Simple Methods of Avoiding Probate

Dean hanewinckel

If you wish to avoid probate, your estate planning must consist of something more than a Will.  The following is a list of tools you can use to leave certain assets to your heirs without probate.

Transfer on Death.  Transfer on Death (also commonly referred to as “TOD”) is a form of securities registration that allows you to name one or more beneficiaries to whom your securities account would pass at your death.  The brokerage firm or other entity that accepts the Transfer on Death registration agrees to deliver the securities according to your direction.  Any assets passing to a beneficiary as a result of a TOD registration are outside of the probate estate and thus avoid probate.

Advantages of Transfer on Death.  TOD registration allows you to maintain complete control of assets during your life and provide for the distribution, outside of probate, to the persons of your choice after your death.  The beneficiaries have no ownership interest in the securities during your lifetime.  In fact, you can change the TOD designation at any time prior to your death.

Disadvantages of Transfer on Death.  TOD only covers assets registered or held in the TOD account.  Assets owned outside of TOD accounts must be dealt with in another manner.  TOD only takes affect at your death.  As with a Will, TOD will not help you if you become incapacitated.  Also, the entire account is distributed outright upon your death.  If you have minor children or beneficiaries who, for one reason or another, cannot manage money, and you want to have the money managed for their benefit, you should not use a TOD.

“In Trust For”   “In Trust For” designations at banks and other financial institutions are similar to TOD accounts in that you can name a person or persons to receive the funds in your account after your death and avoid probate.  This designation is generally used for checking account, savings accounts and certificates of deposit.  The “In Trust For” designation has the same advantages and disadvantages as Transfer on Death.

Joint Ownership.  It is very common in Florida for a surviving spouse to add the name of a child to a deed or to an account or other asset in order to avoid probate.  If the ownership is created properly and provides that the property is owned as “joint tenants with right of survivorship,” then the asset will pass to the survivor upon the first to die.  Although this method avoids probate, it may cause more problems than it solves.

Disadvantages of Joint Ownership

Tax Issues. The addition of your child’s name on the asset is a transfer of at least half of the property by gift.  It may be subject to gift tax if it is large enough.  Also the gift does not provide a “stepped-up basis” to your child for tax purposes.  If your child would have received the ownership of the asset as a result of your death, then his or her “basis” in the property would be the value of the property at your death.  The basis is “stepped-up” from your basis in the property (the value at the time you acquired it plus any capital improvements you made to the asset).  However, because your child received the property as a result of a gift, he or she will also acquire your basis in the property.  If the property has increased in value during your ownership, this will mean that your child will realize a greater capital gain as a result of the gift and increased capital gains taxes.

As an example, Mr. Smith purchased a rental property in 1980 for $60,000.  In 2003, Mr. Smith wants to add his daughter to the title to avoid probate.  The day after adding his daughter, Mr. Smith dies.  The property is worth $200,000.  Mr. Smith’s daughter receives the property without probate and immediately sells it for $200,000.  Since she received the property as a gift, her basis is the same as her father’s, $60,000.  Therefore her capital gain is $140,000 which, at a 15% capital gains tax rate, incurs $21,000 in taxes.  If Mr. Smith would have transferred the property to a revocable Trust and named his daughter as the beneficiary of the rental property, she would have received the property without probate, her basis would have been the value at the time of her father’s death, $200,000.  She would have no capital gain and no taxes as a result of the sale.

Liability. By putting your daughter’s name on the asset, you have added her liabilities to the property.  If your daughter is in an automobile accident, is sued as a result and has a judgment entered against her, that judgment can become a lien against your property.  Her creditors may be able to attach the jointly held property as a means of satisfying her debt.  This also applies to bank and investment accounts.

Loss of Control. Also, if your daughter is joint tenant on a parcel of real estate, you cannot sell the property or even put a mortgage on it without her approval and joinder on the deed or mortgage.  Even worse, if the jointly held asset is a bank account or investment account, she may be able to sell, liquidate or transfer the asset without your approval or even without your knowledge.  You’re saying, “I trust my daughter.  I know she would completely cooperate with my wishes and wouldn’t do anything that was not in my best interest.”  While this may be true, consider what would happen if your daughter gets a divorce or becomes incapacitated.  Would her ex-husband claim any interest in your property?  Who would be appointed as her guardian or have authority to act in her behalf if she was unable?

Loss of Homestead. If the property you are adding your daughter’s name to is homestead, the change in title may cause you to lose at least a part of your homestead exemption, and would cause your property to be revalued for property tax purposes and cause you to lose the advantage of the “Save Our Homes” Amendment.  Depending on how long you have owned your home, it could cause your property taxes to double and possibly even triple.

These disadvantages only apply if you are adding someone other than your spouse to your title.  Property owned by husband and wife (or as tenants by the entireties) would be treated completely different than the examples described above.  Property owned as tenants by the entirety cannot be attached by creditors of only one spouse.  The creditor must have a claim or judgment against both spouses.  Adding a spouse to homestead property will not cause a loss in the homestead exemption nor will it affect the value under the “Save Our Homes” Amendment.

No Survivor. Finally, if both joint tenants die in a common accident, there is no survivor to maintain title to the property.  The property will, in that case, go through probate.

Annuities, IRAs and Life Insurance.  Annuities, Individual Retirement Accounts, life insurance policies, pension plans and other retirement plans provide that the owner may name beneficiaries who would receive the proceeds of the asset upon the death of the owner.  The transfers to the beneficiaries would be paid by contract and avoid probate.  Most of these assets will also allow you to name a contingent beneficiary if the primary beneficiary named does not survive you.  If none of the beneficiaries that you name survive you, then the proceeds will be paid to your probate estate.

Enhanced Life Estate Deeds.  Transfer on death provisions and beneficiary designations are not available for real estate.  However, in Florida, you can create an Enhanced Life Estate Deed which has the effect of adding a beneficiary to your real property.  Also known as a "Lady Bird Deed," Enhanced Life Estate Deeds allow you to transfer your property to your children (or anyone else) and retain a life estate.  This means that you have full ownership rights in the property during your life and, upon your death, it passes free of probate to the remainder-person -- the person or persons you name in the deed.  The "Enhanced" feature allows you to sell or mortgage the property during your lifetime without the consent of the remainder-person and to keep all proceeds of the sale without having to share with or account to the remainder-person.