PROBATE AVOIDANCE
INTRODUCTION
Probate is the formal and
legal process that States require to transfer your property to your heirs
after you die. There are a number of probate avoidance techniques
available to everyone and most are very easy to set up and cost nothing
but your time to initiate. The purpose of avoiding probate is to free up
your estate from lengthy court proceedings and legal fees. Typically
probate fees cost 5% or more of the value of the estate property. Probate
is also public and your will is registered at your local courthouse for
all to examine and read. However, If you transfer property outside of
probate with Joint Tenancy, living trusts or beneficiary and
payable-on-death account designations, the transactions are kept private.
Property passed outside of probate lets your spouse and loved ones get
their inheritances quickly after your death, often within weeks, instead
of a year or longer that is required by probate laws.
There are times when
probate is to your advantage such as having a lot of debt, complex
financial transactions or litigation pending. Read
“Plan Your
Estate,” Chapter 8 for complete information on this subject.
Don’t confuse Probate
with Estate Taxes. Avoiding probate won’t avoid estate taxes if your
estate is at or above the minimum estate tax threshold, currently
$1,500,000. Review the "Estate Tax” section in
"Planning Your Estate" for more
information on this subject.
The first thing you need
to do is identify who owns what. For example, couples could own property
individually, jointly or property could be owned through a trust. You need
to identify how your property is currently registered and then you can
evaluate which probate avoidance methods to use for each asset. Look at
the deed to your home to see how your home was registered. Joint Tenancy
can be listed a number of ways and it varies from state to state. For
example, in Pennsylvania a title registered in the names of both parties
such as "John Smith and Jane Smith Husband and Wife" is considered joint
tenancy. Review "Joint tenancy" for more details and if you
have any questions about how your title is registered contact the lawyer
or title company that closed your sale or simply contact a local title
company and ask them if your registration
– the
way it is stated on the deed –
is equivalent to joint tenancy. List all
of the following items on your personal list:
Bank accounts
Bonds
Certificates of Deposit
Homes
Insurance policies
Money Market accounts
Mutual Funds
Recreational vehicles
Retirement accounts
Stocks
Vehicles
The following example
will help you focus on this process. You can
download this Word document
and tailor it to your personal situation.
ASSET ALLOCATION CHART
Review the book “Plan
Your Estate” for detailed information on property ownership. The rules
change somewhat depending on whether or not your state is governed by
“Common Law” or “Community Property” laws.
Terms
BEN = Beneficiary
JT = Joint Tenancy
POD = Pay-on-Death or TOD Transfer-on-Death
|
ASSET |
Trust/
JT/POD |
Estate
Spouse |
To
Heirs |
Comments |
|
JOINT TENNANT ASSETS |
|
Home Value |
JT |
$120,000 |
|
|
|
Home Contents |
JT |
$45,000 |
|
Resale Value |
|
Bank Checking Account |
JT |
$1,000 |
|
|
|
Money Market Savings |
JT |
$5,000 |
|
|
|
Stocks |
JT |
$25,550 |
|
See attached list |
|
Cars-Chevy & F150 Ford |
JT |
$22,000 |
|
Current Value |
|
Sub
Total |
|
$218,550
|
|
|
|
Spouse’s Assets |
|
Stocks (All holdings) |
TRUST |
|
$15,000 |
See “Living Trust” |
|
IRA |
BEN |
|
$45,000 |
50/50 Son/Daughter |
|
CDs |
POD |
|
$10,500 |
" |
|
Checking Account First national |
POD |
|
$1,200 |
“ |
|
Credit Union Savings |
POD |
|
$2,300 |
“ |
|
Insurance Policy |
BEN |
|
|
$25,000 (Husband) |
|
Sub
Total |
|
|
$73,500 |
To Children 50/50 |
|
Retiree’s Assets |
|
Stocks (See attached chart) |
TRUST |
$25,000 |
$25,000 |
See “Living Trust” |
|
Brokerage Account |
POD |
$25,000 |
0 |
|
|
Savings Bonds |
POD |
$30,000 |
0 |
|
|
Credit Union Savings |
POD |
$10,000 |
0 |
|
|
Thrift Savings 401K |
BEN |
$100,000 |
0 |
|
|
FEGLI Life Ins (Gov’t) |
BEN |
$150,000 |
0 |
Reduces after 65 |
|
Life Insurance Policy #2 |
BEN |
0 |
$25,000 |
Half to each child |
|
Life Insurance Policy #3 |
BEN |
$25,000 |
|
|
|
|
|
|
|
|
|
Sub
Total |
|
$365,000 |
$50,000 |
$25,000 / child |
|
Spouse’s Estate Assets |
|
$583,550 |
|
|
|
Analysis: If the
retiree dies first his spouse’s estate would equal $657,050
the sum of $583,550 plus her $73,500 in assets in today’s dollars.
