Christian Financial Advice and Biblical Stewardship

Future Planning: Probate And How to Avoid It

  • Mary Hunt The Cheapskate Monthly
  • 2004 19 Jul
Future Planning: Probate And How to Avoid It

Many people aren't sure what probate is, only that it involves lawyers and courts, is very expensive and takes a long time. Bingo!

What is probate?

Proper definition: Probate is the name given to the legal process by which the court oversees the distribution of property left by a will.

Realistic definition: Probate is the very long process by which lawyers, officials and executors rip-off a dead person's estate by charging horrendous fees for doing little more than filling out routine paperwork required by state law.

What happens in probate?

• The deceased person's will must be filed with the court.

• The deceased person's property must be identified, even if it is all properly listed and bequeathed in his/her will.

• The property must be appraised.

• The deceased's taxes and debts are paid off out of proceeds and assets of the estate.

• The will must be proven to be valid to the court.

• Anything that is left is distributed to heirs as the will directs.

How to avoid probate

Because leaving proprty in a will usually results in probate, probate avoidance involves arranging before your death to transfer property to your heirs by other legal means.

Revocable living trusts. Living trusts are basically quite simple. You create a legal entity called a "trust" and transfer something of value out of your name and into its name. A living trust is a legal entity that can buy, sell and own property. You keep control over it while you're alive because you name yourself as the "trustee" (or you can be a co-trustee with your spouse or another person). At your death someone else becomes the trustee and transfers the property to the person you've named to inherit it. Property held in a living trust does not need to be probated.

Most people who plan their estates eventually turn to a living trust. But not everyone needs one. If you own little property and are young and healthy, for example, you probably don't need to spend the money to create a trust yet.

Joint tenancy. Generally, this is one way co-owners, called "joint tenants" can own property together. Under some circumstances it is a useful probate-avoidance tool because all property held in joint tenancy carries the "right of survivorship." This means that when one joint tenant dies, his or her ownership share of the joint tenancy property is automatically transferred to and becomes owned by the surviving joint tenants, without the need for probate.

Real estate, bank accounts and safe deposit boxes can be held in joint tenancy.

Pay-on-death. This is a way to formally name another person to receive certain property, or what is left of it, when you die. Property left with a pay-on-death (P.O.D.) designation avoids probate. Most states allow this for stocks and bonds, brokerage accounts, retirement accounts and profit-sharing plans. P.O.D. accounts avoid probate with very little paperwork. Your bank or the U.S. Treasury Department can provide you with a simple form on which you designate the beneficiary.

Life insurance. The proceeds of a life insurance policy avoid probate, which is one reason many experts suggest life insurance to be a possible estate planning tool.

Retirement accounts. Money in an individual retirement plan such as an IRA, Roth IRA or 401(k) account that is left to a named beneficiary upon the owner's death does not go through probate. The plan administrator pays the funds directly to the named beneficiary.

State laws. As a general rule, property left in a will must go through probate. But there are exceptions. Most states' laws allow a certain amount of property in a will to be either free of probate or subject only to a very simplified probate process. Every state is different.

You can use your state's probate exemption laws to your advantage by combining a will that qualifies for probate exemption with other probate-avoidance techniques for the rest of our property.

Gifts. Another way to avoid probate is to die broke. Some of you won't have to work too hard at making that happen. But seriously folks, distributing your property and financial assets before you die is a way to avoid lots of headaches and expenses for your heirs. Besides you get to see them enjoy what you've worked so hard to achieve. Currently you can give up to $11,000 to any one recipient each year without that person having to pay taxes on the gift.

When probate is useful

In some situations probate can be quite helpful, especially in protecting heirs from creditors of the deceased. If an estate has many debts or claims by creditors, probate provides a place for resolving those issues. And if creditors who are notified of the probate do not file claims within a set period, those claims are barred forever.


Plan Your Estate: Everything You Need to Know to Protect Your Loved Ones, 6th Edition, by Attorneys Denis Clifford and Cora Jordan. (Nolo Press, 2002, 490 pp, $44.99);

This is a big book and certainly not cheap. However, if you would like to do a lot of the work yourself, it's a reader-friendly tome that will give you the confidence and educational insight you need to make the best decisions.

[This article is for information only. It is not meant to be a substitute for legal advice, only to stimulate your thinking. Before relying on any information to be true and correct for your situation, make sure you get appropriate legal advice.]

© 2004 The Cheapskate Monthly. All rights reserved. Used with permission.

  "The Cheapskate Monthly" was founded in 1992 by Mary Hunt.  What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt.  Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates.       Click here to subscribe.

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