denies coverage or is insufficient, your jointly owned property will be targeted.

Creditors Rights

If your joint owner goes through some bad times and runs up some debt, your jointly owned property will be the focus of creditors seeking payment. Judgments and abstracts of judgment can attach to the property clouding title. If your joint owner has any tax problems, previous, current, or in the future, the tax liens will attach to your property.

Gift Tax Consequences

Placing a child or loved one’s name on your property as a joint owner is the equivalent of making a gift. If the value of the property gifted is over $15,000, a gift tax return needs to be filed and may result in gift tax consequences or complications.

Capital Gains Taxes

One of the great benefits of properly passing appreciated property to your beneficiaries is that the IRS allows them to take a stepped-up basis on the property. Without getting too complicated, that means that an appreciated property can entirely escape capital gains taxes. On the other hand, if incorrectly planned, such as passing property by way of joint ownership, a significant portion of the stepped-up basis benefit is lost and your loved-ones will end up paying capital gains taxes that could easily have been avoided. This applies to spousal use of joint ownership as well.