Financial Planning 101: Probate

The phrase “avoid probate” is well-known in the legal and financial industries. However, the average individual is often left without an explanation or understanding of what probate actually is and the related proceedings. Probate is the public legal process that takes place after an individual’s death when court proceedings properly distribute a deceased person’s assets to the rightful beneficiaries. Leaving a will directs the probate court to carry out the specific directions as listed within the will. If a will does not exist or is not found, then it is the court’s duty to ensure that all assets are distributed according to the state’s laws and statutes, which is almost always a sub-optimal outcome for the family and heirs. One of the primary reasons why individuals may want to avoid probate is the total lack of privacy. Generally, there remain no restrictions for the public to access the proceedings and filings. Family assets long kept private are suddenly open to the public. Probate is also costly: on average, costs may range between 5 to 10% of the gross estate value. Expenses can include appraisal and attorney fees, federal and state estate taxes, and other unforeseen expenses. Lastly, the probate process is lengthy. In general, the larger and more complex the estate, the more time it takes for the courts to finalize distributions to beneficiaries. 

The good news is that it is possible to title assets in a way that will avoid probate. Below are some methods to consider: 

Assets held in trust – This method may be more complex, costly, and often requires the help of an attorney to draft a trust document. However, a properly executed trust is an effective way to avoid probate and public disclosures. 

Assets titled as Joint Tenancy with Right of Survivorship (JTWROS) – Generally, with assets held by JTWROS, ownership is transferred immediately to the surviving owner. Again, probate is avoided and privacy is protected. 

Assets titled as Tenancy by the Entirety (TBE) – TBE assets are restricted to husband and wife only and maintain a survivorship feature similar to JTWROS. This option also avoids probate and public disclosures. 

Qualified (and sometimes non-qualified) accounts with beneficiary designations – Qualified retirement accounts such as 401(k) plans as well as non-qualified, tax-advantaged accounts including Individual Retirement Accounts (IRAs) can avoid probate if beneficiaries are listed (unless the direct beneficiary is an estate). 

Life Insurance and Annuities – Benefits paid to beneficiaries (note: if the beneficiary is an estate, the filings will be public) avoid probate, and are private transactions. 

Assets passing by beneficiary – Bank accounts can use the Payable on Death (POD) designation while the owners of securities can title their accounts using the Transfer on Death (TOD). This option also avoids probate and public disclosures. 

Incorporating a Pour Over Provision within your will – This is a testamentary passage that is generally included within a will, working only in conjunction with a trust. The Pour Over Provision specifies that all property is to be distributed to a trust, which also will allow the property to avoid probate. 

If you have any questions or concerns, the Wealth Advisor team is here to help. Please reach out to our team if you would like to discuss how your individual situation applies.