Probate is the legal process of settling the estate of a deceased person. The word probate stems from the latin root probatus, meaning “a thing proved”(1). If there is a substantial sum of money or property to be transferred to ones heirs, the probate process is necessary to facilitate the messy logistical aspects of transferring one’s wealth. For example, taxes may need to be made, payments due to or from the estate need to be settled and numerous legal documents usually should be filed to make the inheritance happen.
Generally speaking, probate takes a long time to complete and the process usually entails some extra expenses, sometimes up to 5% of the total value of the estate. So, if it can be avoided, its best to do so.
According to our new favorite personal finance guru, Jane Bryant Quinn, there are three ways of avoiding probate:
1) Putting Property in Joint Names: If you modify your ownership status to be a joint tenancy with right of survivorship, you can sometimes avoid probate. The main idea here is that if one owner passes away, the other automatically retains control of the assets. While you can skip probate with this, sometimes the deceased’s liabilities remain attached to the property. So you won’t be able to avoid any debts using this method.
2) Naming a Beneficiary For A Particular Piece of Property: What you do is name a Paid on Death (POD) beneficiary. If the owners pass away, the property is then automatically passed onto the POD beneficiary. Real estate, investment accounts and securities can all be transferred this way.
3) Putting The Property In Trust: A trust is basically a legal entity whose purpose is to hold assets and distribute them after one dies. What a lot of people do is get a living trust. A living trust is so called because it takes effect during one’s lifetime (e.g. the trust grantor names an executor while the grantor is still alive). The advantages of a trust are 1) that you can get around probate and 2), that the terms of a trust are private. On the other hand, wills are public documents. If you have nosey relatives who you want to cut out of the picture, you might consider getting a trust.
While its important to think about end of life issues, there are a couple of disclaimers you should keep in mind. First, don’t assume you can skip out on taxes or your creditors by avoiding probate. What I’ve read suggests there are legal means for going after you even if you do avoid probate. Second, probate rules differ depending on what state you live in. Whats legal in California may not be valid in New York. So, I recommend you do some research before taking action.