Ideally, when a person passes away, instructions for the distribution of their property to loved ones will be indicated in their will. However, when somebody dies without a will, their assets must be processed through a local probate court. This is a special court division that processes such matters after a person passes away.
Also, if a will is contested, the division of the assets must also be handled through probate court. Having a will in place is ideal, because the probate court might divide the property in a way that the deceased person might not have actually intended.
Probate is overseen and managed by a public court; therefore there will be court fees, attorneys’ fees, appraisers’ fees, executor’s fees, and other costs. Due to these various expenses, as well as potential property distribution issues, it is recommended that you avoid probate court whenever possible. Besides a will document, there are other ways to avoid estate probate.
A joint bank account is one type of financial tool that can sometimes be used to avoid the probate process. A joint account is a specific type of bank account that is shared by two or more individuals. Any person who is a member of the account can withdraw from or deposit to the account.
Typically, joint bank accounts are shared between spouses, close relatives, or business partners. Funds that are held in a bank account may be treated in specific ways that affect the probate process.
Some types of property can easily be transferred to another person at the death of the “decedent,” thus avoiding all of the fees associated with the probate process. For instance, a joint bank account in the names of two or more people can be designated “joint tenancy with right of survivorship.”
This means that when one of the co-owners of the bank account dies, the other will automatically be deemed the sole owner of the bank account. Thus, the funds in the bank account will immediately belong to the surviving bank account partner, without the need for the funds to pass through the probate system.
Setting up a joint account is easy, and usually only involves a few steps:
- Banks provide standard forms that allow you to add a name to your existing account, turning it into a joint account. These forms include a check box indicating a right of survivorship; and
- Upon the death of one account owner, the other owner or owners continue to own the account. They must usually need to show the bank manager the decedent’s death certificate.
However, be aware that joint owners can sometimes be subject to legal conflicts or lawsuit judgments against any other owner. Therefore, joint owners need to keep in contact and must be able to trust and cooperate with one another.
For tax purposes, an owner of a bank account should generally not add other “owners” to the account right before he or she dies. If they do, those other owners might be deemed to have received a gift.
If this happens, the decedent’s estate would then have to pay gift tax on any amount greater than $12,000. Furthermore, all “owners” should make regular deposits into the account to be true owners and avoid any gift taxes. Deposits can help prove that the persons are actual joint owners of the account, and were not just granted a gift.
Besides joint bank accounts, probate can be avoided through the use of various other types of financial tools and mechanisms. These may include:
- Revocable Living Trust: Property can be transferred to a beneficiary prior to a person’s death through the use of a revocable living trust. This is a type of trust that is created during a person’s lifetime, that will be used to hold property that will be transferred to a beneficiary. The property might be transferred at a specified time (when the beneficiary turns 21, for example), or when certain conditions are met (when the beneficiary completes college, for instance). Revocable trusts are advantageous because they can be modified or changed at any time by the person who created it; and
- Payable on Death Accounts (POD accounts): These are bank accounts that have a “beneficiary designation form”. This allows the account owner to name or indicate any persons who will receive the money when they die. The money will pass automatically to the beneficiary or beneficiaries upon the owner’s death; this bypasses the need for probate courts to get involved with the funds.
The probate process can often be complex, time consuming, and expensive. To avoid potential legal issues or conflicts with probate, you should consult with an experienced wills, trusts, and estates lawyer in your area. An attorney near you can help you set up a valid will and can help you understand how joint bank accounts and other legal instruments can be used to avoid the probate process.