Help Heirs Avoid the Hassle of Probate
November 1, 2007
By Kathryn A. Walson
You thought you did everything you needed to do when you drew up your will. You arranged to divvy up your portfolio among your kids and for your favorite nephew to inherit your vacation home. Perhaps you named a charity to receive some stocks.
But after you die, it could be a while before your heirs get your property. Your estate will head to probate, a court procedure that validates the will's authenticity, oversees payment of taxes and debts, and distributes your property. If you own real estate in two states, your estate could face probate in both.
You can take steps to avoid probate, either entirely or for parts of your estate, by leaving property outside of a will. That's good news for your heirs, who could wait six months to more than a year before receiving your assets while probate fees devour perhaps 5% of the estate's value, says Mary Randolph, author of 8 Ways to Avoid Probate (Nolo, $20). "Probate is expensive, and there's a lot of delay," she says.
Probate laws vary from state to state. In some states, such as California, the process is particularly arduous. In others, such as Pennsylvania and Illinois, there's less hassle and perhaps less reason to worry about probate. Measures to avoid probate also differ among states, so consult an estate-planning lawyer before making any moves. Note that the approaches will not reduce your estate taxes.
Pass cash and stocks directly. Assets in a "payable on death" bank account pass directly to a named beneficiary when you die. You can designate a different beneficiary, or more than one, for each of your accounts–savings, checking, certificates of deposit and so forth. "It's very simple–you go to the bank and name someone as a beneficiary," says Colleen Barney, a lawyer with Albrecht & Barney, in Irvine, Cal.
Most married couples have joint accounts with rights of survivorship, so when one spouse dies, the surviving spouse becomes sole owner. If the couple names a beneficiary together, the heir will receive the money only when the second spouse dies. The surviving spouse can change the beneficiary after the first spouse dies. In many states, you can't name secondary beneficiaries on a payable-on-death account. So if you outlive your first choice, be sure to name a new one.
Also, in every state except Louisiana and Texas, you can bypass probate for your stocks, bonds and other brokerage assets by setting up a "transfer on death" account. These work like payable-on-death bank accounts. Your brokerage firm can supply the designation forms.
With both types of accounts, your heirs usually can claim the assets by presenting a death certificate and identification. Some banks and brokerage firms may ask your heirs to fill out special forms.
Name retirement-account heirs. If you designate a beneficiary for your 401(k) and IRAs, your heirs will have relatively quick access to the accounts when you die. Even if probate is not an issue, it's important to name a beneficiary for your retirement plans. By designating heirs on IRA documents, they'll be able to take tax-deferred distributions over their life expectancies.
You should name a secondary beneficiary who will inherit the account if your primary beneficiary dies before you do. Often a benefactor will name a spouse as the primary beneficiary and children as contingent recipients. A spouse who inherits a 401(k) can roll the assets into his or her IRA and start taking lifetime withdrawals beginning at age 70½. Other heirs can roll the 401(k) into an "inherited IRA" but must start taking their lifetime distributions soon after you die.
One common mistake is designating your estate or your living trust as the beneficiary of your IRA. If you do, your heirs will not be allowed to stretch payouts over their lifetimes.
Consider a living trust. If you're looking for an all-in-one probate-avoidance technique, look at a revocable living trust. Like a will, a trust names beneficiaries for your assets. Unlike a will, assets transferred to a trust won't go through probate. That's because you no longer own the property when you die–your trust owns it. So if you live in a state with time-consuming probate procedures, your heirs will likely receive their inheritance faster through a living trust.
You could include your home and other real estate, bank and brokerage accounts, small-business interests, jewelry and art. You can transfer property in and out, change beneficiaries or even cancel the trust. If you own most property with your spouse, you should create a living trust together.
A living trust may be a good option if you have multiple heirs. You can name different beneficiaries for different assets, or perhaps pool everything and split the total proceeds however you want. "It allows you to specify how assets are divided up," says Robert Romanoff, a lawyer with Levenfeld Pearlstein, in Chicago. You can also name secondary beneficiaries, which some other measures, such as creating payable-on-death accounts, often won't allow.
The cost of drawing up a living trust ranges from $1,000 to $4,500, depending on where you live and the complexity of your estate. A trust tends to be more expensive than a will. If you have a simple estate, perhaps only a house and a retirement account in a state where probate is not a problem, you may want to forgo the expense. Once you create a trust, you'll need to change the title of your accounts and the deed on your house to, for example, John Smith, trustee of John Smith Trust.
Even with a living trust, you'll need a "pour-over will." It should state that all assets not named in the trust should transfer to the trust upon your death. This covers assets that you acquire after you create the trust. Those assets, however, would have to go through probate. Some people use a trust for the big-ticket items and a will for the smaller items.
To simplify matters, choose one person as both your successor trustee and the executor of your estate. Avoid naming multiple trustees, especially if they're heirs. They may get along now, but discord could arise after you die.
Another way to avoid probate is to add an heir, perhaps your child, as a co-owner of your house or bank account. But this is one probate-avoidance measure that you should skip. "If your kid gets sued and he's on your joint account, the creditor can make a claim on the account," says Barney. And the co-owner would have the right to spend assets.
(c) 2007 The Kiplinger Washington Editors Inc. All rights reserved.