Some Ideas on How to Avoid Probate
August 14, 2018 | by the National Care Planning Council
Probate avoidance is not as important as it used to be because of the many states that are bypassing the formal probate process with simplified options. But there are still a number of states that have not provided relief from the high cost and time involved. In addition, even in those states where it is simplified, it is much easier to avoid the process altogether. Here are some of the more common strategies.
Pay on Death for Bank Accounts
Almost any bank will establish a pay on death for savings, CDs and checking accounts. This is not automatic and this option must be initiated by the owner. This is not a joint account and the person or persons who are listed on the pay on death card has no access to the funds while the owner is alive. At death of the owner, the beneficiary on the account presents a death certificate and evidence of identity and can take over the account.
Tax Qualified Retirement Accounts
These accounts are such things as IRAs, 401(k)s, 403b's, 401(a)s, SEPP, SIMPLE and so on. Contract provisions of these accounts are governed by the IRS. All of these qualified accounts allow for naming a beneficiary or beneficiaries in the event of death. As a result, these accounts automatically bypass probate. It should be noted that in community property states, if the account was acquired and funded while the couple was married, half of any of these accounts belongs to the surviving spouse.
Transfer on Death of Securities
Almost every state has adopted the Uniform Transfer on Death Securities Registration Act. The provisions of this act allow a person to name someone to inherit ownership interest in stocks, bonds, brokerage accounts and mutual funds. This bypasses probate. When setting up these accounts, the owner must request what's called a "beneficiary form" to set up appropriate beneficiaries. As with the pay on death accounts, the beneficiary has no access to the assets while the owner is alive. At death, the beneficiary provides proof of death and identification to the transfer agent or other entity that controls the investment. The beneficiary becomes the new owner.
Simplified Ownership Transfer for Motorized Vehicles and Trailers
For conveyances -- including mobile homes -- that are registered with the Department of Motor Vehicles, most states have adopted strategies to bypass probate for a change in ownership. In a few states, titles can actually have beneficiaries them. In most states title transfer is simply done after death by presenting a death certificate and evidence of the relationship of the person requesting the title change. Most states have a standard form for this purpose.
Joint Tenancy with Right of Survivorship
Many folks are tempted to place their children or someone else on the title of their home as joint tenants with rights of survivorship. This certainly works to bypass probate. It also has its pitfalls as we have discussed above. As long as the choice of joint owners is a judicious one and there is no anticipation of experiencing any of the pitfalls discussed above, this strategy will work. On the other hand, a better plan might be one that involves the use of specialized deeds such as the one discussed below or strategies involving trusts.
Community Property States and Tenancy by the Entirety
Tenancy by the entirety is very similar to the way property is treated in community property states. With tenancy by the entirety, the surviving spouse obtains ownership of the property at death. This bypasses probate. In community property states, typically, only half of the value of the property is inherited at death and the other half may have to go through probate. Recognizing this dilemma, many community property states allow for a right of survivorship such that the entire property passes to the surviving spouse exactly as with a tenancy by the entirety.
The issues surrounding life resource planning generally embrace gifting as a strategy for planning the final years of life. Gifts are not subject to probate. They may be subject to estate or gift taxes. In all states except for two, the estate and gift tax are unified under one federal tax and generally the tax is paid at the death of the last spouse. The state is paid its portion of the tax out of the federal tax. In Tennessee and Connecticut, a separate gift tax is assessed on even relatively small gifts. In these states, gifting might become expensive.
Revocable Living Trusts
These trusts are described in other places in this document. Generally in the past the sole purpose of setting up these trusts was to avoid probate and to avoid the pitfalls of joint tenancy with rights of survivorship. With simplified probate being instituted in a number of states, these trusts are not as valuable as they once were. In addition, revocable living trusts are at odds with the life resource planning. Life resource planning for the final years of life typically relies on gifting strategies in order to receive benefits such as Medicaid. Revocable trusts do not work for the type of gifting strategies used in life resource planning.
Small Estates and Simplified Procedures
This has been mentioned in the previous section. Real estate and other property below a certain value can easily be transferred in many states without the formal probate process. Usually the change in title is accomplished through presenting a death certificate and signing an affidavit that proves relationship and the title is changed or the money in the account is released.
Enhanced Life Estate Deed
This is a very simple strategy for transferring real property at death. This deed is also commonly known as the "ladybird deed" -- named in honor of former first lady, Ladybird Johnson. Apparently, her husband Lyndon Johnson transferred his property in Texas using one of these deeds. This form of transfer does not work in all states. This is not necessarily because state law prohibits the use of such deeds, but it may be due to the fact that these deeds are not used frequently and the courts may not yet except their use. Apparently more and more states are allowing the use of this strategy.
The concept is not only simple but the language is short and to the point. Here's the typical language used in such deeds.
For good and valuable consideration paid by the Grantee Beneficiary, the receipt of which is hereby acknowledged, the Grantor does transfer and convey the following described property to the Grantee Beneficiary effective on the Grantor's death:
Property Address: ________________________________________
Legal Description: ______________________________________________
The Grantor reserves a life estate for himself/herself during the Grantor's lifetime coupled with an unrestricted power to convey during the Grantor's lifetime, which includes the power to sell, gift, mortgage, lease and otherwise dispose of the property, and to retain the proceeds from the conveyance.
Essentially, the grantor gifts the property to a beneficiary at his or her death. In order to maintain rights to control the property, the grantor retains a life estate on the property as well is the right to sell or mortgage or deal with the property in any other way. Because the grantor retains these rights, this is not considered a gift for Medicaid purposes or for IRS purposes. Therefore, the grantor retains the right to obtain Medicaid as well as retaining favorable tax treatment if the property is a principal residence. At death, the property goes to the beneficiary and bypasses probate. Because there are no other people on the title, the disadvantages of joint tenancy are avoided.
This strategy works well for a single individual under Medicaid. It may be too simple for more complicated Medicaid cases or for complicated estate planning. In fact, the existence of the deed may actually mess up a sophisticated estate plan.