What Is Probate and How Do You Avoid It?
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What Is Probate and How Do You Avoid It?
Probate is the legal process by which a person’s final debts are settled and legal title to property is formally passed from the decedent to his or her beneficiaries and heirs.
Things To Know
- TOD and POD accounts are various financial accounts for which an owner names a beneficiary.
- Retirement fund assets go directly to the beneficiary named on the account.
Most states have streamlined probate procedures for handling the settlement of small estates and uncomplicated larger ones. In a few states, the procedure for small estates may not even require a trip to probate court. If the decedent left a will, there should be an executor named in it to manage the estate and wrap up the decedent’s affairs. If there is no will, the court will appoint an administrator to fill this role.
Property owned in your name at the time of your death is subject to probate unless the property is held in an account that designates a beneficiary. Property jointly owned, owned by someone else, or owned by a trust is not subject to probate (at least not the part you don’t own) upon your death. Getting property out of your probate estate is simply a matter of not owning it when you die. There are many strategies you can use to avoid probate. Here are some ways to avoid probate:
Transfer-on-Death (TOD) and Payable-on-Death (POD) Accounts
These are ordinary financial accounts of various types, for which the owner fills out a form to name a beneficiary (payee). The payee automatically receives the account balance on the death of the owner. Until then, the beneficiary/payee has no rights in the account, since the beneficiary can be changed, or the account depleted or closed. A wide variety of accounts can be held in POD or TOD form. While it saves no tax, this is a timesaving and probate-avoiding option to consider.
Life Insurance Proceeds
A life insurance policy payoff is part of the policy owner’s private contract with the insurance company. It should promptly go to the named beneficiaries with no probate court involvement, upon proof of the insured’s death. Death benefit payments from a policy owned by the decedent to a named beneficiary are excluded from the probate estate.
Trusts
Trusts are often used to avoid probate court and for a variety of other reasons. A trust is a creature of the law that can take legal ownership of one’s property. If a deceased person had placed property into the name of a trust, this property technically does not belong to him or her anymore. Therefore, assets held by the trust are not subject to the jurisdiction of the probate court.
In addition to avoiding probate, trusts that also provide tax savings can be created. Trusts are not for everyone, but for those who can use a trust, they are very powerful estate planning tools.
Retirement Benefits
Retirement fund assets go directly to the beneficiary named on the account. Using the beneficiary option allows the proceeds to bypass probate court. The beneficiary, if a married qualified retirement plan participant does not specify otherwise, defaults to the spouse. That is appropriate in many, but not all, family situations.