4 Ways to Avoid Probate0 USER TIPS ADD YOUR TIP
It is a truth universally acknowledged that probate is a major pain. It requires that an executor or other representative appear in court and get legal approval to distribute the deceased’s assets. Probate costs a lot, in terms of time (months, even years) and money (legal and accountant fees). Nowadays, though, there are several ways to sidestep the legal process of probating a will so that bequests to loved ones and survivors get distributed more quickly. These strategies don’t require court approval after the fact but do have to be planned in advance.
Transfer on death/pay on death
Applying mainly to bank or brokerage accounts, “transfer on death” or “pay on death” simply mean that, when the account holder dies, the account automatically becomes the property of a designated person—similar to making someone a beneficiary of a life insurance policy. An account can be set up with this status, or later converted to it. By making this designation, usually indicated by the initials TOD or POD in the account name, any funds or assets are effectively taken out of the estate before probate and directly passed to the transferee/payee.
One caveat: “Directly” doesn’t necessarily mean “immediately.” Depending on their internal policies, some banks and brokerages set up some hoops to jump through. They might freeze the funds until you can provide proof of death of the original account holder; they might then require the old account be shut down and a new one in the transferee’s name set up, before depositing the assets into it. All this “is something the institution is imposing, not that state law is requiring,” says Jim Worthington of the Worthington Law Firm, a trust and estates practice in Louisville, Kentucky. “But it still goes a lot more quickly than probate.” (Related: Checklist: Everything You Need to Do After Someone Dies.)
Joint account/survivor account
A joint account with right of survivorship (JWROS or JOWROS), also known as a joint-and-survivor account, is another option for financial accounts; in some states it can also be used for bank safety deposit boxes. A joint account means, of course, that two or more people actually own it, and can make deposits, withdrawals or transfers of its contents. What’s crucial is the right-of-survivorship (ROS) designation: It guarantees that, upon presenting the death certificate of one co-owner, the remaining co-owner gets full access to the account. None of it goes into the deceased person’s probatable estate.
Joint accounts often automatically come with right of survivorship (ROS) status when they’re established. But not always; you might have to specify. It’s especially important to specify survivorship if you are adding a person to an existing account; “just putting someone’s name on the checks doesn’t do it,” Worthington cautions—even if that someone is a spouse or child. If you can’t convert the account, you may have to set up a new one (again, depending on the institution’s policies). If you don’t, the account may have to go through probate after all.
Joint tenancy with right of survivorship
The joint tenancy with right of survivorship is another type of joint ownership specifically for real estate and land—what the money pros call real property assets, vs. purely financial ones. The concept is similar to that of joint accounts: With a survivorship designation (abbreviated JTWROS on the title papers), when owner dies, the property passes outside probate to the control of the remaining owner.
Some states offer a specialized form of JTWROS to married couples, called Tenancy (or Tenants) by the Entirety. Ensuring that the jointly-owned real estate cannot be seized by a creditor of one of the owners, it is more of an asset-protection than a probate-avoidance tool, but it does carry rights of survivorship with it.
To establish JTWROS or Tenancy by the Entirety on real estate you already own, you will have to draw up a new deed, have it notarized and the title registered.
Small estates/living trusts
Most states allow you to skip probate—or go through a streamlined, no-lawyer-required version of it—if you are dealing with a “small estate.” The definition of small varies considerably around the country, from $15,000 in Kentucky to $150,000 in California. But whatever the parameters, one way to shrink a probatable estate (in addition to the methods above) is to put as many assets as possible—financial accounts, real estate, art and antiques—inside a revocable living trust. By naming themselves trustee, the assets’ owner retails control of them in life; upon death, the assets go straight to the designated beneficiaries of the trust, bypassing probate.
Transfer on death and right of survivorship, as applied to financial accounts, are relatively new legal concepts, Worthington notes—dating from the 1960s, when the avoid-probate movement began stirring in estate-planning circles. So if you’re dealing with the holdings of elderly parents or relatives, it’s especially important to check designations. That savings account they set up as newlyweds 60 years ago may well not provide for survivorship, or the transfer policies of their little regional brokerage may have changed since it was acquired by that global conglomerate.
It’s also important to recognize the significance of these tactics. Probate by-passing designations like TOD and ROS take precedence over any directives in a last will and testament. Living trusts also trump wills. This could be a problem if, say, your will leaves $10,000 to your favorite museum—but there’s nothing to fund the bequest with, because your bank account transfers on death all the cash to your son, who isn’t an art lover. In other words, make sure that these actions align with other pieces of your estate plan, and don’t work at cross-purposes to them. (Related: Trust vs. Will: Which is Better for You?)