Minimizing
Probate When Setting Up Your Estate
What
can you do to lessen its impact for your heirs?
Probate subtly reduces the value of many estates.
It can take more than a year in some cases, and attorney’s fees, appraiser’s
fees, and court costs may eat up as much as 5% of a decedent’s accumulated
assets.1
What do those
fees pay for? In many cases, routine clerical work. Few estates require more
than that. Heirs of small, five-figure estates may be allowed to claim property
through affidavit, but this convenience isn’t extended for larger estates.
So, how you can exempt more of your assets from
probate and its costs? Here are some ideas.
Joint accounts. Married couples may hold property as a
joint tenancy. Jointly titled property includes a right of survivorship and is not
subject to probate. It simply goes to the surviving spouse when one spouse
passes. Some states allow a variation called tenancy by the entirety, in which
married spouses each own an undivided interest in property with the right of
survivorship (they need consent from the
other spouse to transfer their ownership interest in the property). A few states allow
community property with right of survivorship; assets titled in this way also
skip the probate process.2,3
Joint accounts can still face legal challenges. A potential heir to
assets in a jointly held bank account may claim that it is not a “true” joint
account, but a “convenience account” where a second accountholder was added
just for financial expediency (an adult child able to make deposits and pay
bills for a mom or dad with dementia, for example). Also, a joint account with
right of survivorship may be found inconsistent with language in a will.4
POD & TOD accounts. Payable-on-death and
transfer-on-death forms are used to permit easy transfer of bank accounts and
securities (and even motor vehicles, in a few states). As long as the original
owner lives, the named beneficiary has no rights to claim the account funds or
the security. When the original owner passes away, all the named beneficiary
has to do is bring his or her I.D. and valid proof of the original owner’s
death to claim the assets or securities.5
Gifts. For 2017, the I.R.S. allows you to give up
to $14,000 each to as many different people as you like, tax free. By doing so,
you reduce the size of your taxable estate. Gifts over $14,000 may be subject
to federal gift tax (which tops out at 40%) and count against the lifetime gift
tax exclusion. The lifetime gift tax exclusion is currently set at $5.49
million per individual (and correspondingly, $10.98 million per married couple).6
Revocable living trusts. In a sense, these
estate planning vehicles allow people to do much of their own probate while
living. The
grantor – the person who establishes the trust – funds it while alive with up to 100% of
his or her assets, designating the beneficiaries of those assets at his or her
death. (A pour-over will can be used to add subsequently accumulated assets to
the trust at your death; yet, those assets “poured into” the trust at that time
will still be probated.)7
The trust owns assets that the grantor
once did, yet the grantor can invest, spend, and manage these assets while living.
When the grantor dies, the trust lives on – it becomes irrevocable, and its
assets should be able to be distributed by a successor trustee without having
to be probated. The distribution is private (as opposed to the completely
public process of probate) and it can save heirs court costs and time.7
Are there
assets probate doesn’t touch? Yes, there are all kinds of non-probate assets.
The common denominator of a non-probate asset is a beneficiary designation. By
law, these assets must pass either to a designated beneficiary or a joint
tenant, regardless of what a will states. Examples: jointly titled real
property, jointly held bank accounts with right of survivorship, POD and “in trust for” accounts, life insurance
policies, and
IRA, 401(k), and 403(b) accounts.8
Make sure
to list/update retirement account beneficiaries. When you open a
retirement savings account (such as an IRA), you are asked to designate
eventual beneficiaries of that account on a form. This beneficiary form stipulates
where these assets will go when you die. A beneficiary form commonly takes
precedence over a will.9
Your beneficiary designations need to be
reviewed, and they may need to be updated. You don’t want your IRA assets, for
example, going to someone you no longer trust or love.
If you are married and have a workplace
retirement plan account, your spouse is the default beneficiary of the account under
federal law, unless he or she declines to be in writing. Your spouse is
automatically entitled to receive 50% of the account assets should you die,
even if you designate another person as the account’s primary beneficiary. In
contrast, a married IRA owner may name anyone as a primary or secondary
beneficiary, without spousal consent.10
To learn more
about strategies to avoid probate, consult an attorney or a financial
professional with solid knowledge of estate planning.
WenJing He may be reached at 800-916-9860 or hew@wenadvisory.com.
www.wenadvisory.com
This
material does not necessarily represent the views of the presenting party, nor
their affiliates. All information is believed to be from reliable sources;
however we make no representation as to its completeness or accuracy. Please
note - investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment
Citations.
1 -
nolo.com/legal-encyclopedia/why-avoid-probate-29861.html [9/26/17]
2 - info.legalzoom.com/difference-between-community-property-rights-survivorship-vs-joint-tenancy-21133.html
[9/26/17]
3 - law.cornell.edu/wex/tenancy_by_the_entirety
[9/26/17]
4 - jpfirm.com/news-resources/survivorship-rights-in-joint-bank-accounts/
[1/15]
5 - nolo.com/legal-encyclopedia/avoid-probate-transfer-on-death-accounts-29544.html
[9/26/17]
6 - tinyurl.com/y7rf2ayh [9/6/17]
7 - thebalance.com/how-does-a-revocable-living-trust-avoid-probate-3505224
[11/14/16]
8 - thebalance.com/what-are-non-probate-assets-3505237
[6/21/17]
9 - marketwatch.com/story/make-this-estate-planning-move-right-now-check-your-beneficiary-designations-2017-06-29/
[6/29/17]
10 - connorsandsullivan.com/Articles/Beneficiary-Designations-Getting-the-Right-Assets-to-the-Right-People.shtml
[9/27/17]
