How Do I Avoid Probate?
With proper advance planning, probate can be readily and entirely avoided. Several methods of asset transfer and titling can remove an individual’s property from the probate estate. Typically, a combination of these methods can be implemented to prepare a plan that (i) meets the needs of the individual/family, (ii) addresses other goals and intentions of their family legacy or gifting plan and (iii) wholly avoids probate administration. The following represent the major methods of probate avoidance:
1. Trust Formation. By forming a revocable living trust, the transfer of assets can avoid probate. When a trust is formed, most assets are transferred to the trustee of the trust (which is in most cases the owner/individual) for the benefit of that same owner/ individual during their lifetime. However, the key benefit of a trust is what occurs upon the death of the individual establishing the trust—namely, that the trustee’s rights and responsibilities are transferred to a new pre-determined individual (appointed by the initial owner) and the assets of the trust are distributed (or retained for the benefit of successor beneficiaries) in whatever fashion has been laid out in the trust document by the owner. In short, because the owner’s property was held by the trust, probate is entirely avoided.
2. Joint Ownership / Right of Survivorship. Certain assets (particularly real estate) can be held as “joint” property whether between spouses or other individuals. When such is the case, when one of the joint-owners dies, the property would typically be transferred, in whole, automatically to the surviving owner. No probate would be required. However, if both joint-owners die, with no additional joint-owner, then the property becomes subject to probate with all other property.
3. Beneficiary Designations. Certain assets can be transferred by a “beneficiary designation.” Such assets typically include life insurance policies, independent retirement accounts (IRAs) and employee benefit plans (401k plans, etc.) as well as some financial accounts. Similarly, real estate can be transferred by a “beneficiary deed” which transfers the property to the named recipient automatically upon the death of the owner. By utilizing this type of planning, ownership will be transferred automatically to a named beneficiary. This process is relatively simple, and although not as comprehensive as some other planning, can be a great approach for some people.
4. Corporate Entities. Assets owned by a corporation or an LLC are not subject to probate. Understandably, the business entity does not “die,” but rather its ownership or control is transferred pursuant to the company’s operating documents. However, it must be noted that instruments representing company ownership interests (i.e. stock, LLC membership interest) can indeed be subject to probate and such matters should be addressed by other probate-avoidance mechanisms.
5. Life Insurance. Life insurance proceeds are typically not subject to probate administration. Naming a beneficiary of life insurance proceeds will result in the proceeds being transferred to such individual directly, completely bypassing the probate process. However, if a named beneficiary dies first or the policy is payable to naming “the estate of” a named person, the proceeds will indeed become part of the probate estate.
6. Very Small Estates are Subject to Minimized Probate. Very small estates can generally bypass the lengthy probate process. If the total assets of the decedent do not exceed $40,000, an “affidavit of small estate” is filed with the probate court, much of probate’s formality is dispensed and the process is typically shorter and less costly.