Wills and Trusts:

Avoiding Probate

Most states allow a certain amount of property to pass free of probate, or through a simplified probate procedure. In addition to that, property that passes outside of your will (through joint tenancy or a living trust, for example) is not subject to probate.

Listed below are the most popular ways to avoid probate:

Payable-on-Death Bank Accounts: Payable-on-death bank accounts offer one of the easiest ways to keep money, even large sums of it, out of probate. To set up a payable-on-death bank account, all you have to do is fill out the form provided by the bank, naming the person you want to inherit the money in the account at your death.

As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. You can spend the money, name a different beneficiary, or close the account. At your death, the beneficiary just goes to the bank, shows proof of the death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.

If you and your spouse have a joint account, when the first spouse dies, the funds in the account will most likely become the property of the survivor, without probate. If you add a P.O.D. designation, it will take effect only after the second spouse dies.

Retirement Accounts: When you open a retirement account such as an IRA or 401(k), the forms you fill out will ask you to name a beneficiary for the account. After your death, whatever funds are left in the account will not have to go through probate. Instead, the beneficiary you named can claim the money directly from the account custodian.

Transfer-on-Death Registration of Securities: Almost every state has adopted a law that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. The way it works is similar to a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in a "beneficiary form." When the papers that show your ownership are issued, they will also show the name of your beneficiary.

After you have registered ownership, the beneficiary has no rights to the stock as long as you are alive. After your death, the beneficiary can claim the securities without probate, by providing proof of death and some identification to the broker or transfer agent.

Transfer-on-Death Registration for Vehicles: California, Connecticut, Kansas, Missouri, and Ohio offer car owners the option of naming a beneficiary, right on their certificate of registration, to inherit a vehicle. If you do this, the beneficiary you name has no rights as long as you are alive. You are free to sell the car, give the car away, or name someone else as the beneficiary. Transfer-on-death registration for vehicles works the same way a transfer-on-death registration of securities account or a payable-on-death account works. All you do is register the vehicle in "beneficiary form." The new registration certificate will list the name of the beneficiary, who will automatically own the vehicle after your death.

Joint Ownership: Joint ownership provides an easy way to avoid probate when the first owner dies. The most attractive feature of joint ownership is its simplicity and economy. To take title with someone else in a way that will avoid probate, you usually don't have to prepare any additional documents. All you do is state, on the paper that shows your ownership (a real estate deed, for example), how you want to hold title.

Property owned in joint ownership automatically passes to the surviving owner(s) when one owner dies. After one joint owner dies, generally all the new owner has to do is fill out a straightforward form and present it, with a death certificate, to the keeper of ownership records: a bank, state motor vehicle department, or county real estate records office.

Joint ownership is only recommended for young couples.

Revocable Living Trusts: The advantage of holding your valuable property in trust is that after your death, the trust property is not part of your estate for probate purposes (it is counted as part of your estate for federal estate tax purposes, however). This is because a trustee, not you as an individual, owns the trust property. After your death, the trustee can easily and quickly transfer the trust property to the family or friends you left it to, without probate. You specify in the trust document, which is similar to a will, who you want to inherit the property.

Gifts: Giving away property while you are still alive helps you avoid probate for a very simple reason: if you don't own it when you die, it doesn't have to go through probate. That lowers probate costs because, the higher the monetary value of the assets that go through probate, the higher the expense. If you give away enough assets, your estate might even qualify for a streamlined "small estate" probate procedure after your death.

If you are considering making lots of large gifts, you should know that giving more than $12,000 to any one recipient in one calendar year will require you to file a federal gift tax return. You won't actually have to pay any tax now, though.

Simplified Procedures for Small Estates: Almost every state offers shortcuts through probate or even a way around it completely for "small estates." Each state defines that term differently. Because of the way the laws are written, however, many large estates, worth hundreds of thousands of dollars, are eligible for special transfer procedures that speed property to inheritors.

One type of probate shortcut is by claiming property with affidavits. If the total value of all the assets you leave behind is less than a certain amount, the people who inherit your personal property (anything except real estate) may be able to skip probate entirely. The exact amount depends on state law, and varies. If the estate qualifies, an inheritor can prepare a short document stating that he or she is entitled to a certain item of property under a will or state law. This paper, signed under oath, is called an affidavit. When the person or institution holding the property receives the affidavit and a copy of the death certificate, it releases the money or other property.

Another type of probate shortcut is through simplified court procedures. The probate court is still involved, but it has much less control over the settling of the estate.