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Transferring Property Outside Probate

Transferring Property Outside Probate

Many arrangements besides probate exist for transferring money or property outside the probate system. You can make these arrangements for convenience and to avoid probate court, but don’t expect to save on state or federal death taxes.

Your will disposes of property you didn’t dispose of in any other way. But there are many other ways to transfer your property at your death, outside of a will.

Joint Tenancy With Right of Survivorship (“JTROS”)
With this arrangement, each of two or more “tenants” has an equal, undivided interest in the whole account or asset. Most couples own their house and checking accounts in this way. A deceased person’s share automatically shifts to the surviving joint tenants at the very moment of death.

Of course, there is paperwork to complete before the account will be switched to the survivor’s name alone. And your state taxing authority might place a lien on joint accounts to make sure state taxes are paid, especially if the surviving tenant isn’t a spouse. You’d then need what’s called a “release” from the state to access your funds.

Tenancy In Common
An alternative to JTROS ownership is “tenancy in common.” This isn’t what most married couples in common law states have or want, with respect to their marital property. In this arrangement, each tenant takes a 50% interest and can independently sell or bequeath their interest in the property. Tenancy in common is a frequently seen and appropriate form of ownership in many situations, such as when siblings inherit a piece of real estate from their parents. Be aware, however, that disagreements between tenants in common could lead to the sale of one of their shares to an outsider.

Retirement Plans and Individual Retirement Accounts
Money in retirement plans or individual retirement accounts (“IRAs”) goes directly to the beneficiary you choose when you enroll in the plan or open the account, bypassing probate court.

Life Insurance Proceeds
A life insurance policy payoff is part of your private contract with the insurance company, and should promptly go to whomever you direct, with no court involvement. Proceeds from a policy owned by a deceased person going to a named person as beneficiary are excluded from federal income tax and state income or death taxes in most states.

One way to avoid probate of an asset is to transfer it before you die.

If the gift is to young children, you should be aware of the Uniform Transfers to Minors Act (“UTMA”). Under this law, a gift of money or other property occurs when the “donor” places the asset in the name of a person called the “custodian.” It’s simply a matter of titling the asset or account initially to show the world that it’s held under UTMA. Legal title is with the minor, but the custodian manages the asset until the minor is 21 years old (18 in a few states), at which time the property is turned over to the minor.

Until the minor reaches the age of majority, the custodian is required to pay to or for the benefit of the minor as much of the property as the custodian deems advisable for his or her support, benefit, maintenance and education.

Payable on Death (“POD”) Bank Accounts
The bank account owner names a beneficiary (“payee”), who automatically receives the account balance on the death of the owner. Until then, the beneficiary has no rights in the account, since the beneficiary can be changed or the account closed.

Many states have adopted a Transfer on Death (“TOD”) law regarding shares of stocks and bonds that works the same as the POD arrangement does for bank accounts.

Michael Palermo is a Lexington, Kentucky estate planning lawyer and Certified Financial Planner. More information about estate planning can be found on his Web site.

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