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Weekend Read: How to Avoid Probate
One of the most important considerations is how to ensure that your assets pass smoothly to your loved ones. Probate is a process that often makes this process slower and more arduous. In this article, we'll explore what probate is, and the strategies you can use to avoid it.
What Is Probate?
Probate is the legal process that takes place after someone passes away, during which their assets are distributed according to their will, or if there is no will, according to state law. The probate process is supervised by a court and involves validating the will (if one exists), paying debts and taxes, and distributing the remaining assets to the beneficiaries1.
What Happens During Probate?
During probate, the court takes several steps to ensure that the deceased person's estate is properly managed and distributed. First, if there is a will, the court verifies its authenticity and confirms that it meets all legal requirements. This process is known as validating the will. Once the will is validated, or if there is no will, the court appoints an executor (or a personal representative) to manage the estate.
The next step involves identifying and inventorying all the deceased's assets, which can include real estate, bank accounts, investments, personal belongings, and more. These assets are appraised to determine their fair market value at the time of death.
Once the assets are identified and valued, the executor is responsible for paying any outstanding debts and taxes owed by the estate. This includes everything from credit card bills to final income taxes and estate taxes if applicable. Only after all debts and taxes are settled can the remaining assets be distributed.
Finally, the court oversees the distribution of the remaining assets according to the terms of the will. If there is no will, the distribution is carried out according to the state's intestacy laws, which dictate how assets are divided among surviving family members. This process ensures that the estate is handled fairly and in accordance with the law, but it can be time-consuming and may involve legal fees that reduce the value of the inheritance1.
Do all assets go through Probate?
Not all assets go through probate. Certain assets can bypass the process entirely, such as jointly owned property with rights of survivorship, which automatically transfers to the surviving owner, assets with designated beneficiaries like life insurance policies, retirement accounts, and Transfer on Death (TOD) accounts. Additionally, assets placed in a trust are managed and distributed according to the trust’s terms, bypassing probate4.
The Role of Transfer on Death (TOD) Designations
One way to avoid probate is by using Transfer on Death (TOD) designations. TOD allows you to name beneficiaries for certain assets, such as bank accounts, brokerage accounts, and some states allow real estate, so that these assets pass directly to them upon your death, bypassing probate entirely. TOD designations are simple to set up and can be a highly effective way to ensure that your loved ones receive their inheritance quickly3.
What’s the role of a will in this?
A will is an essential part of estate planning, but having a will alone doesn't avoid probate. In fact, a will must go through probate to be validated and executed. The main advantage of having a will is that it allows you to specify how you want your assets distributed and who you want to manage your estate. However, if you die without a will (intestate), your assets will be distributed according to state law, which may not align with your wishes. This can lead to disputes among heirs and a longer, more complicated probate process. I add this section because it’s important to understand that a will is precisely what the probate process is trying to fulfill as intended1.
How Trusts Can Help Avoid Probate
Trusts are another powerful tool for avoiding probate. When you create a trust, you transfer ownership of your assets to the trust, which is then managed according to the terms you've set. Since the trust technically owns the assets, they don't need to go through probate when you pass away. Instead, they can be distributed directly to your beneficiaries. There are various types of trusts, including revocable living trusts, which can be modified during your lifetime, and irrevocable trusts, which cannot be changed once established and each have their pros and cons4.
Conclusion
Probate can be a time-consuming, but with careful planning, you can minimize or even avoid it entirely. If you're unsure about the best approach for your situation, it's always a good idea to consult with a professional. While I am not an estate planning attorney, I am happy to talk these ideas through with you and loop in the attorney when the time comes.
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Steward Partners Investment Solutions, LLC (“Steward Partners”), its affiliates and Steward Partners Wealth Managers do not provide tax or legal advice. You should consult with your tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters
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1https://www.investopedia.com/terms/p/probate.asp
3https://www.investopedia.com/terms/t/transferondeath.asp
4https://www.investopedia.com/terms/p/probate-court.asp