How to prevent your investment assets from going into probate

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Probate can be an intimidating part of estate planning. It’s associated with costs, delays, family disputes and the meddling of public courts in your personal affairs.

But the truth is, there are several simple ways to keep your investments out of probate court. Some are as easy as filling out a one-page form on your brokerage’s or retirement account’s website — no attorney required.

Understanding probate: What is it and why avoid it?

Probate is a legal process that takes place after someone’s death. It’s designed to ensure the deceased’s debts are paid and their assets are correctly distributed to their beneficiaries.

Probate involves validating the deceased’s will, if one exists, appointing an executor or administrator, identifying the deceased’s property, paying debts and taxes, and distributing the remaining property as the will (or state law, if there’s no will) directs.

A lot hinges on a few documents after you die. When a valid will is present, the probate process follows the decedent’s wishes. Having a will makes for a simpler probate process, though it doesn’t eliminate it.

Without a will, the process gets more complex. State law dictates where your assets go (unless you use a strategy to transfer them to beneficiaries outside of probate.)

Reasons to avoid probate court

Many people dread the idea of their assets going through probate, due to the time, cost and lack of privacy. Here are the main reasons people try to avoid probate court:

• It saves time: Probate can take several months or even years to complete, during which time assets are off-limits to beneficiaries. Bypassing probate allows assets to pass more quickly to those who are meant to inherit them.
• It saves money: Probate can come with costly attorney and court fees — especially if someone challenges the will or the deceased died without one. These expenses can eat into the value of the estate, leaving less for the beneficiaries.
• It keeps estate details private: Probate filings are a matter of public record, so anyone can access the documents, including the will. Avoiding probate helps keep personal matters private.
• It can help reduce family conflicts: A lengthy probate process can hinder grieving and closure, and delay access to assets beneficiaries may depend on. Avoiding probate can ease this burden and help loved ones focus on healing rather than legal proceedings.

How to prevent your investment assets from going into probate

The good news is there are several strategies to prevent your investment assets from going into probate, including joint ownership, transfer on death (TOD) designations, beneficiary designations and the creation of trusts — especially living trusts.

Joint ownership

When you own property jointly with another person, the surviving owner automatically inherits your share of the property when you die. This process, known as the ‘right of survivorship’, allows the account — whether it’s a savings account or a brokerage account — to bypass probate entirely.

However, joint ownership isn’t without risks. It isn’t a great choice if you want to leave your assets to someone other than the joint owner when you die, or if you’re concerned about the joint owner’s creditors.

Transfer on death (TOD)

A transfer-on-death account is an arrangement that allows the assets held within a brokerage account to pass directly to a named beneficiary upon the account holder’s death, thus avoiding probate. Banks offer a similar designation, known as payable on death (POD).

When a person with a TOD account dies, the executor simply provides a copy of the death certificate to the financial institution, and the account is then re-registered in the beneficiary’s name.

Beneficiary designations

Beneficiary designations are a simple, yet effective way to prevent assets from health savings accounts (HSA) and 401(k)s from going into probate. Naming one or more beneficiaries takes just a few minutes and the process can usually be completed online.

Accounts with a designated beneficiary, such as life insurance policies and retirement accounts, pass directly to the named heir.

It’s important to review your beneficiary designations regularly and after any major life event to make sure they still reflect your wishes.

Trusts

Living trusts, particularly revocable living trusts, can prevent your assets from going into probate. When you create a living trust, you transfer your assets into the trust and name a successor trustee.

Legally, you no longer own the assets — the trust does. So, upon your death, there is nothing for the probate court to control or process, because the assets are not in your individual name but in the trust’s name. The successor trustee you’ve selected can then transfer ownership of trust property directly to your designated beneficiaries without the need for probate court proceedings.

Bear in mind that for the trust to be effective, you must transfer your assets into it while you’re alive, a process known as ‘funding the trust’. Any assets not included in the trust may still have to go through probate. It can also cost a few thousand to create a trust with the help of a lawyer.

Other estate planning strategies

Life insurance

While not an investment per se, life insurance can be a useful estate planning tool. It can provide immediate funds for beneficiaries, cover funeral costs and pay off debts. It’s one way to transfer significant sums of money to your family in relatively short order after you pass away. Quick access to those funds can give your loved ones some breathing room if other assets get tied up in probate.

Charitable giving

This might sound obvious, but there will be fewer assets that need to go through probate if you give some of them away while you’re alive or donate them to charity.

One way to donate investments to nonprofits after you die is by using a charitable trust. Or you can create a revocable living trust, just like you would to pass along investments to any other beneficiary. Utilizing a revocable trust lets your charity receive the assets directly after you’re gone. Additionally, it offers you an increased level of control over your philanthropic donations, since you can outline in the trust document how you want the charity to use the funds.

Another way to avoid the worst of probate is to keep your estate relatively simple. A small estate can streamline the probate process by utilizing simplified probate procedures, which are available in many states for estates that fall below a certain threshold value.

One way to lower the value of your estate is by giving away investments and other assets while you’re still alive. If you’re philanthropically inclined, you might consider setting up a donor-advised fund to take advantage of attractive tax breaks while you’re still around to enjoy them.

Speaking with a lawyer and financial advisor

Consulting experts during the estate planning process is important because each professional brings a distinct set of skills and knowledge to the table. An estate planning attorney and a financial advisor can help protect your assets, minimize tax liabilities and ensure your wishes are carried out the way you intended.

Specifically, a lawyer can draft legal documents such as wills and trusts, and ensure they comply with state laws to eliminate or minimize issues for your loved ones later. On the other hand, a financial advisor analyzes your income sources, investment portfolio, retirement accounts and insurance coverage. They can provide financial context and advise on tax efficiency, charitable giving and insurance needs.

Bottom line

Probate can become an absolute nightmare — it’s costly, time-consuming, lacks privacy, and to top it off, it can ignite familial disputes. By planning ahead, you can spare your loved ones the hassle. You don’t necessarily need a complex trust either. Simple steps, like filling out a TOD designation with your broker, help ensure that your family can receive your investments without the headache of probate.