Episode 85: 3 Estate Planning Tips To Avoid Probate

tips to avoid probate

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Y’all always hear people talking about probate, and lots of ways to avoid probate. Some of those ways are really good, and some are not good at all. How do you know what advice to take?

Probate is the legal process of figuring out who gets your stuff. One of the biggest misconceptions about probate is that your estate does not go through probate if you have a will. Be sure, if you have a will, and there are assets covered by that will, your estate will go through the probate process.  But here’s the thing: this process doesn’t apply to non-probate transfers.

What’s a non-probate transfer? It’s a transfer of assets that doesn’t require the probate process. There are three ways that might work for your situation.

Name Beneficiaries

Many types of financial assets will allow you to name a beneficiary. If something is left to someone via these type of instructions, they don’t go through probate. These may also be called “pay on death” or “transfer on death.” In some states, you can even use this strategy for real estate and/or vehicles.

Now, there are some pitfalls to naming beneficiaries. What if one of your potential beneficiaries has debts, or has become disabled, or is in a nasty divorce, or predeceases you? There can be all sorts of problems with leaving money to someone who may not be in a good position to receive that money.

Create A Revocable Trust (also called a Living Trust)

A revocable trust is a trust that you create, and you name yourself as the trustee, so you’re in charge, and you name yourself as the beneficiary. Because it is revocable, you can change the terms of the trust. Then you re-title all your assets into the name of the trust, or name the trust as the beneficiary of a qualified account.

Be careful about naming a trust as the beneficiary of retirement accounts. If that trust was not drafted properly, you can cause taxation at death. A trust can be a qualified beneficiary, but it has to be specially drafted.

A revocable trust can be a powerful way, if used correctly, to get all of your assets into the name of the trust so that all of your assets pass according to the terms of the trust at the time of your death. Within that trust, you can also go through and start addressing some of these other issues, such as disability, or shielding assets from creditors or divorcing spouses, and you can designate what to do if a beneficiary has died.

Joint Ownership

The third way to avoid probate is to hold assets in joint ownership. Does joint ownership avoid probate? Yes. Does joint ownership cause more problems than it solves? Potentially. Many people don’t understand the ramifications of joint ownership. It seems like a simple way to make things easier, especially if you’re adding a child to help you pay bills, or help with other tasks. But having property owned jointly means that property isn’t subject to the terms of your will, so you have to be sure you’ve done it right. The other thing about joint ownership is that now your assets become liable for anything that joint owner might be liable for: child support, back taxes, other types of debt, etc.

As you can see, there are pros and cons to each of these methods. Be sure you understand exactly what you’re doing before making any moves, or you might end up with some surprising results.

Highlights of this week’s episode:

Per capita vs. per stirpes distribution

Bad ideas for avoiding probate

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