Updated May 2, 2019
If you read my last article, you were able to use my chart to calculate how much of your money your family will be giving away in probate court just to collect the things you leave behind. Probate means less money for your family and more money for probate attorneys and probate courts.
So the goal is the avoid probate if you live in California.
Today, I’ll show you three different things you can do today to help your family inherit your things without going to probate court, saving them a lot of time, money, and stress.
1. Set Up A Revocable Living Trust
Let me start with the most effective tool to avoid probate, and that is by creating a revocable living trust to dictate who gets what when you pass away. With a trust, your family will be able to access your bank account, real estate, and other valuables with no delay. In contrast, it could take one or two years for your family to inherit your assets if they're stuck in probate court.
Putting all your assets into your trust ensures your family will enjoy the things you left them without having to go through the exhausting process of probate administration. And how your family can use your money will be up to you. In your trust, you can appoint someone you trust to manage your assets and give him or her instructions on how your assets should be used by your family.
For example, you can appoint your reliable brother to manage and grow your stock portfolio. And you can say that your children can use your money only for their education and living expenses. This prevents them from spending all your hard earned money during a two-night spree in Vegas, or being taken advantage of by a swindler.
Keep in mind that a trust is only effective if it’s done right. There are strict formalities that your trust must satisfy to escape the doors of probate and the thorns of estate taxes. Stay away from pre-made forms that you can download or buy online. Just like you shouldn’t use WebMD.com to diagnose and cure a serious disease by yourself, you shouldn’t plan your legacy and your family’s future without an experienced professional.
2. Make Gifts During Your Lifetime
Another method you can use to avoid probate is by gifting your things away while you’re still alive and well. Your assets will go through probate only if you own them in your personal name. That’s why the things you put in your trust, such as your bank account and home, are safely kept out of probate because everything is titled under the name of your trust.
Let me show you how gifting can work. Say you want to leave your home to your daughter. You can transfer title to her tomorrow and she won’t have to go to probate court to get access and ownership of your home in the future.
Gifting, however, is risky. In the example above, your daughter will have the absolute power to kick you out of your home and sell it. After all, she is now the sole owner of the property. Also, if she were sued in a car accident and lost, the plaintiff can force your daughter to sell the home to pay the judgment.
You also need to consider gift taxes and make sure that you accurately and timely report gifts of significant value in your tax return. Talk to your accountant first before making a significant gift to your children or a friend.
But when done correctly, gifting is an option to avoid probate and to give your assets away as you wish. As a bonus, it also helps reduce the amount of money that California can take from your estate if you received Medi-Cal benefits (that’s a big topic for another day).
3. Set Up A Transfer-On-Death Designation on Your Accounts
You can name one or more people to one day take over your bank accounts after you're gone. You simply fill out a form at your bank naming one or more people as your "transfer-on-death beneficiaries." The same goes with your retirement accounts (contact your financial advisor or brokerage firm for specific instructions).
When you set up a transfer-on-death account, your beneficiaries can have access to your money immediately after you’ve left this world. They just need to bring a certified copy of your death certificate and a valid I.D. The bank will then transfer the money to your beneficiary.
As a caveat, make sure that the beneficiaries in your accounts are up-to-date. If no beneficiary outlives you, then the account will be part of your probate estate. Also, you wouldn’t want to leave your bank account to your ex-husband, right?
Which Method Is Best To Avoid Probate?
You never know what can happen to you and your family tomorrow. But you do know that planning ahead can help ease the burden on your family. So do your homework, consult with a professional or two, and put together a proper plan today to help your family avoid probate.
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