During the estate planning process, you must decide how you would like your assets to be distributed after you die. Your last will and testament will name someone to act as your personal representative. The will may contain all of your instructions on what to do with your property, but those instructions must go through a probate proceeding.
You can keep many of your assets out of the probate process altogether, which will help your personal representative avoid spending too much time in probate court. It will also save your estate money and prevent delays in transferring property to your estate’s beneficiaries.
Avoiding probate can protect your family’s privacy by keeping details about your estate out of the public record.
The probate process can be long and costly
The probate process begins after a person — known as the “decedent” — has died. The personal representative designated in their will files a petition with the probate court in the county where the decedent lived. One of the main purposes of a probate proceeding is to establish that the decedent’s will is valid and enforceable. While proving a will to be valid is usually not a controversial matter, legal fights do happen sometimes.
The court then oversees the representative as they take inventory of the decedent’s estate, have major assets appraised, and pay off debts and taxes. Eventually, the representative distributes assets to the beneficiaries named in the will. Once the court is satisfied that no assets remain in the estate, it will close the probate case.
Seeing a probate case through takes time. The court must approve various steps in the process. The personal representative will most likely have to appear in court multiple times, usually with an attorney. This will delay the distribution of the estate’s assets to the beneficiaries, and it will cost money from the estate that would otherwise go to the beneficiaries. Fortunately, it is possible for many, perhaps most, assets in an estate to avoid probate.
Giving property away keeps it out of probate
Perhaps the most straightforward way to keep property out of probate is to give it away. If a decedent gave property away before their death, it is no longer part of their estate and therefore not subject to probate.
Suppose a person has an asset that they want to make sure passes to a particular beneficiary. This might be a family heirloom or other valuable item. They can give that item to that person before they die to make certain that it will not get caught up somehow in the probate process.
The strategy has some rather significant drawbacks:
- Giving property away can only keep some of a person’s property out of probate. The person cannot give everything away, or they will be left destitute.
- Once the person has given an asset away, they no longer have any control over what happens to that asset.
- Gifts above a certain total amount could trigger federal gift tax liability, which is the responsibility of the person giving the gift.
Property with certain types of joint ownership does not go through probate
If property is owned jointly by two or more people with a right of survivorship, sometimes known as a “joint tenancy,” it will not go to probate when one of the owners dies. Instead, the ownership will pass to the remaining owners automatically. A person can keep property out of probate by establishing this type of joint ownership.
The title that creates joint ownership of the property must state that each owner has rights of survivorship. Joint ownership without a right of survivorship is known as a “tenancy in common.” In that type of arrangement, a decedent’s share of the property passes to their heirs, and would therefore have to go through probate. A dispute over whether property has a right of survivorship could end up in probate court, where a judge will look for clear, unambiguous language establishing a right of survivorship.
Community property might not be subject to probate
In states with community property laws, such as Idaho, most property acquired by either spouse during a marriage belongs to a “community estate” represented by both spouses. Community property may pass directly to the surviving spouse in some situations, without needing to go through probate. That said, the probate court may still want to see an inventory of community assets.
Property with a designated beneficiary can avoid probate
With certain types of property, an owner can designate one or more beneficiaries to receive the property if the owner dies. This property also does not have to go through the probate process:
- Life Insurance: Most policies include a designation of a beneficiary who will receive the policy’s benefits upon the insured’s death.
- Retirement accounts: IRAs, 401(k) accounts, pensions, and other retirement accounts often allow a person to designate beneficiaries.
- Bank accounts with a payable-on-death designation: Some bank accounts can have a designated beneficiary upon the account holder’s death.
- Securities with a transfer-on-death designation: Some securities accounts allow the account holder to designate a beneficiary.
- Automobile titles with a transfer-on-death designation: Some states allow a vehicle owner to designate a beneficiary who may receive the vehicle after the owner’s death.
- Real estate with a transfer-on-death deed: This type of deed is valid in some states, and allows real property to convey to a designated beneficiary without going through probate.
Creating a revocable living trust can help keep property out of probate
A living trust, also known as an inter vivos trust, is a type of trust that a person — known as the grantor — can create to manage assets both during their lifetime and after their death. Assets transferred to the trust by the grantor will not be part of the grantor’s estate when they die, and therefore will not need to go through probate.
When creating a living trust the grantor must designate a trustee to manage the trust assets for the benefit of one or more beneficiaries. During the grantor’s lifetime, some states allow the grantor to name themselves as both trustee and beneficiary, with alternate beneficiaries named after the grantor’s death. A grantor should name another person as co-trustee or successor trustee to ensure that someone continues to manage the trust after they are gone.
A living trust is revocable, meaning that the grantor can revoke the trust at any time. Revocation of the trust transfers the trust’s assets back to the grantor.
One downside to a revocable living trust is that it will not protect assets from estate taxes. Federal estate taxes only apply to very large estates. As of 2021, estates with less than $11.7 million in assets are exempt from the tax. States with estate tax laws may have a lower exemption amount.
An irrevocable trust can keep assets out of probate and protect them from estate tax
An irrevocable trust can keep a grantor’s assets out of probate and protect them from estate taxes. This kind of trust is usually difficult to create. Since most estates will not be subject to estate tax, most people will not need an irrevocable trust.
Learn more about how to avoid probate
Probate proceedings can drag out the process of distributing assets to the decedent’s chosen beneficiaries. Even when the issues before the probate court are entirely routine, the case takes time and costs money that the decedent’s personal representative could otherwise be distributing. Some types of property do not have to go through probate at all. With a bit of planning, a person can keep a substantial amount of their assets out of probate.