estate planning

by Michael Goodman

My favorite class while getting my degree in Financial Planning was the class on Estate Planning. You can really get lost in all the different types of trusts, and I strongly recommend having a legal specialist prepare any trust you need. But there is one rule that should be followed with or without an attorney.

The first rule of estate planning is to AVOID PROBATE!

Probate

Probate is:

1. Expensive

2. The records are public (so anyone can see the details)

3. Assets may be sold for less than full market value

4. Property may not end up where you wanted it to go because a third-party (the judge) will make the final decision.

Avoiding Probate

Avoiding probate is fairly easy with a little planning.

There are basically 3 types of property that are exempt from probate:

1. Funds in a POD (Payable On Death) or TOD (Transfer On Death) financial account that allows the naming of a beneficiary. Examples of this are bank accounts, investment accounts, and life insurance.

2. Real Estate owned with a transfer-on-death deed. The precise deed can vary by state. In California, examples of this are property owned as “community property” or “joint-tenancy with right of survivorship.” In other states, it might be “tenancy by the entirety” with a spouse.

Depending on the state, other personal property (like cars or boats) MAY be excluded from probate; as may other community property. Check with the state in which you live to be sure.

3. Property transferred to a trust, like a Living Trust.

The Bottom Line for Estate Planning

Property that is not protected or excluded from probate must go through the process and any financial assets may not be available until probate has been completed. However, if you do this right, very little property will have to go through probate and many states now have a simplified process for small estates (this varies by state).

An Example

Now that you know this, here is one example to consider: (from an article on Nolo.com)

“An estate consists of a $400,000 house that’s jointly owned, a $200,000 bank account for which a payable-on-death beneficiary has been named, a $100,000 IRA with beneficiary named, and a solely owned car worth $10,000. The estate has a value of more than $700,000.”

Question: How much of the estate must go through probate?

Answer: You are correct if you said the only probate asset is the car—and its value ($10,000) qualifies it for the small estate procedure in almost every state.

Congratulations! You just passed the simplified class on Estate Planning 101!