When you pass away without a proper pre-prepared strategy to transfer assets, these can go through a complex legal process known as probate.
Here’s how that works.
An executor files a petition with the probate court to open a probate case. That person also alerts beneficiaries and creditors of the case. The executor compiles a list of all assets, such as real estate and financials. They then use those assets to pay off any outstanding debts and taxes before remaining assets are passed on to beneficiaries based on the state’s intestacy law. And, in this case, the assets may not go to the beneficiaries as the deceased would have intended. It can also be a long and costly process for loved ones.
But there are ways you can avoid this altogether by taking certain steps in your lifetime.
Create a Living Trust
By establishing a living trust, you transfer legal ownership of your assets to the trust. This means your assets technically leave your estate and thereby avoid probate. Under the terms of the trust, you decide to whom your assets should be transferred and how they should be handled. Perhaps you want your child to receive assets at a certain age or under certain conditions.You can designate yourself as the trustee in order to remain in control of your assets in your lifetime. And you name your successor trustee to distribute assets based on your wishes upon your death.
To establish a living trust, you should consult an estate-planning attorney familiar with the matter. This is because the necessary paperwork and process can vary by state.
- real estate
- vehicles
- jewelry
- bank accounts
- savings accounts
- certificates of deposit (CD)
- brokerage accounts
- retirement accounts (if the trust is named beneficiary)
Designate POD and TOD Accounts
You can designate certain accounts, such as checking accounts and savings accounts, as payable-upon-death (POD) accounts. And it works as it sounds. Upon your death, these assets are transferred to the named beneficiary and thereby avoid probate.Transfer-on-death (TOD) accounts are similar to POD accounts. But they are meant for investment accounts like brokerage accounts and other securities.
To establish a POD or TOD, you simply contact the financial institution and fill out a form. This form may require the beneficiary’s Social Security number. And it would require you and the beneficiary to sign and submit it. You can also choose a contingent beneficiary as a backup.
Set Up Beneficiaries for Important Accounts
In the case of many retirement plans like 401(k)s, you’re asked to designate a beneficiary upon account opening.But it’s important to keep beneficiaries up to date. There have been cases where a person lists their spouse as a beneficiary, and they end up divorcing without updating the beneficiary designation.
Create Joint Ownership
You can set up joint ownership of assets such as real estate. Upon one owner’s death, the property passes on to the surviving owner without the need for probate.Gift in Your Lifetime
You can give generously during your lifetime to reduce your estate. This not only bypasses probate, but it also may help you avoid the estate tax.But be aware of gift tax laws.
The annual gift tax exclusion is $19,000 per recipient in 2025 and 2026. But if you exceed those levels, it doesn’t necessarily mean you owe a gift tax. It means you’d need to fill out an IRS Form 709. The amount that exceeds the gift tax exclusion is then subtracted from the much larger lifetime gift tax exemption.
