How to actually avoid a lengthy Probate – Part 2

How to actually avoid a lengthy Probate – Part 2

Part 2:  What assets pass outside Probate and how to set up and update them

In last week’s post titled “Part I. What exactly is Probate and what is a Probate Court?” we covered:

  • What does a Probate Court do?
  • Who needs Probate?
  • Why everyone? Do you really mean Each and Everyone who dies?

You hear the word Probate and you feel like you are in a bad dream! Probate can be challenging for a few, but for the vast majority of us, it’s actually not as bad as it’s made out to be. Really!

There are many assets that do not need to go through Probate if set up properly because they follow different laws.

These include:

A.     Jointly owned Assets – Real Estate

B.     Jointly owned Assets – Vehicles

C.     Accounts with Beneficiary Designations such as Retirement Accounts and Life Insurance

D.    Accounts with Transfer on Death Registrations such as Investment Accounts

E.     Payable-on-death bank accounts such as Cash Accounts such as savings, checking and CDs

F.     Savings Bonds

G.    Assets held by Trusts

WARNING: This requires some serious diligence on your part. It is not something you can set up on auto-pilot. If you do that, your loved ones might be in for a crash landing! 

  • These assets pass outside Probate for precisely this reason.
  • You can change your beneficiary designations at any time for any reason.
  • Beneficiaries cannot access your funds while you are alive.
  • If you designate a minor as a beneficiary and you die, the court will appoint a guardian or custodian for the inheritance, unless you have already done so and|or set up a trust for the minor and named the trust as the beneficiary.
  • Double check to make sure everyone you intended to inherit is included, i.e. you didn’t inadvertently leave out your favorite grandchild!

With the above in mind, if you are diligent enough to review your accounts and beneficiaries once a year and every time a life event occurs such as marriage, birth of a child, divorce, death, etc., this is a great way to go.

Let’s look into each of these assets in more detail.

A. Jointly owned Assets – Real Estate

Deeds for Real Property are designated in several ways. The most common are:

·       Joint Tenancy with Rights of Survivorship or Tenants by the Entirety (TBE)

·       Tenants in Common

·       Joint Tenancy

        1. Joint Tenancy with rights of survivorship or Tenants by the Entirety (usually have the same pros and cons)

Deed of your real property determines who will inherit your home or other properties. If the Deed to your property says “joint tenancy, with rights of survivorship”, “tenants by the entirety” then these assets will pass directly to your surviving spouse without going through Probate. This designation is available to married couples only.

If you own your home with only you on the Deed and get married later, you can create a new deed with tenants by the entirety or joint tenants with right of survivorship designations. The property will pass through to the surviving spouse without going through Probate. If you have a mortgage on your property, you will need to check the Mortgage Contract or check with the mortgage holder.

If you own your home in your own name only and you die, then the State’s Intestacy laws will take over. This means that if your spouse or partner is living in the same house with you, they may be forced to sell or move out! The primary way to avoid this scenario is to create a Will. See “Don’t think you need a Will? Think again.”

Several States now allow you to create a “Transfer on Death” Deed for real estate. This adds a statement to the Deed that upon your death and the death of the last surviving title holder, the named beneficiary will inherit the property. This also bypasses the Probate process.

When one of the owner’s dies, the surviving owner takes over immediately. It means you inherit the real property and any loans against it, such as a mortgage, home equity loan or insurance payments.

If both you and your spouse die at the same time, the property will be settled through Probate.

Tenants by entirety

Same-sex couples who are married can also take advantage of these designations.

     2. Tenants in Common

Larry, Mo and Curly own a property together and they split the ownership such that Larry has 30%, Mo has 30% and Curly has 40%. The property can be any type of real estate such as a Condo, Land, Investment property, etc.

Now, Curly leaves the planet. His two surviving children Moe and Joe will inherit 20% each of Larry’s 40% share of the property.   Hopefully, Curly left a Will and the transfer of ownership can happen smoothly, if not, Curly’s share of the property will be probated through the Probate process.

