Williamson & Gentilini
Attorneys at Law
1945 Palo Verde Ave., #101
Long Beach, CA 90815
How Can Probate be Avoided?
There are some types of property
that don't have to go through the probate process. Some types of
joint ownership in real estate and bank accounts will avoid
probate, but are usually accompanied with their own unique tax
and control drawbacks.
Likewise, retirement accounts,
life insurance, and investment accounts with designated
beneficiaries will also avoid probate, but need special
consideration in proper estate planning.
Each of the above methods to
avoid probate come with their own particular risks,
inconveniences, and potential tax disadvantages.
By far, the most widely used and
advantageous way to avoid probate is to have an effective living
trust as the cornerstone of your estate planning.
Assets of all kinds can be
transferred to a trust including bank accounts, real estate,
stocks, mutual fund shares, cars, jewelry, and business or farm
interests. With a living trust, you can accomplish all of the
- Maintain full control of your assets and
manage your investments during your lifetime;
- Provide for management of your assets
should you become incapacitated or not wish to manage them;
- Provide for the management of trust
investments at your death if beneficiaries are minors or are
- Arrange for your spouse to receive income
- Arrange for trust principal to be
distributed to your children at the death of your spouse;
- Specify the circumstances under which
distributions are to be made, when and in what amount; and
- You can change the terms of your trust or
revoke it entirely if at any time your financial circumstances
or family relationships change.
Most importantly, all assets in a valid
living trust are beyond the reach of the probate system. A
living trust is revocable and you have complete control over its
assets during your lifetime. There are no adverse tax
consequences to transferring property into a living trust. You
can always add, subtract, and modify any assets held in your
trust as well as change the beneficiaries or the amounts they
receive. You can even revoke the trust in its entirety at any
time. You, as the trustee, are charged with the duty of managing
the estate property and seeing that all the terms of the trust
are carried out - much like the way you currently manage your
property. As such, living trusts are favored by individuals who
want to create a flexible estate plan, retain control of their
assets, plan to minimize estate taxes, and avoid probate at
As mentioned above, the most
commonly attempted shortcut to proper estate planning is joint
ownership of property. Real estate, bank accounts, and
automobiles are examples of assets which can be jointly owned.
In the case of real estate, the terms "joint tenancy" or "joint
tenants" is a description of joint property ownership. To a
lawyer, the term "joint tenancy" has a specific meaning along
with its own unique characteristics. Property held in joint
tenancy will avoid probate in most cases, but there are some
distinct disadvantages in using joint ownership of assets.
Disadvantages to Joint
Loss of Control.
Once you transfer an asset into joint ownership, you will need
your joint owner's approval and signature to sell it or
transfer the asset. If your joint owner were to become
incapacitated, you would need to petition the court to regain
control of your property.
Risk of Lawsuits
In today's litigious society, assets and insurance are the
name of the game. If you place another person's name on your
property in joint ownership, your property is now exposed to
the potential lawsuits of that joint owner. A car accident is
a good example. If your co-joint-owner is involved in an
accident and the insurance denies coverage or is insufficient,
your jointly owned property will be targeted.
If your joint owner goes through some bad times and runs up
some debt, your jointly owned property will be the focus of
creditors seeking payment. Judgments and abstracts of judgment
can attach to the property clouding title. If your joint owner
has any tax problems, previous, current, or in the future, the
tax liens will attach to your property.
Gift Tax Consequences
Placing a child or loved one's name on your property as a
joint owner is the equivalent of making a gift. If the value
of the property gifted is over $13,000, there will likely be
gift taxed incurred. Gift taxes range from 37% to 55% and if
overlooked can result in stiff penalties and interest.
Capital Gains Taxes
One of the great benefits of properly passing appreciated
property to your beneficiaries is that the IRS allows them to
take a stepped-up basis on the property. Without getting too
complicated, that means that an appreciated property can
entirely escape capital gains taxes. On the other hand, if
incorrectly planned, such as passing property by way of joint
ownership, a significant portion of the stepped-up basis
benefit is lost and your loved-ones will end up paying capital
gains taxes that could easily have been avoided. This applies
to spousal use of joint ownership as well.