Using a living trust is an effective and time-tested way to avoid probate, but living trusts aren't the only probate-avoidance method around. Here are some methods you might want to investigate, to use with or instead of a living trust.
Payable-on-death bank accounts offer one of the easiest ways to keep money -- even large sums of it -- out of probate. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. You can spend the money, name a different beneficiary or close the account. At your death, the beneficiary just goes to the bank, shows proof of the death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.
Every state but Texas has adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. It works very much like a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what's called "beneficiary form." When the papers that show your ownership are issued, they will also show the name of your beneficiary.
After you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. You are free to sell it, give it away or name a different beneficiary. But on your death, the beneficiary can claim the securities without probate, simply by providing proof of death and some identification to the broker or transfer agent. (A transfer agent is a business that is authorized by a corporation to handle stock transfers.)
In over half of the U.S. states, you can actually prepare a deed for your real property (your house or land) that transfers your property to people you name, without probate. These "transfer-on-death deeds" must be prepared, signed, notarized and recorded (filed in the county land records office) just like a regular deed. But unlike a regular deed, you can revoke a transfer-on-death deed. The deed should expressly state that it does not take effect until death.
Learn more about transfer-on-death deeds and which states allow them.
Many states car owners the sensible option of naming a beneficiary, right on the certificate of title or title application, to inherit a vehicle. If you do this, the beneficiary you name has no rights as long as you are alive. You are free to sell or give away the car, or name someone else as the beneficiary.
Learn more about transfer-on-death registration for vehicles and which states allow them.
To name a transfer-on-death beneficiary, all you do is apply for a registration in "beneficiary form." The new certificate lists the name of the beneficiary, who will automatically own the vehicle after your death. You can find more information on the website of your state's motor vehicles department.
Retirement plans, such as IRAs, 401(k)s and Keoghs, don't have to go through probate. All you need to do is name a beneficiary to receive the funds at your death, and no probate will be necessary.
Life insurance proceeds are subject to probate only if the beneficiary named in the policy is your estate. That's done occasionally if the estate will need immediate cash to pay debts and taxes, but it's usually counterproductive.
Joint tenancy is an efficient and practical way to transfer some kinds of property without probate.
Joint tenancy is a way two or more people can hold title to property they own together. In some states, joint owners (called joint tenants) must own equal shares of the property. When one joint owner dies, the surviving owners automatically get complete ownership of the property. This is called the "right of survivorship." The property doesn't go through probate court -- there is only some simple paperwork to fill out to transfer the property into the name of the surviving owner.
A will doesn't affect who inherits joint tenancy property. So even if your will leaves your half interest in joint tenancy property to someone else, the surviving owners will still inherit it.
This rule isn't as ironclad as it may sound. You can, while still alive, break the joint tenancy by transferring your interest in the property to someone else (or, in some states, to yourself, but not as a joint tenant).
Joint tenancy often works well when couples acquire real estate or other valuable property together. If they take title in joint tenancy, probate is avoided when the first owner dies -- though not (unlike a living trust) when the second owner dies.
Joint tenancy is usually a poor estate planning device when an older person, seeking only to avoid probate, puts solely owned property into joint tenancy with someone else. If you make someone else a co-owner, in joint tenancy, of property that you now own yourself, you give up half ownership of the property. The new owner has rights that you can't take back. For example, the new owner can sell or mortgage his or her share. And federal gift tax may be assessed on the transfer.
There can also be serious problems if one joint tenant becomes incapacitated and cannot make decisions. The other owners must get legal authority to sell or mortgage the property. That may mean going to court to get someone (called a conservator or guardian, in most states) appointed to manage the incapacitated person's affairs. (This problem can be partially dealt with if the joint tenant has signed a document called a "durable power of attorney," giving someone authority to manage his or her affairs if he or she cannot.) With a living trust, if you (the grantor) become incapacitated, the successor trustee (or your spouse, if you made a trust together) takes over and has full authority to manage the property. No court proceedings are necessary.
Several states have abolished or restricted joint tenancy.
|State Restrictions on Joint Tenancy|
|Alaska||No joint tenancies for real estate, except for husband and wife, who may own property as tenants by the entirety.|
|Oregon||A transfer of real estate to husband and wife creates a tenancy by the entirety, not joint tenancy. All other transfers in joint tenancy create a tenancy in common.|
|Tennessee||A transfer of real estate to husband and wife creates a tenancy by the entirety, not joint tenancy. All other transfers in joint tenancy create a tenancy in common.|
|Wisconsin||No joint tenancies between spouses after January 1, 1986. If spouses attempt to create a joint tenancy, it will be treated as community property with right of survivorship.|
Tenancy by the entirety is a form of property ownership that is similar to joint tenancy. About half the states offer it, and it is limited to married couples or same-sex couples who have registered with the state (in states that allow this).
|States That Allow Tenancy by the Entirety|
|District of Columbia2||Mississippi||Rhode Island1,2|
1 For real estate only.
Tenancy by the entirety has many of the same advantages and disadvantages as joint tenancy and is most useful in the same kind of situation: when a couple acquires property together. When one owner dies, the surviving co-owner inherits the property. The property doesn't go through probate.
If property is held in tenancy by the entirety, neither spouse or partner can transfer his or her half of the property alone, either while alive or by will or trust. It must go to the survivor. (This is different from joint tenancy; a joint tenant is free to transfer his or her share to someone else during his or her life.)
EXAMPLE: Fred and Ethel hold title to their house in tenancy by the entirety. If Fred wanted to sell or give away his half interest in the house, he could not do so without Ethel's signature on the deed.
In a few states, married couples (and registered domestic partners) can own property together "as community property with right of survivorship." When one spouse dies, the other automatically inherits the property, without probate. The states that offer this option are Alaska, Arizona, California, Nevada and Wisconsin.
Many states have begun, slowly, to dismantle some of the more onerous parts of probate. They have created categories of property and beneficiaries that don't have to go through a full-blown probate court proceeding. If your family can take advantage of these procedures after your death, you may not need to worry too much about avoiding probate.
Almost every state has some kind of simplified (summary) probate or out-of-court transfer process for one or more of these categories:
Small estates. Most states offer streamlined probate court procedures for small estates; what qualifies as a small estate varies widely from state to state. In many states, even if your total estate is too large to qualify as a small estate, your heirs can still make use of the simplified procedures if the amount that actually goes through probate is under the limit.
Personal property. If the estate is small, many states also let people collect personal property (that's anything but real estate) they've inherited by filling out a sworn statement (affidavit) and giving it to the person who has the property. Typically, the beneficiary must also provide some kind of proof of his or her right to inherit, such as a death certificate and copy of the will.
Property left to the surviving spouse. In some states, if a surviving spouse inherits less than a certain amount of property, no probate is necessary.