Probate can be expensive, time consuming, public, and frustrating for your heirs. Should you create a will? A trust? What is the difference? Is it worth the effort to avoid probate? In this episode I’m going to discuss 5 specific strategies to avoid probate. This is part of my ongoing commitment to assist you in getting educated about retirement and helping you making better decisions in all 8 areas of retirement planning.
I am not here as an attorney but rather am here to educate you on high level aspects of estate planning. I recommend working with competent legal professionals that can assist you in making estate planning decisions for your specific needs. My goal is to put these strategies on your radar so you can plan your retirement and estate effectively.
WHAT IS PROBATE
Probate is the legal way a person’s estate is handled after they pass away. It’s purpose is to make sure that assets and possessions are given to the correct people. It also ensures that any debts and taxes are paid.
A will does not help you avoid probate, but rather gives specific instructions upon your passing. The probate process then reviews a will and validates it. Then an executor is appointed to distribute your estate to the beneficiaries of your choosing.
If no will exists, your estate will be handled through the default intestate laws. Be aware that your assets may not be distributed as you would have designated.
As a side note, there may be small estate guidelines in your state that minimize the probate process. In Utah, this is for estates with less than $100,000 and no real property.
3 REASONS TO AVOID PROBATE?
Time – The probate process can last anywhere from approximately 4 months to 2 years, depending on the complexity of your estate. Many factors can influence the timeline of settling your estate.
- Is there a will?
- The number of beneficiaries
- Is the will being disputed? Do the beneficiaries agree?
- Does the estate have debt?
- Is the estate taxable?
- How complicated are the assets?
Expense – Probate can cost 3-7% of a person’s total assets. On a million dollar estate that could be $30,000 if at 3%, $70,000 at 7%. With proactive planning, these costs can often be reduced.
Lack of Privacy – The probate process is a public process, meaning that estate matters can be discovered by your neighbors or others. If someone showed up at the courthouse, they could view the entire record.
The probate process can be different across the United States, so researching your local laws and working with a competent attorney can help you make wise estate planning decisions.
5 STRATEGIES TO AVOID PROBATE
While every situation is unique, many retirees who have accumulated assets can benefit from minimizing the impact of probate. When you avoid probate, it can often be less expensive, less time-consuming, and private. Your neighbor won’t know the amount of your assets or to whom you gave them.
#1 - TOD DESIGNATION
A TOD designation stands for Transfer on Death. TODs are generally used for non-qualified bank and brokerage accounts. This designation transfers the ownership of an asset to a beneficiary.
For example, in the last year I worked with a new client who was single and had a large amount of money in her bank account. If she were to pass away without a TOD designation, that money would be included in the probate process. On the other hand, if she were to go to her bank and add a TOD designation, that money would go directly to the beneficiaries she selects. This same principle applies to a taxable brokerage account.
#2 - BENEFICIARY DESIGNATIONS
When you set up your 401(k), 403(b), or IRA, you’ll select beneficiaries. These accounts are a form of TOD and will simply pass to the beneficiaries you selected without going through probate.
One common mistake is not updating your beneficiaries as life events occur. It’s important to understand that the beneficiary designation is a contract that supersedes a will. For example, let’s say that a 401(k) was established when a husband and wife were married and then later divorce. If the beneficiary designation isn’t updated, this could create an estate nightmare.
#3 - HOLD PROPERTY JOINTLY
Various types of assets can be set up jointly with rights of survivorship by a husband and wife. When one spouse passes away, the assets automatically go the joint account owner. Let’s say a married couple has a bank account set up jointly. If the husband were to pass away, the assets would be in his wife’s name. There are various types of joint accounts, depending on the state in which you live.
#4 - USE A LIVING TRUST
A living trust is a legal document that can be set to own your assets and then pass them to beneficiaries, often at your death. A trust can own assets such as your home, vehicles, and collectibles. Once a trust is set up and then funded, assets pass privately to beneficiaries, rather than publicly like probate.
There is a fee with an attorney to set up a trust but the costs can often be much less than navigating the probate process. In addition, the process is overseen by a trustee that you designate, which can be much quicker.
There are both revocable and irrevocable living trusts, with advantages and disadvantages for both. Generally, revocable trusts can be adjusted and adapted by the grantor (the person who sets up the trust) at any time and assets in the trust will be included in the estate at death. With the estate tax being so high right now at 11.7 Million, most retirees won’t be concerned with that. An irrevocable trust can be set up to move assets out of your estate but can’t be changed by the grantor.
There are a variety of trusts and strategies in estate planning. Please talk to an attorney about your specific estate.
#5 - TAKE ADVANTAGE OF THE ANNUAL GIFT EXCLUSION
No matter your net worth, a powerful strategy to move assets out of your estate and thus avoid probate is to give away assets while you are living. In 2021, individuals can give away up to $15,000 to one individual without having to pay a gift tax (The person receiving the gift doesn’t pay tax on the gift).
If you have 5 people you want to distribute money to, you could move $75,000 out of your estate in a given year. If you’re married, your spouse can give $75,000 as well. This can be a highly effective way to avoid probate.
As an additional note, you can also gift money for tuition and medical payments on behalf of other individuals, but this money must be given directly to the organization. For example, you could give a grandchild $15,000 and also pay their tuition of $20,000.
If you’re within 10 years of retirement and looking to create strategies around replacing your paycheck, deciding when to take Social Security, and invest during retirement, I’d invite you to set up an appointment with us at Thrive Retirement Planning, either in person or virtually, where we can get to know each other. Simply call 801-810-8434 or go to thriverp.com and click on get started to learn more.
Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass by going to thriverp.com/ss.