See diagram below.

Tenants

      3. Joint Tenancy

Joint Tenancy means that all owners have equal part ownership in the property. If two people own the property it is 50|50, if three people own the property it is 1/3rd each and if 4 people own the property it is 1/4th each. If one owner dies, then the property ownership is readjusted among the surviving owners. The deceased owner’s share does not go through Probate.

Joint Tenacity

B. Jointly owned Assets – Vehicles

Similar to Real Estate, Vehicles are considered real property. Your State’s Department of Motor Vehicles (DMV) determines the rules for transfer of property based on the title.

  • If multiple individuals are named on the title (i.e) Mary Jones and Tom Jones, both Mary and Tom own the vehicle equally.
  • You can add “rights of survivorship” to the title, which means, the surviving person will inherit the property without going through Probate. Visit the DMV for more information.
  • State DMV‘s use “AND”, “OR” or a “/” to indicate ownership by multiple people. Check your title. If it’s not clear visit State’s DMV website, visit an office or call them for clarification.

Some States now allow you to create a “Transfer on Death” Registration for your vehicle. This is a different title form that is available from the DMV where you can designate a beneficiary.

Upon your death and the death of the last surviving title holder, the named beneficiary will inherit the property. This also bypasses the Probate process.

Some States allow you to set up these designations for vehicles other than automobiles. Check with your State’s DMV.

C. Accounts with Beneficiary Designations 

You can name beneficiaries for your insurance policies and retirement accounts such as:

  • 401 (k)
  • 403 (b)
  • SEP IRA
  • Simple IRA
  • IRA
  • Roth IRA
  • Pension Plans (check your plan for details)
  • Life Insurance

It’s best if you designate your beneficiaries when you first sign up even if you have to call your parents or your spouse for their social security numbers or even your children. If you have named one or more beneficiaries, these assets can pass through directly to your beneficiaries without the involvement of the Probate Court.

If you and your beneficiaries die at the same time, this asset will be processed through your estate. You can change your beneficiaries at any time. I suggest you review this annually or whenever a life event occurs such as a marriage, birth of a child, divorce or death of a beneficiary.

I have heard many stories of ex-spouses or dead parents inheriting these types of assets because the beneficiaries were never changed!

Also, it doesn’t make sense to name your elderly parents as your beneficiaries when you have a spouse and children – although, you may have reason to do so. Note that if you name a minor as a beneficiary and you pass away while the child is still a minor, the court will likely appoint a guardian – unless you have already established a guardianship agreement for the child.

WARNING: Special case of an Employer Sponsored Retirement Plan 401 (k) and 403 (b)

Employer Sponsored plans are administered under ERISA – the employment laws. According to these laws, your spouse is automatically the beneficiary. In order to disinherit your spouse, your spouse will need to sign a waiver.

  • If you rollover your 401(k) or 403(b) into an IRA when you leave your employer, you can designate a different beneficiary other than your spouse.
  • If you or your now spouse signed a pre-nuptial agreement, your now spouse will become the beneficiary of these employer sponsored plans, regardless of what that agreement says. Typically, pre-nuptial agreements are signed prior to marriage.
  • If you get divorced, update your beneficiaries. If you get remarried, your new spouse will automatically become the beneficiary.

What I need to Know

https://www.fidelity.com/customer-service/how-to-update-account-beneficiaries

529 Plans

529 Plans are administered by States and there are differences amongst them. Some allow you to name a joint account owner and others don’t. Please read your 529 plan to see what it says and if it does not allow a secondary account owner to take over, you may need to create a trust, especially if the beneficiary is still a minor. For more information on 529 plans, visit http://www.savingforcollege.com/ or https://www.irs.gov/uac/529-plans-questions-and-answers.

D. Accounts with Transfer on Death Registrations (TOD)

Many States allow you to designate a beneficiary for your investment accounts. If this is a joint account, it will automatically transfer to your spouse or person named on the account. If it’s not, you can set up a beneficiary by registering a Transfer on Death (TOD) form with your brokerage or investment firm. Each firm has their own version, and I have found many online. You can also contact your firm to get one set up.

