The term “probate” generally refers to the court procedure for validating a will and passing ownership of property from a decedent to others. Said another way, probate is the process by which the decedents property is collected, debts and taxes are paid and the remainder is distributed to the heirs. The process is overseen by the appropriate court in each state.
While things often go smooth with the process, factors that can complicate it are the existence of minor beneficiaries, disputes among heirs, insolvency and other circumstances that necessitate formal probate. In many states, it can take a year or longer to probate an estate, even if there are no legal challenges. With that being said, it is both the cost and time of probate that make probate avoidance an important estate planning goal of many people.
There are many ways to avoid probate, either totally or in part. Listed below are some of the common mechanisms to transfer property without the necessity of a will, and therefore probate.
Gifts made prior to the donor’s death are not subject to probate. These gifts are referred to as inter vivos (Latin for “during life”) gifts. The reason such gifts are not subject to probate is obvious: once given, the subject matter of the gift is no longer part of the decedent’s estate. In order to make a valid gift before death, all of the following elements must be present:
- The intent on the part of the donor to make a present transfer
- Delivery of the gift, either actual or constructive
- Acceptance of the gift by the recipient
Joint tenancy ownership is a terminable interest that terminates at death. When one joint tenant dies, the other joint tenant(s) succeed to the property without probate. But making someone else a joint tenant of property an individual owns alone, just to avoid probate, is often a bad idea. The new owner could sell his or her half-interest, or the new owner’s creditors could go after it.
Pay On Death Accounts
Pay on death accounts allow an owner to have the proceeds disbursed to a beneficiary at death. Using these accounts are the simplest way to keep assets held in bank and brokerage accounts from becoming part of an individual’s probate estate. Not all states have a POD law. However, individuals may still be able to make use of the accounts by doing business with a broker or a bank based in a state that has one on the books.
The proceeds of life insurance are paid directly to the beneficiary or beneficiaries and are not subject to probate. Gifting life insurance is a popular way of transferring wealth without significant tax implication. The gift tax is assessed on the value of the policy at the time of transfer (not on its cash value at the time of the insured’s death). To be an effective gift for tax purposes, the policy must be given away at least three years before the donor’s death.
Trusts are a flexible mechanism for transferring property either before or after an individual’s death and avoiding probate. A trust may be created during the life of the donor or at the death of the donor. A trust can be either revocable (on which case the trustor is free to change their mind and retrieve the property within the trust) or irrevocable. Virtually anything can be the subject of a trust. The only significant limitation is that a trust cannot be used for an illegal purpose or to support an illegal activity.