When a loved one passes away, settling his or her financial affairs can be an emotional and complex task. Understanding how the probate process works and planning ahead can help protect your assets, reduce unnecessary costs, and make the process easier for your family.

Downsides (and upsides) of probate

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs. Depending on applicable state laws, the probate process can be expensive and time consuming. Not only can probate reduce the value of your estate due to executor and attorney fees, but it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private. For many families, avoiding unnecessary delays and maintaining privacy are two of the primary reasons to incorporate probate avoidance strategies into an estate plan.

However, there are instances where the probate process can work in your favor. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

Simple strategies to avoid probate

Some of the simplest estate planning strategies to avoid probate involve designating beneficiaries or titling assets so they can be transferred directly to beneficiaries outside of your will. So, for example, have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities, IRAs and other retirement plans.

For assets such as bank and brokerage accounts, consider the availability of pay on death (POD) or transfer on death (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind that while the POD or TOD designation is permitted in most states, not all financial institutions offer this option.

Strategies for homes and other real estate

Many homeowners avoid probate on their homes or other real estate (as well as bank and brokerage accounts and other assets) by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” But joint ownership has several significant drawbacks.

First, unlike with beneficiary designations, once you retitle property you can’t change your mind. Second, holding title jointly gives your spouse or child some control over the asset and exposes it to his or her creditors. Finally, adding someone to the title may be considered a taxable gift of half the asset’s value.

A handful of states permit TOD deeds, which allow you to designate a beneficiary who’ll succeed to ownership of your real estate after you die. TOD deeds allow you to avoid probate without making an irrevocable gift or exposing the property to your beneficiary’s creditors.

Strategies using trusts

For larger, more complicated estates, a living trust (sometimes called a revocable trust) is generally the most effective tool for avoiding probate. It involves setup costs but allows you to manage the disposition of your wealth in a single document while retaining control and reserving the right to modify the trust’s terms. Assets in the trust will be distributed to your heirs according to the trust’s provisions, without having to go through probate.Living trusts are commonly used in estate planning because they can help families avoid probate while providing flexibility during your lifetime.

Other types of trusts can be beneficial for specific situations. For example, placing life insurance policies in an irrevocable life insurance trust (ILIT) can provide significant tax benefits.

Making it easy for your family

Avoiding probate isn't appropriate for every estate, but thoughtful estate planning can reduce costs, delays, administrative burdens, and stress for your surviving family members.

Whether your estate is simple or more complex, proactive planning today can help protect your wishes tomorrow.Contact us today.

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