Most of the time – but not always – people don’t enjoy going to the county courthouse, especially when a court is making decisions about their property (or a crime, that will definitely ruin your day). Unfortunately, when a loved one passes away, many times you will need the county judge – or some other judge – to get things squared away (aka “probate,” “estate administration,” etc.). The complexity and cost of probates vary from state to state, ranging from simple and relatively cheap to expensive and convoluted, especially if the decedent (the person who passed away) had no will or other estate plan in place.
However, with proper planning, you can potentially help your loved ones avoid the need for a courthouse visit when your life adventure ends. Many assets can pass outside of the probate process if the decedent planned ahead. The key is that most of these assets allow the owner to list beneficiaries who receive the asset under property, contract or banking laws, not probate laws – generally.
So, let’s briefly discuss a few examples of those “nonprobate transfers.”
1. Pay-on-death (POD) bank accounts
If your state permits POD accounts, you can move your funds into this type of account and complete the beneficiary designation form. Essentially, you are preselecting the person(s) that will receive the bank account balance upon your passing. These people generally do not own the funds or have any legal right to access or use the funds until you have passed away.
2. Joint accounts with ‘rights of survivorship’
Most people are aware of joint bank accounts. However, a joint account with “rights of survivorship” is different. It is a joint account because all the account holders listed jointly own the funds in the account and have the right to access and use the funds. However, the right of survivorship grants the last surviving joint owner rights to the entire balance. So, at the risk of sounding crass, it’s survival of the fittest with the last person living getting the funds.
3. Life insurance policies
If the policyholder filled out the designated beneficiary forms, the proceeds due under a life insurance policy will be paid to the beneficiary listed, without the need for probate. There are exceptions to this, including if the beneficiary is a minor and there is no other legal alternative to provide payment to a minor in your state – such as a prior guardianship, a Uniform Transfer to Minors Act (UTMA) account or a trust. In that case, probate, guardianship or some other legal proceeding may be necessary in order to provide the funds to that minor.
4. Real property
There are numerous ways to pass title to real property (which essentially means land), and we couldn’t possibly cover them all in this article. So, in the words of my ag teacher, “If you can’t make it good, make it short.” Real property passed by special deeds, such as life estate deeds, lady bird deeds and transfer on death deeds (with some legal exceptions for “clawbacks” to pay creditors, etc.), does not require probate to transfer title to the persons listed in those deeds. In fact, some deeds will have already transferred a portion of the title ownership to the receiving person or entity before you have passed – such as a life estate deed or a lady bird deed.
Other than those established by your will (aka testamentary trusts), trusts are also, generally, nonprobate assets, but they come with their own complicated pro/con considerations. That is a topic for another day.
The pros of nonprobate transfers:
- Avoid probate
- Expedite proceedings after your passing
- Offer some creditor protection (varies by state and does not apply in all instances)
The cons of nonprobate transfers:
- It takes a little work. You need a reliable accounting and inventory of your assets. Once you know what pieces are on the board, you can then devise a game plan to prepare for – or avoid – probate.
- It takes upkeep. You need to keep your beneficiaries current, which may require fairly frequent updates as heirs grow older, have their own children, etc.
As always, planning pays off.
This information is made for educational purposes only and is not intended to be legal advice for any particular reader. Reading this article does not create an attorney-client relationship. Readers are encouraged to consult a licensed attorney for their legal needs. The information is primarily based upon the laws of the U.S. and the state of Texas. Laws generally vary by state.