Many people are worried about probate. What exactly is probate? How can I avoid the headaches, time delays and estate shrinkage that it causes? If you have ever asked any of these questions or heard your parents or friends ask them, here is a simple plan to follow.
What Is Probate? It is the formal process of proving someone’s Last Will and Testament. It entails filing with the county surrogate court office, appointing an executor to administer the terms of the Will and proving that the Will was properly executed if necessary. In some states, there is a mandatory minimum waiting period during which the executor pays final expenses, contacts potential beneficiaries and creditors, then begins organizing the deceased’s assets for distribution and/or liquidation. All these actions can cost your beneficiaries money and this is where the estate shrinkage comes into play.
How Can I Avoid Probate? The easiest way to bypass the probate process is to take steps in advance that will contractually establish a distribution plan upon death of the owner. This can take on many forms, but if an asset is left to be distributed by the Will, it will be exposed to probate. (Note: If a deceased person’s estate is required to file an inheritance or estate tax return, some, or all, of the assets below may be included in that filing.)
Six Ways To Avoid Probate:
1. Joint Accounts With Rights Of Survivorship: Owning your accounts with someone else as a joint tenant is the first and easiest way to potentially bypass the probate process. If one tenant passes away, the other is automatically the new and sole owner of the asset. No administration is needed to pass this account on, but a problem will arise if both joint owners pass away simultaneously. Number 2 can take care of this situation.
2. Designated Beneficiary Plans: The next way to avoid probate is to use a Designated Beneficiary plan on any brokerage or bank accounts that you have. If they are already joint accounts, that is even better as the joint tenancy will take precedence over the beneficiary designation, but both will bypass probate.
3. Payable On Death Plans: If a designated beneficiary plan is not available, a payable on death plan may be offered as an alternative. It is basically the same type of instrument, but some credit unions, banks, and other financial institutions prefer this option. If you have an account in question, ask about both.
4. IRA And Retirement Plans With Beneficiaries: Most retirement plans allow for a specific, primary and contingent beneficiaries to be designated. These designations are a legal and contractual way to bypass probate and administer your wishes. Just make sure that your beneficiaries are specific individuals or charitable organizations and that you specify exactly the percentage that you want them to receive. If you have more beneficiaries than the lines or spaces provided on the form, you can use a second form or attach a typed statement including all the relevant names, address, birthday and social security numbers. If you do this, write “See Attached Statement” in the beneficiary box.
5. Life Insurance Proceeds: The proceeds of a life insurance policy can avoid probate if the beneficiary designation is listed as a person, multiple persons or other legal entity. These proceeds will bypass probate if done properly and are usually income tax-free to the beneficiary.
6. Annuity Proceeds: An annuity contract can also bypass if the beneficiary designation is filled out correctly. Annuities are a contract from a life insurance or annuity company that will bypass probate, but some, or all, of the proceeds may be taxable to the beneficiary depending on how they were established.
Summary: Please note that having a detailed structure on each of the above beneficiary designations is vital to avoiding probate. If you designate a primary or a contingent beneficiary with the following – “As Per Estate”, you will force that asset back through your Will and into the probate system. Always place specific names, addresses and percentages (or amounts) on each designation. If you need more room, prepare a notarized attachment to the form that spells it out in detail.
The first step to creating wealth is knowing where you are and then charting a path that will enhance your financial strengths and correct your weaknesses. The next step is making sure that you keep as much of it as possible to distribute to your loved ones. Both are equally important. Take the time to review your plans now and save a lot of headaches and stress later.