Understanding (and Avoiding) Probate

Understanding (and Avoiding) Probate

Eileen St. Pierre, The Everyday Financial Planner

In my travels across Oklahoma teaching Estate Planning, I find the mere mention of the word Probate strikes fear in my audience.  I guess the thought of your life being displayed in court for all to see (even if you aren’t there) could be terrifying.  We hear horror stories of celebrities’ estates like those of Michael Jackson and Anna Nicole-Smith taking years to settle.  But there are steps you can take to make the probate process easier on your heirs, or avoid it altogether.  Understanding the probate process is the first step.

The Probate Process

Your will must go through the probate process to be considered legally valid.  Probate is the legal process through which your property is properly transferred to other parties.  It is a very public process involving having to prove the will, notifying all creditors and potential heirs, and resolving any contests to the will.  Ancillary probate may be required if you own real estate in another state.  The entire probate process can take anywhere from six months to many years.

  • According to the National Association of Financial and Estate Planning (NAFEP), probate can cost between 4% and 10% of your estate, based on national averages.  Some of these fees are set by law, such as court fees and required documents.  Others can be negotiated, such as the types and costs of services provided by your attorney.
  • In Oklahoma, if the amount of your estate that is subject to probate is less than $200,000, your estate is eligible for Summary Administration, an expedited probate process (other states may have similar processes).  Your personal representative would submit an application and an inventory of assets to the court.  If the court deems it necessary, it will then order an appraisal of these assets.  After this, it will issue an order for a final hearing to settle the estate.  If the value of your estate subject to probate is more than $200,000, you may want to consider removing assets from your probate estate to make it eligible for Summary Administration – use the techniques discussed next.

Avoiding Probate

Remember, for a will to have any legal effect, it must be submitted for probate.  Probate is generally required only when you die owning property in your name without a surviving joint tenant or named beneficiary.

Whether or not real estate and other financial assets such as mutual funds go through probate depends on how the property is owned.  Property owned with the right of survivorship is not subject to probate.  Property owned this way cannot be left to others in a will or trust.   Most couples own their houses in joint tenancy with the right of survivorship.  The house would pass to the surviving spouse without going through probate.  The house will have to go through probate after the surviving spouse dies unless the property deed has been retitled and/or the property has been placed into a trust.

Effective November 2008, Oklahomans can transfer real property like homes outside probate through the use of a transfer-on-death (TOD) deed.  The property owner must title the property as transfer-on-death and designate a beneficiary (and ideally an alternative beneficiary).  You then need to sign the TOD deed and record the deed in the county where the property is located.  Unfortunately, this cannot be done for vehicles and other titled personal property.

  • Other states that allow TOD deeds for real property: AZ, AR, CO, HI, IL, IN, KS, MN, MO, MT, NV, NM, ND, OH, OR, WI
  • You do not need to be a resident of the state to use a TOD deed.
  • States that allow you to name TOD beneficiaries for a vehicle: AZ, CA, CT, IN, KS, MO, NE, NV, OH, VT

As mentioned in my column Wills vs. Trusts, assets placed in a trust are not subject to probate.  Another way to avoid probate and pass along assets outside of a will is by naming beneficiaries to certain types of asset accounts.  Examples of accounts where you can name beneficiaries are:

  • Life insurance policies
  • Annuities
  • Retirement plans
  • Brokerage accounts
  • Bank accounts

Be sure you keep these beneficiary designations up to date.

Do not name minor children as direct beneficiaries.  They cannot own assets until they turn 18.  Instead, name a trust (for the child) as a beneficiary or have the money put into a custodial account.

Try not to name a charity, business, or some other organization as a beneficiary for a retirement plan.  The IRS will require the money to be taken out after 5 years.  If you name “designated” beneficiaries for your retirement plans (i.e., your spouse and/or adult children), then the IRS will allow your heirs to keep the money in the account and let it continue growing tax-deferred.  If you have already started taking distributions, your beneficiaries can continue using your distribution plan.  Be sure to discuss the options with your plan administrator and your tax advisor.

You can designate brokerage accounts as TOD to also avoid the probate process.  Likewise, bank accounts can be designated as payable-on-death (POD).  POD accounts get the FDIC insurance limit for each qualifying beneficiary.  TOD and POD are not quite as flexible as wills and trusts.  You can only name primary beneficiaries.  If your primary beneficiaries die before (or with) you, the money will have to go through probate.

They say the only two things that are certain in life are death and taxes.  When it comes to paying estate costs, you can choose to pay now or later.  You can pay now by setting up trusts, correctly titling assets, recording TOD deeds, and paying for legal/financial advice to help get your affairs in order.  Or you can pay probate costs later.