Many people don’t like dealing with the legal system on principal, sometimes with good reason.  The law can be complex and difficult to understand and any court process has the potential to be lengthy and expensive.  If you do not plan otherwise, when you pass away your estate will have to go through a court process called probate.  A designated representative will have to submit your estate to the court and follow all laws and requirements regarding filings and notifications.  It is highly recommended that this representative have legal assistance to guide them through the process.  Court and legal fees can eat away at your estate while the length of time it may take to get through probate can be significant.  These are some solid reasons to avoid Arizona probate and keep your estate and assets out of the court system.

Trusts can be effective vehicles to use to avoid probate.

You can establish a living trust and then move your assets into the trust to avoid the probate process altogether.  There are many different types of trusts available and not all trusts will work for your individual situation.  A charitable remainder trust (CRT) is an excellent option if you would like to donate a large amount of money to a qualifying charity at the time of your death.  This type of trust is not appropriate for every charitable donation.  A CRT is an irrevocable trust, which means it cannot be undone and while you and your beneficiaries can reap big tax breaks you also have to give up legal control of the assets within the trust.

Trusts are only effective if you set them up and follow through with all required steps.  For instance, if you set up a trust but don’t move any assets into it, the trust is useless.  Your assets will still go to probate and may not be as tax efficient as they could be.  To have proper management of your trust you also have to assign a trustee.   After your death, your trustee is the person that will transfer ownership to your designated beneficiaries.

Trusts can be complex; you can utilize more than one and there are restrictions to each type to qualify for tax savings.  It is important to work with an attorney to make sure your trust(s) are set up and implemented correctly.

Another strategy is to hold property jointly.

In the state of Arizona there are different ways to own property.  If you own an asset jointly with someone else you can own it as joint tenants with the right of survivorship.  This means that if you were to die, the property transfers to the joint owner automatically, thus avoiding probate.  If you are married in the state of Arizona, you can also own property with your spouse as community property which achieves the same result.  There are some downsides to joint ownership.  If you want to sell the asset you will need the joint owner’s permission to do so.  Also, joint tenancy assumes equal shares of ownership.  Arizona law recognizes the tenancy only as it is written so if you make one child a joint tenant assuming that he or she will then split the asset among the other siblings when you die, it may not work out that way.  If the child that is the surviving owner decides not to split the asset and is the only other owner listed the additional siblings will have little recourse.

Another consideration before choosing joint tenancy is cost basis.  Your beneficiary may receive a step-up in cost basis when inheriting an asset after your death.  A step up in basis changes the amount of gains the IRS uses when calculating tax due.  The step up in basis may make choosing a beneficiary instead of opting for joint tenancy more preferable.  Work with an estate attorney to run the numbers and identify the best strategy.

Beneficiary designations can help avoid probate.

Some types of accounts and assets can avoid going through the court system through a specific beneficiary designation. It is important to review your beneficiary designations and make sure that they are in accordance with your will or trust.  If there is a conflict, the named beneficiary of an account will receive the funds. (https://www.fidelity.com/viewpoints/personal-finance/estate-plan-pitfalls)  A very easy and cost effective strategy is to use payable on death (POD) or transfer on death (TOD) account designations.  These assignments can be used for financial accounts such as checking and savings accounts or investments.   The danger of these accounts comes when they are not used with the proper knowledge or guidance.  These designations should be used as part of a comprehensive estate plan.  You should also keep in mind that the beneficiary of a TOD or POD account is responsible for paying the taxes due on the account.

Life insurance is another example of a beneficiary designated item that can usually bypass the courts.  If you have an active life policy at the time of your death, your beneficiaries should receive payment from the insurance company directly, without having to go through probate.

Gifts can be fun to give and avoid probate altogether.

If you would prefer, you have the option to gift your loved ones a set amount of money tax exempt every year.  That amount in 2015 was $14,000 annually although this amount can change and vary based on federal and state law. Gifting a little bit of your estate at a time while you are still alive gives you the opportunity to see your loved ones enjoy your generosity.   If you decide to go this route, make sure that your estate is sufficient enough to provide for you and your needs long after your estimated time of death.  Once you have gifted the funds, there is no way to get them back.

Physics and estate planning have something in common.  Just like Newton’s third law that for every action there is an equal and opposite reaction; for every estate planning option there are possible pitfalls and alternate strategies.  Let us review your goals and help you formulate the most cost efficient estate plan that best benefits you and your heirs.  We will explain all your options and help you legally and effectively execute your choices.

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