Avoiding Probate Without a Trust
Probate can be an expensive and time consuming process, but not all assets require probate. Many types of assets can be passed to beneficiaries without probate. The question is, however, whether that particular “non-probate” method is appropriate for your specific set of circumstances. Nonetheless, here are two of the most common non-probate methods of transferring property.
Beneficiary designations are a simple, non-probate, method of transferring property. The account holder makes a written beneficiary designation on a form provided by the financial institution. Upon the account holder’s death the beneficiary simply files a claim form with a certified copy of the death certificate and, typically within a few weeks, is paid his or her share of the asset.
However, beneficiary designations are not always appropriate. Consider not using beneficiary designations in the following circumstances:
- Young/Immature Beneficiaries: If you leave money to minors via a beneficiary designation it is likely the court will need to be involved to distribute those funds to, or for the benefit of, the minor. Additionally, many people do not want young (or immature) adults to receive lump sum gifts of cash and instead want another more mature family member to manage that money until the person reaches a certain age. If you want this type arrangement, a beneficiary designation will likely not be suitable.
- Special Needs Beneficiaries: If your beneficiary is receiving government assistance a cash gift may make him or her ineligible for government benefits. If you wish to make assets available for the benefit of someone with special needs without disqualifying them, you will likely need to have a “special needs trust” drafted for them.
Property that is jointly owned will typically pass to the surviving joint owner without the need for probate. However, there are many reasons why joint ownership should not be considered:
Available to Creditors: If a joint owner gets into financial trouble then a creditor of the joint owner may try to collect on the debt by way of the asset (e.g. your home).
Loss of Freedom: If you make someone a joint tenant you are giving up your exclusive right to sell, refinance, rent, reside in and/or obtain a reverse mortgage on the home. It is not uncommon for the elderly to sign a deed making a child a joint owner only to find out later that the child gains significant unwanted control over the elder by way of the joint ownership of his or her home or other assets.
Tax Detriment: If you inherit property you typically get a full “step-up” in basis to the value on the date of the decedent’s death. The difference between your basis and what you sell the property for is your “gain”. However, when you are a joint tenant you only receive a one-half step-up in basis. Not having a full step-up in basis may result in income subject to capital gains taxes when the survivor sells the property.
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