Don't Make Your Heirs Wait a Year to Receive Their Inheritance
How long will it take your heirs to receive the assets you left them in your will? Orrin McLeod, never imagined it would take his local library three years to receive his $1 million gift. Why so long? Because his estate had to go through probate.
What is Probate?
Probate is the process by which courts verify that wills are valid. In most states, it lasts a minimum of one year, and it can take much longer. During probate, assets are frozen and not available to heirs. This gives creditors time to get paid and relatives time to challenge the will. The more challenges, the greater the delays.
Probate also can be expensive; lawyers can charge up to 5% of the value of the estate. Therefore, avoid naming a bank or lawyer to serve as executor of your will. Appoint a family member instead who can hire lawyers if needed. This could save your estate tens of thousands of dollars in legal fees.
How to Avoid Probate
The easiest way to avoid probate is also the wrong way: titling assets between generations. While it avoids probate, it creates another -- and very expensive -- problem.
Take Anne, for instance. Her mother, a widow, owned a house worth $180,000 that she wanted Anne to inherit. Having gone through probate years ago when Anne’s father died, Mom wanted Anne to avoid it when she died. So she put Anne’s name on the deed. By doing so, Anne avoided probate. She also avoided estate taxes, since the house was worth less than $2,000,000. But she did not avoid capital gains taxes.
Forty years ago, Anne’s mother bought the house for $30,000. Because Anne’s name was on the deed of the house when her mother died, the IRS considers Anne an owner, not an heir. Therefore, she has to pay taxes on the $150,000 profit after she sold it, a loss of up to $50,000. That’s a hefty price to pay to avoid probate.
The best way to avoid probate is to establish a revocable living trust, naming yourself as trustee and your heirs as beneficiaries. Because the trust is revocable, you can put assets into the trust and take them back out at any time during your lifetime. And because the assets are owned by trust, and not by you, your estate avoids probate. When you die, your assets pass directly to the trust’s beneficiaries (your heirs). To set up a trust, meet with an attorney who specializes in estate planning.