Basic Steps to Avoiding Probate - John R. Dundon II, Enrolled Agent
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Basic Steps to Avoiding Probate

Basic Steps to Avoiding Probate

As many of you know that follow this blog my father recently passed away and I’ve been called upon to settle his financial affairs. My biggest fear is probate and after studying the tax code I have grown to be of the opinion that it is best to be avoided when possible. This short post on the basics of how to avoid probate was meant to help codify my thoughts. Hopefully you find it helpful.

Probate is essentially the legal process of transferring assets you own at your death to your heirs. It can last up to two years in some states, and involve court costs, attorneys’ and executors’ fees often fixed as a percentage of the assets probated (attorneys can be vultures), as well as unwanted publicity (mainstream media is evil).

From what I have experienced with other files probate cases can get ugly and tend to bring out the worst in people. Fortunately probate can be minimized if not avoided entirely by titling assets with beneficiary designations or sheltering assets outside your name entirely with the following arrangements.

  • Joint tenancy is an arrangement between two people (usually spouses, but sometimes a parent and child) that automatically passes title at the first death to the survivor. Joint tenancy is easy and inexpensive to establish. But it subjects each owner to the other’s personal liability. And it dissolves at the first death, leaving the asset subject to probate at the second.
  • Qualified plans, IRAs, life insurance, and annuities pass automatically to your designated beneficiaries. These bypass probate unless you designate your estate as your beneficiary.
  • State transfer-on-death (“TOD”) laws may let you pass real estate and financial accounts to designated beneficiaries.

Simple beneficiary designations are not necessarily enough particularly for children who are not ready to manage their inheritance or assets such as closely-held businesses, investment real estate, and family limited partnership interests. In those cases, the revocable living trust is usually the estate-planning vehicle of choice. Here’s how it typically works:

  • First, you’ll establish the trust. This involves designating a trustee to manage trust assets and beneficiaries who enjoy the benefit of the property. Typically, you’ll designate yourself as both trustee and beneficiary during your lifetime. You’ll also designate a successor trustee or trustees to take over at your death or disability.
  • Next, transfer assets from yourself to the trustee. You’ll enjoy the same freedom and flexibility to manage trust assets as if you owned them personally. The trust is ignored for tax purposes, and you’ll report trust income on your personal return.
  • At your death, your designated successor steps into your shoes to manage trust assets. Your successor can terminate the trust and distribute the assets (such as with adult children) or continue to manage them (such as for minor children).
  • The trust bypasses the delays, expense, and publicity of probate because trust assets are no longer titled in your name.

An Enrolled Agent can incorporate tax-planning provisions to take advantage of unified credit and generation-skipping tax exemptions by making the trust one tool in an over all estate plan. An estate plan will generally include these additional documents:

  • The “Living Will” directs physicians to discontinue life-sustaining treatment should you fall into an irreversible coma.
  • The “Durable Power of Attorney for Health Care” designates someone to make medical decisions on your behalf should you become unable to make those decisions yourself.
  • The “Durable Power of Attorney for Finances“ designates someone to manage non-trust assets such as retirement and annuity accounts should you become unable to manage them yourself.

You can designate a living trust as beneficiary of your IRA without forcing the trustee to distribute assets and trigger taxes. To qualify, you’ll need to meet five tests:

  • The trust is valid under state law.
  • It becomes irrevocable at your death.
  • It has only people as beneficiaries — not corporations, estates, other trusts, or charities.
  • The individual beneficiaries are specifically identifiable from the trust document.
  • You give the IRA sponsor a copy of the document before your required beginning date for distributions.

If a probate estate is necessary one responsibility of an estate administrator is to contact creditors that may have a claim against a decedent’s estate. The Internal Revenue Service understands that filing a proof of claim is time sensitive and that probate proceedings are administered in many different courts each with its own deadline. To obtain a proof of claim (aka creditor’s claim) from the IRS contact the Collection Advisory group for the area that includes the decedent’s last address. IRS Publication 4235, Collection Advisory Group Numbers and Addresses (PDF) has the information you will need. If you make contact by phone, ask to speak to the Decedent Adviser. If you write, address your correspondence to IRS Advisory Group, Attn: Decedent Advisrr, at the appropriate address.



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