If, in your lifetime, you don't make estate plans, your death could bring about a long process before distribution of your assets. It's called probate.
Probate is expensive and the longer it goes on, the less your beneficiaries will receive. So, by working with an attorney well-versed in drafting estate plans, you can avoid probate and all of the difficulties it could bring.
There are four ways to pass on your assets and avoid probate:
1. Revocable Living Trusts
Certainly, the living trust avoids probate and that’s why people do it. So, for example, a new grant deed will be recorded that transfers title from the married couple’s names to their trust and thereby avoid probate of the home. So if your assets are titled in the name of your trust and you become incapacitated or pass away, the assets immediately come under the control of your successor trustee named in the trust agreement. The court is not involved since the “owner” of the assets have not changed—the trust is still the owner—allowing the estate transactions to remain private. In addition, the new trustee can access accounts immediately, making trust administration typically shorter and less expensive than probate. However, the trustee is legally responsible for the management and distribution of trust assets, and the trust must have been properly funded to avoid probate proceedings.
2. Death Beneficiaries
Many types of assets, such as life insurance and retirement accounts, transfer to a designated beneficiary when you die. Since they aren't part of your estate upon your death, they are not an asset to be probated.
Other less-well-known types of assets not typically associated with death beneficiaries include:
- Payable-on-Death Accounts: This can be used for bank accounts and 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, designating the person you want to inherit the money in the account at your death. 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.
- 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. If you're single, you're free to choose whomever you want as the beneficiary. You can also name a secondary beneficiary, who will inherit the money if your first choice dies before you do or at the same time. If you're married, your spouse may have certain rights to some or all of the money. In California (a community property state), chances are your spouse owns half of what you have in a retirement account.
- Transfer-on-Death Registration of Securities: California adopted a law (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.
- Transfer-on-Death Registration for Vehicles: California offers car owners the sensible option of naming a beneficiary, right on the registration form, to inherit the vehicle. It's a simple, effective way for folks to pass on their vehicles and small boats.
- Transfer-on-Death Deeds for Real Property: In 2016, California allowed the use of transfer on death deeds for real property. But you should consult an attorney as there are certain caveats to consider.
Note that there are caveats associated with using beneficiary designations and we urge you to consult an estate planning attorney to discuss further. We always advise against passing on assets to beneficiaries outright and unprotected. Learn more here.
3. Joint Ownership of Property
- Joint Tenancy with Right of Survivorship: Property owned in joint tenancy (typically real property but is used in bank accounts as well) automatically passes, without probate, to the surviving owner(s) when one owner dies. It's easy to set-up but there are a number of caveats attached to its use. First, there is no step-up-in-basis upon the death of the first owner which will result in greater capital gains taxes upon the sale of the property. Second, the co-owner can sell or mortgage his or her share -- or lose it to creditors. And finally, a co-owner may not realize that they can't leave their share to someone else in their will or trust. Upon their death, it automatically goes to the surviving co-owner(s).
- Tenants-in-Common: Real property owned as tenants-in-common avoids some of the drawbacks associated with joint tenancy. There is a step-up-in-basis upon the death of the first co-owner hence minimizing the capital gains tax issue. And a co-owner can leave their share of the property to someone else in their trust (or will).
You can give gifts while you're alive, such as tuition money to your grandchildren. But be aware that this may require the advice of an estate planning attorney if gifting is associated with estate tax planning or Medi-Cal planning.
Note that there are simplified procedures for small estates. If the total value of all the assets you leave behind is $150,000 or less in California (as of 2019), the people who inherit your personal property -- that's anything except real estate -- may be able to skip probate entirely. If the estate qualifies, an inheritor can prepare an affidavit (available online) stating that he or she is entitled to certain property under a will or state law. When the person or institution holding the property -- for example, a bank where the deceased person had an account -- receives the affidavit and a copy of the death certificate, it releases the money or other property.