If you are single or widowed and don’t want to set up a joint account, just in case you suspect that your joint account owner (usually a child) will sell your assets without your knowledge, this is a great alternative.

Beneficiaries

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/beneficiaries-transfer-on-death.pdf

While you are filling out these forms, you may run into a couple of terms:

  • Per Stirpes
  • Per Capita

Per Stirpes: Your estate will be distributed per stirpes as if each of your children received an equal share. If one of your children died before you (also called pre-deceased), his|her children will receive equal shares of the portion your dead child would have received. See diagram below.

Beneficiaries-Per-Stirpes

 

 

Beneficiaries-Per-Capita---Survivors(1)

Per Capita: If one of your children died before you (pre-deceased), your estate will be distributed per capita. That means it will be split equally among the remaining children. If one of them subsequently dies, your direct children will keep their share of your estate, but, the next generation will split the remaining share equally.

Per Capita

 

Just to confuse the heck out of you, Schwab has its own definition of Per Stirpes and Per Capita. I am sure others do too. Before you sign one of these forms, make sure one of the company’s financial planners diagrams your inheritance chain for you. It’s probably best if you visit one of their local offices rather than try this over the phone!

 

Special Considerations

https://www.schwab.com/public/file/P-831898/APP10780ADA-15_(3).pdf  – Page 4

E. Payable-on-death bank accounts or (POD)

While a TOD is applicable to investment accounts, a POD is applicable to most Cash Accounts such as savings, checking, CDs, Money Market, etc.

You can fill out and set up a POD for your bank accounts and name a beneficiary. PODs become active after your death. It functions like a normal account while you are alive and the beneficiary does not have access to your funds while you are alive.

Again, you don’t need to set up a POD if it’s a joint account. The joint owner will automatically inherit the account.

An alternative to this is to name someone else on your signature card. A signature card is a form you filled out when you opened your bank account (long time ago!), and the bank has on file. You can add a beneficiary to your signature card, although, this might require a field trip to the bank where you opened your account!

If you are single or widowed and don’t want to set up a joint account or give someone Power of Attorney, because you suspect that your joint account owner (usually a child) will withdraw all your money and bankrupt you, a POD is a great alternative.

F. Savings Bonds

Savings Bonds

The US Treasury no longer issues Paper Bonds, although, if you desperately want Paper Bonds, you can use your IRS Tax Refund to purchase them! Talk about a loophole! Our government at work!

You can convert your existing Paper Bonds to Electronic Ones online at http://www.treasurydirect.gov/readysavegrow/start_saving/converting_bonds.htm

You can name a co-owner or beneficiary when you purchase a Savings Bond. If you did not, you can add a co-owner or beneficiary.   The bonds may need to be reissued. See:

https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eereplace.htm

Changing or adding co-owners or beneficiaries is not a taxable event. You just have to fill out the right forms and follow the directions.

If the bonds are held solely in one name, the bonds will be settled through Probate.

G. Assets held by Trusts


There are several types of trusts. Trusts hold assets in the Trustee’s name. A Trustor administers the Trust according to the rules of the Trust. The Trustor has a fiduciary responsibility to follow the rules and can be taken to court for using funds against the rules of the Trust.

Assets are transferred into the Trust and administered according to these rules. Trusts do not go through Probate, however, these are complex instruments and it may be best to consult an Estate Planning attorney if you plan on going this route.

Note that in this case, the Trustor, not the Executor is the one that administers the Trust. It may be the same person or a professional.

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Disclaimer: This is simple, practical advice. If you have a complicated situation or feel like you need further information, please consult an attorney.

Do you like this article?  Let me know your #1 takeaway in the comments section below.

Jasmine Alexander has a B.S. in Computer Science from NYU and a M.B.A. from UCLA Anderson School of Management, and is the Founder and CEO of www.jazmine.com, an online organizer that safely stores personal records, account numbers, ownership documents and everything in between.  

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