Non-Probate Transfers: Avoiding Probate and Taxes
If you are among the people who believe that going through probate is inevitable, consider updating your estate plan with non-probate transfers. These transfers may alleviate your probate requirements or even eliminate probate for your estate entirely.
Not sure what probate is or why you might want to avoid it? Keep reading.
(Yes, I am an attorney, but, no, I am not your attorney. Nothing in this post constitutes legal advice or creates an attorney-client relationship. This post and this site are merely educational, informational, and entertaining.)
What is Probate?
Probate is simply the orderly and court-supervised administration of your assets and affairs after death.
In probate, your personal representative pays your final expenses and medical costs, your taxes, bills, and administrative costs.
Your personal representative prepares detailed accountings and asset inventories for the beneficiaries, files tax returns, and ultimately distributes those assets.
Probate is not in and of itself a bad thing.
RELATED POST: What is probate?
Your assets will need to be collected, liquidated and divided. So, why do people give probate such a bad wrap?
Why you might want to avoid probate.
The problems with probate are that it is:
- Expensive
- Drawn Out
- Inflexible
- Public
- And more.
RELATED POST: Why Do I Want To Avoid Probate?
Probate is generally an expensive process with a thick stack of required filings and complicated directions that require the assistance of hourly professionals.
Attorneys, accountants, and even appraisers all may need to get involved. This adds up to thousands of dollars spent very quickly.
Further, even if the family wants to wait awhile before settling the estate or make distributions over time to different individuals, probate won’t allow that. You must follow a strict path and report those steps to a judge.
Contrastingly, if all of the matters of an estate can be wrapped up in a matter of minutes, you still have to sit around and wait for several months until your statutory time limits run.
Finally, because you are reporting to a judge, probate is also public. Your assets, your distributions, your will, and even your debts are aired for the world to review.
If you are someone who appreciates privacy, then you likely want to avoid probate.
But can you?
What are Non-Probate Transfers
Transfers of your assets that don’t require judicial oversight are referred to as “non-probate transfers.” Generally non-probate transfers refer to transferring assets at death or after death.
While the actual transfer, liquidation, or conversion of the asset may not arise until you actually die, a non-probate transfer avoids probate entirely.
This is one of the major benefits of non-probate transfers.
What are the benefits of using non-probate transfers?
By using non-probate transfers, you can often avoid the expensive and public problems of probate.
Further, your beneficiaries may be able to avoid certain types of taxes such as estate income taxes or transfer costs while still maintaining a step-up in basis.
RELATED POST: WHAT IS THE BIG DEAL ABOUT STEP-UPS IN BASIS?
Most non-probate transfers are set up during life but don’t complete until death.
For example, a transfer on death deed is signed and recorded during life but does not transfer the real estate until a death certificate is issued.
Therefore, in addition to avoiding probate, non-probate transfers have the added benefit of granting a great deal of peace of mind –knowing that you save your beneficiaries a major headache.
Non-Probate transfers also have no monetary limit. You can transfers millions of dollars by non-probate transfer, and you can even transfer your measly checking account by non-probate transfer.
So, what are some examples of non-probate transfers?
Examples of non-probate transfers
Non-probate transfers are limited by your state’s laws. Indiana has one of the most progressive non-probate transfer statutes in the nation, and some other states have followed suit.
Still others are quite restrictive in what and how you can transfer assets. States such as Florida have a rather aggressive probate system that can restrict the use of many of these non-probate transfers.
As always, you should consult with a reputable attorney in your area before you proceed with any of these transfers
Examples of Non-Probate Transfers:
Transfer on Death Deeds
Assignments of Personal Property
Transfer on death titles
Beneficiaries added to accounts, investments, funds, or other cash accounts
Joint Ownership (though I never recommend it…see why I never recommend joint ownership with a non-spouse here.)
Pay on death accounts
And more
Other non-probate transfers
You might notice that trusts are missing from the list above. Trusts can be a vehicle for non-probate transfers if they are properly funded.
Don’t be afraid of trusts. Trusts are simply buckets of assets that can do only what is dictated by the trust agreement.
Trusts are formed by a grantor and controlled and managed by a trustee. While trusts must be formed and funded during life, they usually avoid probate by transferring assets through a trustee rather than through probate.
RELATED POST: What does it mean to have a trust?
A properly funded trust often works to collect, distribute, and account for your assets after death without the intervention of a probate court.
However, some trusts are formed only through probate using what is known as a testamentary trust or, in other circumstances, a pour-over will.
A testamentary trust, unlike revocable and irrevocable trusts that are formed during life, are formed in a decedent’s will. Therefore, while they contain many of the same restrictions, protections, and advantages of a trust, they are formed only through probate.
Related post: The unfunded trust problem
A testamentary trust does not spring to life until a person passes away. Then it is funded through the court-administered probate process.
Similarly, trusts that are not funded during life may be funded through a pour-over will. A pour-over will essentially collects all of the probate assets and transfers them into a trust.
The assets remain in the name of the deceased person until he or she passes away, and then the probate court orders that they transfer into the trust via the terms of the pour-over will.
RELATED POST: But I have a Trust, Why do I still need a will?
Non-Probate Transfers: Transfer on death deeds
With limited exception my nerdy favorite non-probate transfer is a transfer on death deed.
A transfer on death deed is a simple, cheap, and efficient way to transfer a lot of assets in a short amount of time.
As I mentioned, some states (not all) have special provisions for transferring real property at death.
A transfer on death deed is merely a place holder in the land records where your real property is located. In effect, the transfer on death deed says, “if I die, then I want _________ to own this property.”
Upon the property owner’s death, the beneficiary simply claims the property by an affidavit without court oversight or accounting.
A transfer on death deed does nothing to transfer the property during the property owner’s life and does nothing to restrict the property owner’s ownership. Further, a transfer on death deed does nothing to any mortgage on the property. The home owner can buy, sell, borrow, and encumber as usual.
OTHER BENEFITS OF NON-PROBATE TRANSFERS
Control and Autonomy
Knowing that you can still control your assets is a huge benefit of non-probate transfers. You not only avoid probate, you also maintain your autonomy.
Revocability
Most non-probate transfer are freely revocable, modifiable, or amendable during the lifetime of the owner. And, the beneficiary doesn’t receive any interest in the property until the owner passes away.
Inexpensive
Further, most non-probate transfers are inexpensive. While probate may run you thousands of dollars and wills or trusts may cost you hundreds to thousands of dollars, some non-probate transfers are free.
A simple beneficiary change on your investment account, a pay on death update to your savings account, or even a TOD added to your title might cost nothing or a few bucks.
Power of attorney
Finally, another benefit of non-probate transfers is that your attorney-in-fact (the person you designate to act on your behalf in a power of attorney) may have the power to complete these non-probate transfers for you.
In other words, if you are incapacitated or incompetent, your attorney-in-fact may have the right to update your life insurance beneficiaries, fund your trust, or even change your accounts. He or she could finish the planning you started to save your estate the expenses of probate and the hassle and embarrassment of public proceedings.
NON-PROBATE TRANSFERS AND ESTATE PLANNING
Non-probate transfers are an excellent alternative to a simple will. They are relatively painless processes that not only save you the frustration and expense of probate but leave you in control of your estate during your lifetime.
Non-probate transfers are available in every state, but they vary from jurisdiction to jurisdiction. So, meet with a local estate planning attorney in your area to discuss your options.