You may have watched a scene in a movie or on a television show that depicts a post-funeral assemblage. People gather at someone’s home, and at some point, there is a “reading of the will.” The implication is that estate matters are settled as soon as the person holding the meeting has read the will to the interested parties.
In fact, things do not work that way in the real world. There is a legal process called probate that will often be part of the equation when a will is used as the primary asset transfer vehicle. The executor that is named in the last will would take care of the hands-on estate administration tasks under the supervision of the court.
This court is also involved when people pass away intestate. Intestacy is the condition that exists when someone dies without any estate planning documents in place.
Transfers Outside of Probate
There are some types of postmortem asset transfers that are not subject to probate. One of them is the receipt of insurance policy proceeds. If you have life insurance, the beneficiary or beneficiaries would receive payouts from the company directly, outside of probate.
The same thing is true if you have an individual retirement account. When you establish the account, you name a beneficiary to assume ownership of the IRA after your passing. This transfer would take place without any probate court involvement.
When you open up a bank account, you have the option of adding a beneficiary that would assume ownership of assets that remain in the account after you are gone. This is called a transfer on death or payable on death account, and brokerages offer this option as well. If you have payable on death accounts, the transfers to the beneficiaries would not be subject to the probate process.
Joint tenancy fits into this category as well. You can add someone to the title or deed of your home as a co-owner. This is called joint tenancy with right of survivorship. After you pass away, the other joint tenant would become the sole owner of the property, and the transfer would take place in a probate-free manner.
Drawbacks of These Methods
When you digest the information above, you may decide that you can create a makeshift estate plan on your own using these methods. In reality, there are some major drawbacks and limitations that you should take into consideration before you embrace these approaches.
There is nothing wrong with life insurance transfers as long as there is no estate tax exposure. However, when it comes to payable on death accounts, there are some problems. One of them is the fact that you may be able to add multiple beneficiaries, but you would have to allow for equal distributions. This may not be consistent with your true wishes.
In some instances, a person will name a single beneficiary and instruct the person to distribute the assets among multiple family members. From a legal perspective, the beneficiary would not be compelled to follow these verbal instructions.
Using joint tenancy with right of survivorship as an estate planning strategy is risky business. When you add a joint tenant to your property ownership documents, this individual would own half of the home immediately. As a result, if the joint tenant was to run into tax problems or legal difficulties, his or her portion of the property could be attached by litigants seeking redress.
Revocable Living Trusts
A much more effective way to facilitate probate free asset transfers would be to use a revocable living trust as the foundation of your estate plan. With this type of trust, you can act as the trustee and the beneficiary while you are living, so you would have complete access to property that you convey into it.
In the trust declaration, you name a successor trustee and successor beneficiaries. After your passing, the trustee would follow distribution instructions that you leave behind in the document. The process of probate would not be a factor.
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