The short answer is that unless you create a Revocable Living Trust, you cannot avoid probate for property held in a sole name, but you can minimize the number of assets that have to go through the probate process to get distributed to your beneficiaries.
Many people want to avoid putting their beneficiaries through the probate process. They don’t like the fact that the filings in probate are publicly available or that it takes 8-12 months to close a probate. Or, that legal fees in a probate proceeding can be expensive. Additionally, they don’t want to leave their loved ones with turmoil when they die. They seek to make it simple. But, they don’t want to spend the money to create a Revocable Living Trust.
What can be done to minimize the number of assets that have to go through the probate process?
Since probate applies only to property held in your sole name when you die, you can transfer title of the property to someone else during your lifetime. Or, if you want to continue to maintain some control over your property, you can transfer title to yourself and someone else. If you re-title the asset with someone else so that each of you are holding the asset jointly with “right of survivorship”, when one of you dies, the other will inherit ownership of all the asset and there will be no probate.
Keep in mind that if your property is the subject of a mortgage, the mortgage company may restrict your rights to transfer your ownership.
Most commonly, a husband and wife will hold an asset, like their primary residence, in joint name with right of survivorship (also termed “tenants by the entirety”). This means that when one spouse dies, the other takes ownership of the entire property and there is no probate of the asset since it was held in joint name. Of course, when the survivor dies, there is probate of the asset.
The key issue is how you re-title the assets. If you hold an asset like real property as “tenants in common” with another person and not as joint tenants, that means that you and the other person each hold a one-half ownership interest in the property. When you die, the other person still holds only a one-half interest in the property and your one-half interest will have to go through the probate process to get to your loved ones. For example, when children inherit property and there is no Will to advise how the property should be titled, they will inherit the property as tenants in common, meaning each of them will have an equal ownership share of the property.
Suppose you own a house and your spouse is deceased, meaning you own 100% of the property in your sole name. You have one child and want to add that child to your title to the property. Can you add another person, like a child, to your title to the property? Yes, that can be done with a deed. But, there are consequences you must think about before you re-title any property.
The first issue is a tax issue. When you buy a house, your cost is your tax “basis” in the house. Suppose you bought a house with your husband forty years ago for a price of $20,000 and the house is paid off. Today that house is worth $200,000. If your husband is deceased, you own the house and add a child to your title, that child receives the property at your tax basis or $20,000. When you die, if the child wants to sell the property, the child is going to have to pay tax on $180,000, being the difference between your tax basis of $20,000 and the market value of the property, $200,000.
That tax can be avoided by passing the property to your child through your Will or Trust. A Will or Trust provides a “step up” in basis so the child or beneficiary takes the property at the market value. If the child then decides to sell the property, there is no tax since the child inherits the property at a value of $200,000 and sells it for the same amount. Of course, that means you will transfer the property at your death through probate to obtain the step up in basis.
The other issue to be faced with putting a child on your title is whether the child has or will have creditors. Once you place property in the name of the child, their creditors become your creditors.
One option to avoid probate is to use what is called “payable on death.” Every bank will have a “payable on death” form you can fill out indicating who will take the money in your accounts when you die. By filling out this form and designating a beneficiary to take your accounts, the accounts are not held in sole name and there is no probate on those accounts. The “payable on death” or “Transfer on death” forms can be used for investment accounts as well as bank accounts.
The best approach to probate is to focus on organizing your assets so that your loved ones will not have to search through years of paperwork to try to find out what you own, where your accounts are, what insurance policies you have, etc. To make it simple for your loved ones, you have to do the work upfront. Believe me, your loved ones will love you even more if you leave them with very little to do in a probate proceeding.
As you may know, my colleague, Carl Buchheister, has retired. I am pleased to report that Andrea B. Baddour has become a named partner in the law firm, now titled STRIEGEL & BADDOUR. Andrea has worked with me for several years and I am so proud to have her as my partner. Her practice is focused on wills, trusts and estates, probate administration and litigation. Stop by our new office at 8906 Bay Avenue in North Beach for a tour.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over 30 years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.