How To Avoid Probate Fees
Probate fees are an inescapable part of dealing with death. Investopedia tells us that probate is a term referring to examining a will to determine if it’s legal and valid . Part of this process also involves reviewing the Last Will and Testament and determining who the inheritors are and what they’re entitled to get. Probates can be complicated matters and will take some time. Depending on your state, the fees associated with probate may vary.
However, no one plans their estate solely around avoiding probate. Probate fees and the time taken for processing can leave a mess and introduce bad blood between your family as they wait for the final settlement. If that settlement is too little because of the amount paid to process the probate, then maybe planning your estate around lowering probate fees may be worth it. If you’re looking at avoiding probate, here are some practical tips that you can employ.
Payable-on-Death (POD) Accounts
Your money will transfer into probate as soon as you die. To avoid having your family go through a time of uncertainty regarding money, you can put some (or all) of your funds into a payable on death registration or account. They’re relatively simple to set up. The beneficiary can claim the money without waiting for an extended period or spending more money to process the funds through probate. Naming a beneficiary as an individual is an option for these types of accounts, but your provider should allow you to do so. It may take slightly more paperwork than setting up the account initially did.
Most financial institutions make setting up POD accounts easy. Both banks and credit unions allow you cost-free transfer of POD accounts to a beneficiary. All it requires is filling out the relevant forms. Once you inform the bank of the beneficiary, the institution will forward a form to you called a Totten trust. Filling out this form allows the bank to move forward in converting the account into a POD account.
POD accounts offer a certain level of built-in security. The beneficiary doesn’t have any access to the assets in the account if the owner is still alive. Once the owner dies, the beneficiary takes over the account as its owner, without a need for probate. It’s interesting to note that no bank or financial institution puts a minimum limit of the amount of money that must be available in the account when the owner dies. For the beneficiary to gain control of the account, he or she must present proof of identification to the financial institution. Proof of ID can be through any government-issued identification such as a driving permit of a passport.
Transfer Property to a Trust
Trusts were explicitly designed to ensure that individuals could avoid going through the process of probate. Properties within a trust aren’t subject to probate, and as such, those listed as beneficiaries can immediately access those assets. Creating these trusts starts with drafting the document and transferring the property titles you want to be included in the settlement to the trust. Trusts also have a built-in function for naming beneficiaries, without the need for extra paperwork. Additionally, you aren’t limited to a single beneficiary and are more difficult to attack in court.
Trusts come in several different varieties. Revocable trusts are fluid mechanisms. You can transfer assets and properties to the revocable trust and name anyone as a beneficiary. Unfortunately, you are still responsible for paying tax on the assets and whatever income they generate, although they offer you the flexibility of redesignating a beneficiary if you please. In an irrevocable trust, the owner transfers assets and property to a trustee, but they don’t pay taxes on those assets or the income they generate. Owners are also required to relinquish certain rights on the assets and can’t rename beneficiaries after they’ve been assigned. The trustee becomes the legal holder of those assets and is responsible for all taxes associated with them.
Payable-on-Death (POD) trusts are also a viable way of securing assets and avoiding probate. They function similarly to POD accounts, in that the beneficiary can only gain access to the assets and property after they have presented ID. POD trusts are also known as testamentary trusts since they trigger after the owner has died.
The IRS states that you can give each of your heirs a payment of up to $15,000 per year without worrying about paying an additional gift tax. If you decide to do this before you die and gradually distribute funds, the total cost of your probate fees will be less. The reduced fees come from the fact that your probate costs are based on the full value of the assets being probated. Thus, less money means a lower overall price for the process.
If your estate is worth quite a lot, you may consider gifting throughout your lifetime. The exemption, up to 2020 for an estate stands at $11.58 million. However, while you’re alive, you can transfer up to twice that amount, tax free, to your spouse. The unfortunate circumstance is that if your estate is worth even a cent more than the exemption amount, the state is entitled to a hefty 40% tax on it. What’s more, if you’re transferring to grandchildren, an additional 40% tax known as generation-skipping transfer (GST) tax may apply. Tax free gifts should be embraced and used as much as possible to avoid getting hit with these sxorbitant fees.
Not Paying More than Necessary
Wills are still useful tools, and they shouldn’t be overlooked. Yet these tips can give your family some comfort and less worry when dealing with the distribution of your estate. While some of them aren’t much use if you were to die suddenly, these tools can be instrumental in estate planning over the long term. In all that you do, always consider how it will affect those who care about you. Life is, after all, more than just the things you own. It’s how you impact those around you.