When you die, any assets you wish to transfer via your will must pass through probate. However, probate proceedings can be long and expensive and have a number of other disadvantages. In this guide, we will briefly overview the probate proceedings, and discuss ways to mitigate them by passing assets to your intended beneficiaries outside of this process.
It must be pointed out from the outset that one does not simply avoid probate. Whenever someone dies, regardless of whether they left a will or died intestate, their estate must undergo probate before any of their assets can be distributed to their beneficiaries or heirs. In brief, this is how the process works.
At the outset, it is critical to note that one does not simply avoid probate. Rather, specific assets can either become part of your probate estate (referred to as “probate assets”) or pass outside of it your death (referred to as “non-probate assets”). Simply put, probate assets are those owned solely by the decedent at the time of their passing which have no designated beneficiary. The following are the main advantages to passing assets outside of probate:
More privacy. Probate requires the submission of various documents and information to the court, providing a detailed account of the decedent’s assets, debts, and beneficiaries. This information then becomes part of the public record, which can lead to disputes among beneficiaries and additional exposure to the claims of potential creditors.
Less court involvement. Because assets that become part of your probate estate fall under the purview of the probate court, any disputes regarding the disposition and distribution of those assets will be settled by the probate court. In doing so, the probate court will apply state laws, which can often result in the assets ultimately being transferred to beneficiaries you did not intend for them to receive.
Quicker and smoother transfer of assets to your beneficiaries. Probate proceedings can take from several months to well over a year, during which time the assets you want distributed to your beneficiaries will be unavailable to them. By contrast, non-probate assets can transfer to your beneficiaries immediately after death.
Cost savings. The longer the probate proceedings drag out, the more probate court costs and fees to executors, attorneys, accountants, etc., will accumulate. These costs will generally be taken out of your probate estate, leaving less assets to pass on to your beneficiaries.
Tax savings. One of the often-cited benefits of passing assets outside of probate is that they avoid taxes imposed on probate estates. However, it is essential to note that federal estate tax exemption thresholds are very high ($12,920,000 for individuals in 2023), and there are no federal inheritance taxes. Furthermore, as of this writing, less than a third of US states impose estate taxes, and less than a half dozen states impose inheritance taxes. Conversely, tax exemption thresholds for gifts you transfer while alive are far lower. So unless you are passing on a very sizable estate, as far as taxes are concerned, there are more advantages than disadvantages to passing assets through probate.
Before we conclude, it must be emphasized that not all of these probate avoidance vehicles/strategies benefit from all the probate-avoidance advantages discussed previously. For example, while POD and TOD accounts benefit from not having to go through probate and can therefore pass directly to the named beneficiaries, they are still subject to federal and state taxes that would apply to probate assets. Furthermore, while this particular guide addresses the disadvantages of probate and ways to avoid it, there are numerous situations in which its disadvantages far outweigh its advantages.
As you can see, the particular strategies to use in drafting your will and planning your estate is a very complex topic, and will depend on a wide variety of factors, such as the laws of your state, the types of assets and accounts you want to leave your loved ones or your favorite charities, and many more. Through AAL’s directory, you can find many skilled attorneys with extensive experience in practicing Trusts & Estates law who can be invaluable in helping you craft an estate plan best suited to your particular circumstances and desires.