You hear a lot about avoiding probate, and since it is such a common topic in estate planning circles we sometimes overlook the fact that the layman may not know what probate is or why you would want to avoid. To put it very succinctly, probate is the legal process that your estate must pass through before it can be distributed to your heirs. The probate or surrogate court examines the will, determines its validity, and supervises its administration.
The reasons why people try to avoid it is because it is costly; the various fees involved can eat up perhaps 2%-7% of your estate’s value. It is also time consuming, taking several months and even years to run its course in some cases. Most people don’t want to make their heirs wait that long to receive their inheritances, and they don’t want to see their estates lose any value through payment of fees. Below are three common estate planning tools that are used to avoid probate.
Revocable Living Trusts
With a revocable living trust you place assets that you want to pass on to your heirs in the trust and name them as the beneficiaries. While you are alive you have total access to these assets, and since it is revocable you can change the beneficiaries or even dissolve the trust if you want to. When you pass away, the assets are distributed to your heirs in accordance with the trust agreement and the transfers are not subject to probate.
Pay On Death Accounts
Pay on death accounts are bank or brokerage accounts. When you open the account, you name a beneficiary. During your life these funds or securities are totally under your control, but after you pass away ownership of the account is assumed by your beneficiary free of the probate process.
Life Insurance Policies
Life insurance a simple, straightforward way to get funds into the hands of your heirs directly without the transfer having to make its way through the time consuming and costly process of probate.