Planning for one’s death can be daunting, but it is important to consider how your estate should be settled prior to your passing. If proper planning does not occur, you can open your family and loved ones up to added costs and significant delays of receiving their inheritance.
What is Probate?
Probate occurs when an individual dies, and their will must be proven valid. If a probate court determines an individual passed without a will or an invalid will, they have passed intestate, meaning that person did not have a legal will in place. When this occurs, that individual’s estate will become probated.
Once the probate process begins, a court, generally located in the county in which the decedent was a permanent resident at their death, will allow heirs, other individuals, and creditors the opportunity to come forward and claim assets in the decedent’s estate. If the decedent passed without a will or designated beneficiaries on their assets, the probate process can be a long, expensive endeavor. Probate proceedings can often last one to two years and cost between 3%-7% of the probate estate assets.
How to Avoid Probate?
As explained above, having a will does not necessarily mean you will avoid probate, so what steps can be taken to ensure that an estate avoids probate altogether? There are several options including establishing trusts, designating beneficiaries, joint ownership of assets, and gifting strategies. Each avoidance strategy has pros and cons.
Trusts are one way in which an individual can avoid probate. Trusts can be revocable meaning changes can be made while you are living, or irrevocable meaning changes cannot be made to the trust unless all beneficiaries consent to changes. Trusts will also allow an individual to state who will receive certain assets held within the trust at that individual’s death. Certain constraints can be placed as to when a beneficiary can receive an inheritance and how much of the inheritance can be received at any one time. The grantor of the trust will designate a trustee who will be the administrator of the trust provisions.
Trust creation can be expensive and is not necessarily appropriate for everyone, so it is important to work with a reputable estate planning attorney to determine if a trust is an appropriate probate avoidance vehicle for you.
Designating beneficiaries on bank and investment accounts is another probate avoidance strategy, which is much more straightforward than drafting a trust. By designating beneficiaries on your investment accounts, your assets will pass to the stated individual(s) at your passing and completely avoid probate altogether. An individual can have multiple beneficiaries on an account, and they can list primary or contingent beneficiaries. Primary beneficiaries will have priority at the decedent’s passing, and contingent beneficiaries will receive an inheritance only if the primary beneficiaries have all passed away prior to the decedent. We work closely with our clients to ensure that they have designated beneficiaries listed on their accounts.
Joint ownership of investment accounts or property can also avoid probate. There are several types of joint ownership, so it is important to work with an attorney or financial advisor to determine which type of joint ownership is appropriate given the situation. When assets are held jointly, the asset will be distributed to the other owners at the passing of one owner. In this instance, probate will be avoided.
The final strategy for avoiding probate is gifting strategies. When an individual gifts assets or property to other individuals, charities, etc. while they are living, the asset is completely removed from their estate and avoids probate. There can also be several tax benefits to a gifting strategy while living. We work with many of our clients to determine an appropriate gifting strategy for their unique situation.
If you have questions or concerns about your beneficiary designations or estate plan and would like to hear more about your options, please reach out to us today.
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