Probate is a complicated legal process that can be both expensive and stressful. If you don’t have the right type of estate planning strategies in place your family may find themselves in a position where they have to go through a probate process while you’re alive or after you’ve passed away (or both!). In this post, our probate attorney will provide you with important insight that you should know that can help you to avoid the probate process while still ensuring that your final wishes for your assets are adhered to.
The Best Ways to Avoid Probate
One of the common questions that we receive as probate attorneys in San Diego revolves around what steps a person should take to avoid probate. Here are some examples of the top six ways to avoid your family having to go through probate in California:
1. Gifting your assets
You can always give away assets during your lifetime as a surefire way to ensure the intended recipient receives the gift, but this may not be the best choice to make. Once these assets are no longer in your name, they are no longer considered to be in your estate which will not make them subject to probate. Before you take this step, however, it’s imperative that you consult with an experienced estate planning attorney in San Diego for a number of reasons. First, once you give something away it’s no longer yours to control and this scenario is often the recipe for a nightmare that can almost always be dealt with in a more optimal way (i.e.- the recipient was supposed to keep the house you gifted for your benefit, but they instead sell it right out from under you and pocket the proceeds). Second, you may jeopardize your eligibility for Medi-Cal if long term care is needed as the gift may be captured in a look back period. Third, and perhaps most overlooked, this strategy is often one of the worst for many families in terms of taxes. A lifetime gift will not receive a step-up in basis for capital gains purposes like a gift through a trust will, meaning the person receiving the gift may be forced to pay massive capital gains taxes if the asset is sold in the future. If the gift is a house, you may also force an unexpected increase in property taxes if the transaction is outside the narrow rules Proposition 19 imposed in 2021, leading to potentially catastrophic results for those with fixed incomes intent on aging in place. Before you go this route, please be sure to check with a qualified estate planning attorney to see if there may be a better way!
2. Creating a living trust
Creating a living trust is one of the best ways to avoid probate. When you establish the trust, you will transfer any bank accounts, property or other tangible assets into the name of the trust. You will still have unlimited access and control over what happens to these assets during your lifetime, and you really don’t have to change anything you do in terms of dealing with the property in your trust. When you pass away the trust will become irrevocable, meaning that the terms cannot be changed. Since everything you own was either in the name of your trust or paid to your trust through a beneficiary designation (and nothing was left in your personal name), there’s nothing that has to go through Probate court. Your named trustee will be tasked with following your wishes expressed in the trust all without the need for court supervision or a Probate Judge’s approval. What’s more, when your chosen beneficiaries receive their gift through the trust, they receive a full step-up in basis on everything they inherit. That means if they sell anything shortly after inheriting, they will not pay any capital gains taxes. Even if they choose to hold the property longer, they will only pay taxes on the appreciation that occurs after your passing.
Related post: 4 Reasons to Incorporate a Trust into Your Estate Plan
3. Establishing joint ownership
More than one person can own the same property, and in California, the people involved in a joint partnership will need to have “right of survivorship” language connected to the asset in order to avoid probate. This is a unique legal verbiage in which the surviving individual will assume ownership of all assets when the other owner passes away. California has two types of joint ownership with rights of survivorship, and they include:
Joint Tenancy – This involves two or more “joint tenants” in the ownership of property, who need not be related in any way. Essentially the survivor takes all in a joint tenancy.
Community Property – As a married couple, if you hold property as Community Property, the property must be “Community Property with right of survivorship” to keep the surviving spouse out of Probate court. Holding title only as “Community Property” will force a surviving spouse through what’s known as a Spousal Property Petition in Probate court, just to claim their own house! This is one of the most common ways a surviving spouse will “accidently” end up in Probate Court in California.
There are nuances to how title is held from a tax perspective and what option is best will vary depending on circumstances. Many people choose to place their children on title as a joint tenant while alive in an attempt to avoid Probate court. While this will in fact avoid probate court, it suffers from the same dreadful shortcomings as Gifting your assets in point 1 above. You lose control of the property, the property is subject to the new owner’s creditors, the person receiving the home will not receive a full step up in basis and thus will likely pay capital gains taxes when sold, you may force an increase in property taxes immediately due to Proposition 19, and the what if contingencies are not dealt with. While an easy route may sound like the best route on first glance, before you go this route you really should speak with an estate planning attorney to make sure you understand all of the implications of this choice and that you’re not costing your beneficiaries a tremendous amount of money in the long run.
4. Adding payable-on-death designations to bank accounts
California allows you to designate money in bank accounts to a certain beneficiary or set of beneficiaries. This includes savings accounts, checking accounts and certificates of deposits (and most other financial accounts as well). The beneficiary has no control over the account during your lifetime, however, they can claim ownership to the account when the owner passes away without having to go through Probate court. While this approach can work in the simplest of cases where no real estate is involved, it is not the best option if minor children are involved as beneficiaries. Although it may sound farfetched, we also see time and time again where a beneficiary passes away before the account holder and no update is made, thus forcing the account into Probate Court. We also see cases where a beneficiary survives the account holder but does not claim the account before their own passing, thus again leading us to Probate Court. Having a trust be the owner or beneficiary of these accounts can take care of all the “what if” scenarios we see play out, as those things will be covered in a detailed trust document.
5. Transferring vehicles upon death
In California, transfer-on-death registration for vehicles operates under the same principle as payable-on-death designations. You have the option to name a beneficiary when registering a vehicle with the Department of Motor Vehicles or at any time while you own the car. This way, they will inherit the vehicle automatically upon death. Should you go through this process? Maybe, but it may not really be worth the headache unless you absolutely want a specific beneficiary to receive a specific vehicle and you don’t have a trust in place already to designate that gift. Even if you leave a vehicle in your personal name without a beneficiary designation on registration, your heirs will not have trouble transferring the vehicle after your passing, especially if it is free of any liens. A death certificate and form at the DMV is about all they will need, regardless of value of the vehicle. As such, many people choose to take the easier route and leave the vehicle in their personal name and make a specific gift of the vehicle through their trust, if they wish.
Probate can create a messy legal situation that will take up a lot of your loved ones’ time and energy. However, if you work with the estate planning attorneys at Jenkins & Jenkins, Estate Planning Attorneys, you can take comfort in the fact that we can help you put together a strategy that will help you and your family avoid probate. Give us a call today to learn more!
Testimonial from Samantha, Satisfied Client
My husband and I decided to create a living trust. Michael and his team were very thorough and walked us through the entire process with no issues. They’re very responsive to emails and answered all our questions.