You may have heard that probate is necessary when assets are being transferred after someone dies. There is a lot of truth in this statement, but it is not absolute, and we will provide the details here.
Sole Personal Possession
Generally speaking, transfers of assets that were in your direct and sole personal possession at the time of your passing would be subject to the probate process. This would apply to distributions through the terms of a will, and the probate court presides over intestate estate matters.
Transfers Outside of Probate
When you open an account at a brokerage or bank, you can name a beneficiary. This is called a payable on death or transfer on death account. The person that you name as the beneficiary would not have access to the resources while you are alive, so there are no concerns on that level.
After your passing, the beneficiary would obtain a copy of the death certificate and present it to the institution, and they would become the owner of the account. We should point out the fact that you can exercise a transfer on death option when you register your motor vehicle in California.
You designate a beneficiary when you establish an individual retirement account. After your passing, the beneficiary would assume ownership of the account, and the transfer would not be subject to probate.
Property can be held in joint tenancy, which is the condition of co-ownership. It comes with right of survivorship, and this means that the surviving joint tenant would inherit the portion of the property that was owned by the deceased tenant. The probate court would not be involved.
The problem with joint tenancy is the fact that the person that is added to the ownership documents would own half of the property immediately. As a result, that portion of the property would be in play if the individual is targeted by the IRS, creditors, or another type of litigant seeking redress.
There are drawbacks that go along with probate, and one of them is the time consumption. Nine months or so is a best case scenario, and no inheritances are distributed during this interim.
Probate records are available to anyone that wants to access them, so there is a loss of privacy, and this information can potentially cause hard feelings among interested parties.
Expenses accumulate, including the filing fee, the executor’s remuneration, legal fees, accounting charges, appraisal and liquidation expenses, and incidentals. The red ink shrinks the estate before it is transferred to the heirs.
Revocable Living Trust
If you want to avoid probate, you can use a living trust to serve as your primary asset transfer vehicle. There would be no loss of control of the assets, because you would act as the trustee while you are alive and fully capable of handling your affairs.
Your heirs would be the beneficiaries, and you would name a successor trustee to assume the role after your death. When the time comes, the trustee would distribute the assets in accordance with your wishes, and probate would not be a factor.
This is a major benefit, and you can also include guardrails for beneficiaries that are not ready to handle large inheritances. A spendthrift provision would protect the principal from the beneficiaries’ creditors, and you can instruct the trustee to provide incremental distributions over an extended period of time.
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