Are you concerned about what will happen to your assets after you pass away? Obviously, you can't take them with you, so you want to ensure they get to the people you want them to! What are ways you can avoid probate? Will you still have to pay taxes? We'll cover these questions and more, so read on!
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You might be wondering why a realtor is discussing probate. I get a lot of calls from people who have had relatives pass away and want to sell their property. This video will talk about why you want to address transfer of property BEFORE you pass so your relatives don't have to figure it out. Please contact a lawyer with specific questions about living trusts and beneficiary deeds and your financial planner about giving away.
What is probate? Let me give you a definition so we are all on the same page:
A public court process used to review assets and liabilities of an estate. A judge will distribute the remainder according to the will or law if there is no will.
Sounds like something I would want to avoid: a judge using the law to decide how my assets are divided!
There are a few reasons to want to avoid probate:
- Time: the process is slow and can take months or years depending on how many assets and court availability, this goes into the next concern also because time is money
- Cost: the estate will be paying attorneys, courts, an executor--that adds up quickly and I am a penny pincher
- Public: all parts of a court process are on record for the public to review. I'd rather not everyone know my assets, nor what the inheritors are receiving!
So what ways are avoiding probate possible:
- You may have a small estate. In Arkansas if your total assets are under $100,000, then you can avoid probate. There is still a court process, but it's much quicker and less money. To get to $100,000 you make have to use the next idea.
- Give away your assets before you die. This may decrease estate taxes, but you are giving up control of your assets, so you have to be ok with that too. You can give up to $15,000 to an individual without tax implications to the giver or receiver EVERY YEAR.
- Create a Living Trust. This is the most common I see in our area. Since a trust is managed by a trustee rather than an individual, death does not cause assets to be divided. All your assets will need to be transferred to the trusts name once you have it created. A trust can be costly to have created and may not make sense if you do have a small estate.
- Make your accounts payable upon death. This is an easy fix for bank accounts, life insurance, retirement plans and vehicles. You can also do this with real property with a beneficiary deed or ladybird deed. Contact each of your accounts individually to have a beneficiary named so once your death certificate is recorded, the beneficiary has control. Beneficiary deeds are legal document which transfers real estate upon the death of an owner. They can be for multiple people or different percentages, so a spouse could have 50% and two kids another 25%. However, they have no access or rights while the owner is alive, and it can be changed without the knowledge of the beneficiary. If you are married (in most states) spouses still have rights before the beneficiary. A ladybird deed is a little different though. It is usual a life estate and a remainder estate. A life estate gives the person unlimited use, but they can't sell or give or encumber the property, nor change who the remainder is without the remainder knowing. The remainder receives full estate after passing of life estate holder. For example, a man could have a life estate for his new wife, but have the remainder go to his biological son. His wife could stay in the home until he dies, and the son could not sell the property while she still lived.
- Own property jointly. Joint tenancy with right of survivorship allows the one who lives longer to inherit the property and solely their heirs. Tenancy by entirety (marriage) means that each person's heirs will inherit the property separately. Tenancy in common is similar to tenancy by entirety, but for unmarried people, so you could still have your significant other inherit the property like a spouse.
Keep in mind, in Arkansas, spouses have interest in property whether it was bought during the marriage or before, so this needs to be addressed throughout your life. If married, spouses have equal interest, so if one passes, the other gets their interest. They also have equal rights, so action can be taken without the consent of the other, but they can't sell or transfer completely without them knowing. This is similar to a beneficiary deed except they both have rights now rather than later.
What about taxes?
Many people want to avoid taxes in general, but especially when it comes to their estate. Assets you have lifetime use of are likely to be included in estate for tax, so check with your accountant about how your estate will be taxed.
Gift tax will apply to adding joint owner or adding remainder interest. It does not apply to beneficiary of a living trust, retirement accounts, life insurance, annuity, transfer on death (beneficiary deed) or ladybird deed because they are incomplete gifts. This means these are great ways for you and your heirs to avoid taxes!
Keep in mind creating a will is NOT a way to be avoiding probate. It can speed up probate and reduce costs, but will still require it. It is important to have a will as well as any option above that works best for your situation in place BEFORE death. This makes the process easier for those inheriting, as well as your possessions going where you want them to.
For more ways to save on taxes, check out this video who is exempt from paying property taxes?
Feel free to reach out with any questions!
