Ways to Avoid Probate
Payable-on-Death Bank Accounts
Payable-on-death bank accounts offer one of the easiest ways to keep money -- even large sums of it -- out of probate. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. If you need the money -- or just change your mind about leaving it to the beneficiary you named -- you can spend the money, name a different beneficiary, or close the account.
At your death, the beneficiary just goes to the bank, shows proof of the death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.
You can turn almost any account, whether it's yours alone or you own it jointly with your spouse or someone else, into a P.O.D. account. Most joint accounts come with what's called the " right of survivorship," meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So if you and your spouse have a joint account, when the first spouse dies, the funds in the account will become the property of the survivor -- without probate. If you add a P.O.D. designation, it will take effect only when the second spouse dies. Then, whatever is in the account will go to the P.O.D. beneficiary you named.
Retirement Accounts
Funds in retirement accounts such as IRAs and 401(k)s do not have to go through probate after your death. The beneficiary you've named can claim the money directly from the account custodian.
When you open an IRA or 401(k) account, the forms you fill out will ask you to name a beneficiary. You will probably also be given the opportunity to name an alternate (sometimes called " secondary") beneficiary, who will inherit the money if your first choice dies before you do or at the same time.
If you're single, you're free to choose whomever you want as the beneficiary.
If you're married, your spouse may have certain rights to some or all of the money:
- If you have a 401(k) account, your spouse is entitled to inherit the money unless he or she agrees, in writing, to your choice of someone else.
- If you live in a community property state, chances are your spouse owns half of what you have socked away in a retirement account. (Community property states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin; in Alaska, couples can sign an agreement making some or all of their property community property.) If any of the money you contributed was earned while you were married, that money remains " community property," and your spouse owns half.
Many Americans now have sizable amounts of money tied up in corporate and government securities instead of plain old bank accounts, savings bonds or certificates of deposit. And most of these people can now leave their securities to their loved ones without probate.
Almost every state has now adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. It works very much like a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what's called " beneficiary form." When the papers that show your ownership are issued, they will also show the name of your beneficiary.
After you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. You are free to sell it, give it away, or name a different beneficiary. But on your death, the beneficiary can claim the securities without probate, simply by providing proof of death and some identification to the broker or transfer agent. (A transfer agent is a business that is authorized by a corporation to transfer ownership of its stock from one person to another.)
Transfer-on-Death Registration for Vehicles
So far, only two states, California and Missouri, offer car owners the sensible option of naming a beneficiary, right on the registration form, to inherit the vehicle. The practice should spread; it's a simple, effective way for folks to pass on their cars, trucks and small boats.
All you do is apply for a certificate of car ownership in " beneficiary form." The fee is the same as for a standard certificate. The new certificate lists the name of the beneficiary (or more than one), who will automatically own the vehicle after your death. The beneficiary you name has no rights as long as you are alive. You are free to sell or give away the car, or name someone else as the beneficiary.
If you own the vehicle with someone else -- say, your spouse -- you can still designate a beneficiary. The beneficiary will inherit the vehicle only after both you and the other owner have died.
Joint Ownership
Several forms of joint ownership -- joint tenancy, for example -- allow you to avoid probate when the first owner dies.
Many couples conclude that holding title to their major assets in a form of joint ownership that avoids probate is all the estate planning they want to engage in, at least while they are younger. The most attractive features of this strategy are its simplicity and economy. To take title with someone else in a way that will avoid probate, you usually don't have to prepare any additional documents. All you do is state, on the paper that shows your ownership (a real estate deed, for example), how you want to hold title.
When one owner dies, it's easy for the survivor to transfer the property into his or her name alone, without probate. After that, however, the survivor will have to find another method to avoid probate on his or her death.
Joint Tenancy with Right of Survivorship
Property owned in joint tenancy automatically passes, without probate, to the surviving owner(s) when one owner dies. Joint tenancy often works well when couples (married or not) acquire real estate, vehicles, bank accounts, securities or other valuable property together. Setting up a joint tenancy is easy, and it doesn't cost a penny.