Each child would receive ½ of $50,000 or $25,000 each.
If his spouse dies first all her stocks and cash accounts would go to
the children leaving them $73,500 or $36,750 each. If
the spouse dies first the remaining assets would equal $458,550,
all joint tenancy assets, retiree's assets less his insurance, plus
his wife's insurance policy value. At age 67 the retiree's FEGLI
Insurance decreases to $34,000. His spouse’s estate at age 67 would
decrease by $116,000 leaving her with $511,050 in
today’s dollars if he would die at age 67 or later. |
Additional Chart Analysis
I put the cart before the
horse by presenting it before explaining the probate avoidance methods
such as joint tenancy, trusts, beneficiary designations, etc. However,
this is a good exercise and shows the importance of the planning process
and it will get you thinking seriously about your personal situation. It
also shows you just how easy it is to avoid probate with a little planning
knowledge.
This couple wanted all of their joint
tenancy property to simply revert to the other when one dies. That is the
primary purpose of owning property in joint tenancy. The surviving partner
would then have to consider how the joint tenancy property's registrations would be
changed to avoid probate when they died. They would consider either a
living trust, POD designations, or estate gifts.
Each partner wanted to insure that when
either died their two children would each receive an inheritance. However,
because the retiree's wife would have a reduced pension – 55% of the
husbands annuity – the husband and wife designed their plan so that the
wife's estate would be larger to handle any unforeseen emergencies. The
husband's estate is less however his earning power is greater with his
regular annuity.
The example is for a
federal employee earning $68,000 a year just prior to retirement. His
FEGLI life insurance coverage included one multiple with Standard option
A, the additional $10,000. Therefore his total life insurance coverage
equals $150,000. He intends to elect a 50 % reduction for his FEGLI
coverage so that his wife would have sufficient funds for unforeseen
emergencies. He also decided to keep the one multiple at least until age
65. An annuitant can always reduce coverage, however you can't increase
coverage unless there is an open season and they are very rare.
You can see from the
chart that most of the assets are transferred to heirs out of probate
through POD or beneficiary designations. The individually owned stocks and
other non registered personal effects (not listed here) are transferred
through an easy to prepare living trust. They used a living trust because
in many cases you can only designate one POD for stocks and bonds and they
have two children they want to leave these assets to. The living trust was
the best way to do this. See the living
trust discussion for more information. The trust also allows you to
transfer most other non-registered property such as jewelry, coin
collections, personal effects, antiques, art work and so on by simply
listing the items on a attachment to your trust document. Therefore, most
of your estate can transfer direct to your heirs without going through
probate. I highly recommend that you purchase a copy of
"Plan Your
Estate" for complete information about wills, trusts and avoiding
probate. This site provides examples that I developed by working up my
estate plans using this valuable resource. You will need their expert
guidance to formalize and finalize your personal plan. This book is easy
to follow and written so all can understand the process.
Now that you identified
your assets, list how the asset is owned; jointly, individually or
otherwise. The next step is to decide who you want to leave each asset to.
Your decision will determine – in part – which of the following listed
methods of probate avoidance that you will use.
NOTE: Multiple methods
can be used or mixed depending on your situation. Refer to
“Plan Your
Estate” for variations and exceptions in certain states. This book is
a must for anyone planning their estate and especially for those
approaching or in retirement. Highly Recommended.
JOINT TENANCY
This is one of the most
used probate avoidance methods and your property automatically passes to
the surviving spouse. Joint tenancy works well with about anything
you own including homes, cars, stocks, bonds, bank accounts and many other
things.
