My wife and I recently had the privilege of assisting a widow in our church with some legal/financial issues after her husband's passing. It was my first experience with the "Clerk of the Superior Court" in my county.
Fortunately, this woman and her husband had their affairs in order. They had a will and a living trust, ensuring their property and financial accounts would easily pass to her upon his death. However, the will had not been probated, and she needed access to some funds that had been paid to her husband's estate in an account she did not have access to because they were not held in the trust.
Hence the trip (actually two) to the clerk's office with an additional trip to her bank. It took about a month for the county to process the paperwork, which is itself instructive: These things take time, and one unfilled line, checkbox, or missing signature can start the process all over again.
I won't go into all the other details, but suffice it to say that it was not a simple matter to resolve (and, as I write this, it still isn't), even though the will does not have to be probated to address it.
As I reflected on this experience, I thought: Will my wife (or our children after we're both gone) have to walk through a similar process? I no longer have a living trust, which may necessitate my will be probated should I predecease my wife. However, we hold most of our assets in "joint tenancy," and when we don't (my IRA accounts, for example), my wife is listed as my beneficiary.
Still, as with the widow in my church, there could be a situation where the will would need to be probated, even if I have a trust. In those situations, going to the clerk's office (which felt a little like being at the DMV, even though they were pretty helpful) and getting all the required legal forms completed and notarized was a little challenging.
I understand that probate can be much more complicated (and take much longer). According to Trust & Will, probate takes a minimum of four months in my state (NC), and "fees can often run anywhere from $2,000 – $10,000 or more, depending on how complex the estate is." Frankly, I had no idea it could take that long or cost that much.
I now think most of us should consider having a strategy to avoid probate for the sake of those we leave behind, if possible. I don't like to think that my wife may have to deal with that after I'm gone, even though she'd likely have friends or family to help.
The next question that arises is this: How can we avoid probate, at least for the majority of our property and financial assets? And do I need a living trust?
There are several relatively simple and effective ways to ensure that some of our property and financial assets pass directly to our heirs (or charities, or both) without going through probate and without a living trust.
State laws differ on this, and as we'll see, depending on where you live, some things are best handled with trust.
1) Joint ownership of financial accounts
Joint ownership of financial accounts provides a simple and easy way to avoid probate when one owner dies. When one owner dies, the property goes to the other joint owner—no probate involved. Think "joint checking and savings accounts."
One issue is that retirement accounts, such as 401(K)s and IRAs, can't be owned jointly, so they must be addressed differently—what is legally defined as "pay-on-death" account designations (see #3 below).
2) Joint ownership of real estate
This is where a husband and wife own property together (i.e., both names on the deed) or when a beneficiary is added to the deed, thereby becoming a joint owner.
This is usually considered a good idea for husbands and wives. However, with non-spouses (e.g., a child), there are some important considerations.
First, if you add a beneficiary to the title while retaining joint ownership, the title will stay in the probate court's purview. It would not if you relinquish ownership and name your beneficiary(ies) the sole owner(s).
Second, adding a beneficiary to the deed gives them a gift per the IRS laws for tax purposes. Whether your beneficiary would have to pay any gift tax is another matter. You can read the IRS rules on gifts to family members HERE or consult a tax professional.
The third thing is capital gains, probably the most significant potential "gotcha" to consider. These taxes can be significant (up to 20% for higher-income people).
If your beneficiary assumes sole ownership while you are still alive, and they want or need to sell it within two years, that will trigger the long-term capital gains taxes; they will have to pay them on the appreciated value of the property since you first purchased it.
However, if you sell it as the original owner, you would be eligible for an exclusion of up to $500,000 (as a married couple) as long as you lived in the property for at least two of the previous five years.
3) "Payable-on-death" accounts
By designating a beneficiary, you can make almost any bank or retirement account a "payable-on-death" account. You can do the same for government bonds and corporate stocks and bonds, and brokerage accounts. (The mechanism for doing this may be as easy as completing an online form.)
Most financial institutions allow account owners to designate both a primary beneficiary and a contingent (alternate) beneficiary, who would be entitled to the funds if the primary beneficiary didn't survive the account owner. (It's common, for example, for someone to name their spouse as the primary beneficiary and the children as contingent beneficiaries.)
