Avoid Probate on Taxable Assets


“Probate” is the legal process of transferring assets you own at your death to your heirs. This can last up to two years in some states, and involve court costs, attorneys’ and executors’ fees (often fixed as a percentage of the assets probated), and unwanted publicity. Fortunately, you can avoid it by titling assets with beneficiary designations or outside your name entirely.

  • Joint tenancy is an arrangement between two people (usually spouses, but sometimes a parent and child) that automatically passes title at the first death to the survivor. Joint tenancy is easy and inexpensive to establish. But it subjects each owner to the other’s personal liability. And it dissolves at the first death, leaving the asset subject to probate at the second.
  • Qualified plans, IRAs, life insurance, and annuities pass automatically to your designated beneficiaries. These bypass probate unless you designate your estate as your beneficiary.
  • State transfer-on-death (“TOD”) laws may let you pass real estate and financial accounts to designated beneficiaries.

Simple beneficiary designations aren’t enough for children who aren’t ready to manage their inheritance or assets such as closely-held businesses, investment real estate, and family limited partnership interests. In those cases, the revocable living trust is usually the estate- planning vehicle of choice. Here’s how it typically works:

  • First, you’ll establish the trust. This involves designating a trustee to manage trust assets and beneficiaries who enjoy the benefit of the property. Typically, you’ll designate yourself as both trustee and beneficiary during your lifetime. You’ll also designate a successor trustee or trustees to take over at your death or disability.
  • Next, transfer assets from yourself to the trustee. You’ll enjoy the same freedom and flexibility to manage trust assets as if you owned them personally. The trust is ignored for tax purposes, and you’ll report trust income on your personal return.
  • At your death, your designated successor steps into your shoes to manage trust assets. Your successor can terminate the trust and distribute the assets (such as with adult children) or continue to manage them (such as for minor children).
  • The trust bypasses the delays, expense, and publicity of probate because trust assets are no longer titled in your name.

The revocable living trust isn’t a tax-planning tool. However, your attorney can incorporate tax- planning provisions to take advantage of unified credit and generation-skipping tax exemptions. Your estate plan will generally include these additional documents:

  • The “Living Will” directs physicians to discontinue life-sustaining treatment should you fall into an irreversible coma.
  • The “Durable Power of Attorney for Health Care” designates someone to make medical decisions on your behalf should you become unable to make those decisions yourself.
  • The “Durable Power of Attorney for Finances” designates someone to manage non-trust assets such as retirement and annuity accounts should you become unable to manage them yourself.

You can designate a living trust as beneficiary of your IRA without forcing the trustee to distribute assets and trigger taxes. To qualify, you’ll need to meet five tests:

  • The trust is valid under state law.
  • It becomes irrevocable at your death.
  • It has only people as beneficiaries — not corporations, estates, other trusts, or charities.
  • The individual beneficiaries are specifically identifiable from the trust document.
  • You give the IRA sponsor a copy of the document before your required beginning date for distributions.

If you have any questions regarding the probate process and taxable assets, please do not hesitate to contact us.

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