It is easy to set up. All
you have to do in most states is to add the statement “as Joint tenants”
or “Tenants in Common.” There are differences between states as to
the proper wording. For example, some states permit simply stating
"John Smith and Mary Smith, Husband and wife." It is important that
your property deeds are registered with your state's official "joint
tenancy" statement. Check your deed to see how it is registered. If you
want your property to be registered in joint tenancy and you are not sure
if your property recorded properly check with an attorney or local title
company.
There are many benefits
of joint tenancy however there are also a number of precautions that you
need to be aware of including various limitations, gift tax considerations
for non-spouses, and other areas.
"Plan Your Estate"
provides detailed guidance and explains the differences between common law
and community property states. It also explains the benefits of "Tenancy
by the Entirety" that you may wish to consider. This method of
registration protects jointly owned property form creditors if one owner
goes into bankruptcy.
PAY ON
DEATH (POD)
“Pay-on-Death”
Designations are used frequently on bank accounts, stocks and bonds. It is
an easy and convenient way to avoid probate. In most cases all you have to
do is fill out a form to change the name on the bank accounts to read
"John Smith Payable on Death to John Smith Jr. and Sara Smith." In this
case he left equal amounts of what is remaining in his account to each
child at his death. If one of his children dies before he does all will go
to the child that survives. Unfortunately you can't name alternate
beneficiaries. If you want to name alternate beneficiaries you should
consider a simple living trust.
If you have minor
children that you wish to leave money to you will have to name an adult
"custodian" for the property, under the Uniform Transfers to Minors
Act in most states. Some states don't permit leaving unequal
shares and there are many other considerations as discussed in
"Plan
Your Estate" Chapter 11. Refer to this book for complete guidance.
It discusses all aspects and considerations when choosing POD for your
accounts.
Under the "Uniform
Transfer-on-Death Securities Registration Act Another consideration with
POD/TOD designations is the limitation in many states of designating only
one beneficiary for stocks and bonds. If you refer back to the
Asset Allocation Chart you will
notice that this couple made up trusts for individually owned stocks. They
did this because the stock transfer companies only permitted designation
of one POD/TOD beneficiary and they have two children that they wanted to
leave the stocks to. Therefore, they had to form a trust to do this. They
discovered that there were many other advantages of a living trust as well
that they were able to take advantage of.
BENEFICIARY DESIGNATIONS
This is one of he basic tools that you have
available to avoid probate and it is the easiest of all to use. You are
already using this method with insurance policies and you can expand that
to your retirement and other accounts.
Federal employees need to verify their
beneficiary designations for their
THRIFT Savings Plan (TSP) and Federal Employees Group
Life Insurance (FEGLI). Your Thrift Savings
Plan (TSP) statement lists in the upper right hand corner whether or not
you have a Beneficiary Designation on file. If it says "NO" you need to
request a TSP-3 form to list your beneficiaries. This forms permits you to
select a single, multiple, or contingent beneficiaries. You can download
this form from http://tsp;gov.
If you are not sure if you designated
beneficiaries for your FEGLI coverage contact your personnel office and
have them check your Official Personnel File (OPF), contact OPM if you are
retired. If you designated beneficiaries you will have a SF-2823 form on
file that stated your elections. If one is not on file, or if it is
outdated, request a SF-2823 form to select beneficiaries. Keep a copy for
your records. You can update this form at any time and your personnel
office should send you a signed copy for your records. Keep this with your
"Survivor's File". If you are already retired OPM is your personnel
office and you can send it to them for processing. Email them at
reitre@opm.gov for additional
information. Visit OPM's FEGLI site at
http://opm.gov/insure/life/index.asp for the latest downloadable insurance
guide and for related information.
Actually, anyone you leave anything to is
called a beneficiary and "Plan Your Estate" describes all of
the differences that you need to be aware of. For example, you need to
know the difference between a primary, alternate, life estate, final and
residuary beneficiary and their use and limitations. This book describes
them in detail under Chapter Five.
REVOCABLE LIVING TRUSTS
Living trusts provide an
efficient method to transfer property outside of probate when you die. The
beauty of a living trust is that it is easy to create and can be as little
as several pages in length. The living trust does many things that a will
can do with the benefit that the property that you transfer into the trust
avoids probate. That is the real benefit of living trusts. They are
versatile, easily amended, and don't require separate trust tax records.