You can also designate an entity, such as a church or ministry, as a beneficiary providing they meet IRS requirements as a registered 501(c)(b) charitable organization.
When you die, the money in the account goes directly to your beneficiary (or beneficiaries) without going through probate.
My wife is the beneficiary of my retirement accounts. That information is registered with Fidelity Investments, the brokerage that holds them. If I should predecease her, it's up to her to claim the money directly from Fidelity. They would help her to set up an Inherited IRA account, which would be optimal for her from a tax standpoint.
Note: A beneficiary's options (and the tax implications, such as the RMD rules) depend on the kind of retirement account, the beneficiary's relationship to the deceased, and how old the deceased person was.
Once she has taken possession of the funds, she can change the beneficiary arrangements if she desires.
4) "Transfer-on-death" (TOD) arrangements
Many states also allow transfer-on-death vehicle registrations, and the majority of the states also now allow transfer-on-death deeds for real estate. You can use these tools to transfer your cars and real estate to someone else after your death without probate.
If your state allows TOD deeds, you can pass your interest in your home on to a beneficiary while you're alive. The TOD has to be recorded with your county recorder of deeds, and when you (and your spouse if jointly owned) pass, it would automatically go to your beneficiary.
This functions like your beneficiary inheriting the property but without probate. (Estate taxes may apply, but usually not.)
Your beneficiary won't owe any income tax on the home's value, but should they decide to sell it, they'll have to pay capital gains tax based on the home's value on the date they inherited it. This is the "stepped-up" capital basis for paying taxes on an inherited house. (That would result in a much lower capital gains tax than under option #2 above.)
If they choose to rent or occupy it, they would owe no tax for as long as they own it. If and when they sell it, they may owe capital gains based on the appreciation above the "stepped up value" because those who inherit property aren't eligible for capital gains tax exclusions like regular homebuyers are.
5) Revocable living trust
The widow friend from our church I mentioned earlier had a living trust. A trust can be used to avoid probate because property or assets that you hold in the trust are not part of your probate estate. It is, however, counted as part of your estate for federal estate tax purposes.
But most people won't owe any taxes. That's because a "trustee"—not you as an individual—owns the trust property. After your death, the trustee (who can also be your beneficiary) can easily and quickly transfer the trust property to whomever it was left to without probate.
I had a living trust when my children were younger because it was the best way to address guardianship issues and future financial provision if my wife and I passed away before they became adults. We dissolved the trust when we redid our wills, but as you might guess, we're reevaluating that decision.
Because I can name my spouse, children, and even entities (like my church) as beneficiaries of my Fidelity retirement accounts, I don't need to include them in a trust to avoid probate. I would, however, keep them in my will to ensure that things are handled correctly.
Because our house and vehicles can't be bequeathed via a TOD action, they must be included in the trust. That's easy enough to do in the trust document itself, but I would also have to change the deed and car title ownership to the name of the trust. That requires a legal filing with the county court and a visit to the DMV—ugh!
Giving away property while you're alive helps you avoid probate for a very simple reason: If you don't own it when you die, it doesn't have to go through probate (duh!). That lowers probate costs because, as a general rule, the higher the monetary value of the assets that go through probate, the higher the expense.
In 2023 you can give away $17,000 per person without filing a gift tax return.
7) Simplified procedures for small estates
Almost every state offers shortcuts through probate—or a way around it completely—for "small estates." Each state defines that term differently, but estates that are especially simple or small in value can skip probate or go through streamlined probate. If you think your estate will qualify, you may not need to take elaborate measures to avoid probate.
You can learn more about this and see if your state has such a procedure HERE.
In light of everything I've learned, I think my wife and I may revisit our decision not to have a simple living trust. If I do set one up, I'll probably 'fund it' with our house and vehicles so that our heirs can avoid probate.
Our bank and retirement accounts can be handled with beneficiary registrations supported by our will. Still, our other possessions can't pass via our will without probate since, in NC, they have to be valued at less than $20,000 (in some states, it's as high as $500,000). Therefore, some of those must also be included in the trust to avoid probate.
A final note: As I have written before, Prov. 13:22, notwithstanding, I don't believe Christians are required to leave an inheritance to their children or anyone else. If you want to spend it all or give it away while alive, you're free to do that. However, if you want to leave something to your heirs and avoid probate for their benefit, this article may help you.