Probate Avoidance 2

Second in a Series

In the first part of this series, we discussed the probate process and why some people think it's a good idea to avoid probate. If you fall into that category, you should know that there are a number of ways to avoid probate. Some ways, as in all things, are better than others.

Assets on which you name a beneficiary do not go through probate. For example, retirement plans, IRAs, annuities and life insurance which are owned by you, but which have a named beneficiary, do not have to go through probate. These assets pass to the surviving beneficiary by virtue of the contract which you enter into with the financial institution holding the asset. For assets such as these, it is important to be sure that a beneficiary is always named. For example, for a married couple, it is common to name the surviving spouse as the beneficiary on retirement funds and annuities. However, if your spouse predeceases you and you don't name a contingent or successor beneficiary, when you die, you have no beneficiary and that asset will then have to go through the probate process. Therefore, it is always important to name a contingent or successor beneficiary on these types of assets. The naming of a primary and contingent beneficiary is the proper method of avoiding probate on retirement plans, IRAs, annuities and life insurance policies.

For bank accounts, stocks and bonds, and other types of liquid assets, many people swear by owning these accounts "jointly with right of survivorship." Ownership in this manner does avoid probate, however it can have some unexpected adverse consequences for you. For example, if you have a bank account held jointly with rights of survivorship with your son, you both are owners on the account and have complete access to all of the money. Your son could take your money and close out the account. Additionally, if he has creditors pursuing his assets, they may also pursue your bank account because he is a joint owner on it. These types of problems can be avoided by avoiding joint ownership. Instead, you should own these assets individually, but name a beneficiary to take those assets upon your death. For bank accounts, this means titling a bank account in your individual name with a Payable Upon Death ("POD") designation to a named beneficiary. For stocks and other securities, it means titling the assets in your name individually with a Transfer Upon Death ("TOD") designation to a named beneficiary. This prevents your beneficiary from having any ownership rights in your assets until your death, at which point they inherit the asset outright. Keep in mind, however, that if your named beneficiary dies before you do, and you fail to name another beneficiary, your assets will have to go through probate because it will be in your name alone with no living beneficiary.

Finally, with regard to real estate, owning your real estate jointly with rights of survivorship with another individual carries with it all of the problems of joint ownership that I have listed above and, in addition, some new problems! For example, consider the case of a widow who, in order to avoid probate on her assets, titles all of her bank accounts and her real estate jointly with rights of survivorship with her married daughter. If mom decides at any time to sell the real estate prior to her death, both mom and the daughter must sign off on the deed because both are named as joint owners of the property. However, not only must the daughter sign off on her rights to the property, but her husband must also sign the deed in order to release his statutory "dower" rights to the real estate. If he refuses to sign, mom can't sell the property. Therefore, ownership of real estate joint with right of survivorship (except for between husband and wife) may not be a good idea. Instead, titling the real estate in your name individually with a TOD designation to a named beneficiary is better.

Aside from joint ownership, POD and TOD, is there any other better way to own your property in order to avoid probate? In the next article in this series of three, we will address these issues and address methods of probate avoidance that you may wish to consider.