Trust income is simply reported on your tax return. Living trusts have no
major risks and if you change your mind later they can easily be amended
or voided.
Trusts can be used for all
types of property. If you have collectables, art work, antiques, homes,
coin collections - ANY PROPERTY - that you own can be transferred by a
trust with few exceptions. For real estate or assets with legal registrations
such as stocks and bonds, you have to change
registration to the trust name.
Typically you name the trust after the originator, called the trustee. For
example if you have stocks that you want to add to your trust you would
transfer registration from your name to “(Your Name), as trustee for the
(Your Name) Trust.” Chapter Nine of
"Plan Your Estate"
thoroughly reviews trusts and provides all of he guidance you need to
draft trusts for yourself and spouse. I used
"Willmaker Plus"
to complete my family's wills and trusts. "WillMaker Plus"
is easy to use. The program asked you questions and
determines exactly what you need in your document based on your answers
and laws of your state. The program also prints out complete step-by-step instructions on
how to transfer property to the trust and provides written reports and
instructions for the person you assign successor trustee
–
the person who will manage your trust and transfer property to your heirs
after your death.
You still
need a will to designate custodians for minor children and to capture any
other property in your residual estate. The will also cover property
that you either neglected to include in your trust or didn't have time to
include in your trust before your death.
GIFTS & GIFT TAXES
Anyone can give property away during their
lifetime to whomever they choose. Gifts are a good way to reduce your
estate, they are easy to do, and if your estate is large enough you can
save on estate taxes. The downside to gift giving is that after you give
property away it is gone forever. Currently, large gifts of over $11,000
per year require you to file a gift tax return with the federal government
and if you give gifts to minors the gifts are subject to special rules to
keep them tax-free.
Gifts are exempt from gift tax for gifts of
$11,000 to any one person per year. A married couple can give $22,000 to
any person per year tax free, $11,000 each from the husband and wife. The
one exemption is that you can gift tax-free any amount to your spouse. If
you pay your children's or grandchildren's tuition or medical expenses
those gifts are tax free as well. Any amount that you donate to tax-exempt
charities is also tax free.
There are many considerations and potential
tax savings possible with gift giving. You need to thoroughly
understand the options.
"Plan Your Estate" describes all of
your options, their advantages and disadvantages. For example, you need to
aware of the tax consequences of gifts to minors, special gift tax rules,
and state law differences. This book describes
Gifts and Gift Taxes in Chapter Fifteen.
GETTING STARTED
Most
federal employees attend agency sponsored retirement seminars several
years prior to retiring. I attended a retirement seminar in 2002 and I
came back from the briefing with more questions than answers. I was
confused about many things – mostly things that were not covered at the
seminar. I was interested in knowing just what I would have to live on in
retirement – from all income sources, what my wife will have to live on
when I die and most importantly, I was uncertain whether or not I was
financially able to retire and I knew nothing about living trusts or
probate avoidance techniques.
I am
not a lawyer or an expert in this area. This site presents my personal
perspective based on considerable research and discussions with others in
this same situation. I highly recommend anyone contemplating retirement or
currently retired to pick up a copy of
“Plan
Your Estate”
(written by lawyers in everyday language that all can understand) and use
“WllMaker
Plus” software to draw up your wills and trusts.
These excellent resources are indispensable for retirement and estate
planning. I could not have completed my plans without them and I refer to
them frequently whenever I have questions.
This
site will help you determine what you will have in retirement, what your
spouse will have to live on after you die, explain benefit options,
provide survivors with an easy-to-follow checklist to help them through
difficult times, and direct you to other resources to finalize your plans.
This site should get you seriously thinking about your personal situation. You should also
consult an attorney if you have complicated personal or financial
situations, a disabled child that will need care after you die, or if your
estate will be subject to estate taxes.
If you
find that you would like additional information about specific retirement
and planning issues posted on this site email me at
bookhaven@aol.com. I will try to steer you to the resources you need
and if appropriate post additional helpful information on this site. Your
feedback is welcomed and important to us.
You can also read my personal retirement journal
online.
Return to the Retirement Planning Site to begin
planning your retirement.
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