Most estates must go through the probate process. Probate is the legal process of determining if a will is valid, paying any qualifying debt and estate taxes, and distributing whatever assets remain.
It is potentially a very complicated legal process, and an attorney should be involved in any estate planning activities.
Using these strategies will help you design your estate to avoid some common challenges of the probate process and save you money:
- Have a valid will. Probate can last up to a year in many cases; typically this is due to a protracted process of validating the will. Probate is a legal process, so the longer it takes, the more money the attorneys make. Having a valid current will for the state you live in will help shorten and streamline the probate process. Be sure to draw up your will with an attorney and review it annually for anything that needs to be addressed.
- Avoid having your assets pass through probate.
- Create one or more trusts. Assets and property within a properly drafted trust avoid the probate process. They are simply transferred directly to the beneficiaries of the trust. This may also provide greater protection of the assets from creditors and reduce or avoid estate taxes.
- Name beneficiaries for your 401(k) account. This will allow the account to avoid passing through the probate process. Again, this can provide protection from creditors. You can call your 401(k) administrator for the necessary beneficiary designation form.
- Name beneficiaries for your IRA. As with the 401(k), naming at least one beneficiary will avoid probate and can shield the assets from creditors. Just call your IRA administrator and they can help you out.
- Name beneficiaries on your life insurance policies. This is the same situation as above. If you don’t name a beneficiary, then the proceeds are simply paid to your estate and must pass through probate, increasing the potential for higher fees and costs. Be sure to name your beneficiaries!
- Own Assets Jointly with Right of Survivorship. This can include almost anything: real estate, vehicles, stocks, and more. A jointly owned asset is passed onto the survivor automatically if it is titled properly.
- Your bank account can have a paid-on-death designation (P.O.D.), and brokerage accounts can have a transfer-on-death (T.O.D.) designation, allowing ownership of the accounts to pass directly to the beneficiaries upon your death.
- Give it away: You can gift your assets to anyone you choose, each year, up to a specific amount, tax-free. Currently, you can give as many people as you want a gift up to $15,000 without having to worry about paying taxes on the gift.
- The gift tax only kicks in after you have gifted over a specified amount during your lifetime. Interestingly, it is the gift-giver that is responsible for paying the tax, if any.
- This reduces the amount of your estate and will lower the probate costs, since they are typically based upon the total value of the estate. See your certified public accountant for more information.
Except for certain circumstances, assets that avoid probate are still subject to federal estate taxes, including those assets held in living trusts. A good estate planning attorney can guide you through this maze so that probate expenses will impact your family as little as possible.
The real enemies in the probate process are lack of planning and failure to utilize all the available options. Having your estate plan prepared properly will eliminate the amount of time your estate spends in the probate process. In the legal world, time is very expensive. You don’t want the attorneys and courts to get your money instead of your heirs.
By properly planning your estate with the appropriate financial and legal professionals, you can maximize the amount of your estate that passes to your family, friends, and charitable organizations. The unfortunate alternative is that more of your estate will pass to your creditors, various attorneys, and the legal system.