Posted by Laura Sefcik and Gary Dunn
What are your priorities when it comes to passing on your wealth and property from one generation to the next? One key consideration for most individuals is the desire to avoid probate. Probate is the legal process of administering and accounting for assets of an individual’s estate after their passing. It often comes with time-consuming procedures, costly legal fees and potential privacy concerns. For those with significant wealth, avoiding the estate and gift tax is also a major concern.
The discussion below explores key planning strategies to efficiently transfer certain types of assets to your chosen beneficiaries, while avoiding probate, and also touches on estate and gift tax planning.
A will, or last will and testament, is a legal document that details how you would like your estate assets to be distributed after your death. Having a will does not prevent these assets from going through probate, but it does help simplify the overall process. The will can be all encompassing and help cover any assets you may have forgotten to retitle or put into what’s known as a living trust. It is very common for personal property, such as jewelry, art and furniture to be included in a will. Within this document, you will be able to list the specific beneficiary for each asset, ensuring your assets transfer as you intended.
The creation of a living trust, also known as a revocable living trust, will help directly pass the assets it holds to beneficiaries according to the terms of the trust document — avoiding probate altogether. A trust is very helpful when it comes to larger estates and multiple beneficiaries. In general, assets are placed into the trust by changing the name on the asset title or on financial accounts to the formal name of the trust. You become the trustee of the trust and maintain control over the assets during your lifetime. At death, a successor trustee, as named in the trust document, will take control of the trust and its assets. This is normally the surviving spouse or children of the deceased. The successor trustee is responsible for distributing the assets to each of the beneficiaries as stated in the trust.
To create a living trust, you will need to work with an estate attorney. The attorney will draft a trust document, which includes instructions for distribution of your assets to your intended beneficiaries. Note that a living trust does not eliminate the need for a will, so the drafting attorney would need to coordinate the two documents. Typically, they would transfer any remaining probate assets into the living trust after death.
For your personal investment accounts, a joint account with right of survivorship is a common titling for married couples, which avoids probate at the first death. Another option is to submit a form for individual financial institutions, choosing a Payable on Death (POD) designation for the account. At your passing, the beneficiaries named under the POD will complete a notice of death form and provide a copy of the death certificate to each financial institution to initiate the change in ownership. Once processed, your account will be closed and the funds will transfer to new accounts for your beneficiaries without passing through probate. You can also assign your personal investment accounts to a living trust to avoid probate. This can be done by completing new account paperwork and signing authorization documents to retitle the assets to the trust’s name.
For retirement accounts, you most likely completed beneficiary designation paperwork when you created the account. Confirm what beneficiary designations you have on file, which can often be done online, and update them as needed. The assets will pass to the beneficiaries upon your death and will avoid probate.
For life insurance policies, you can complete and review/update the policy beneficiaries with your insurance agent or during your open enrollment period for employer-provided policies. The policies will pay out at your death based on these designations and avoid probate.
For any account with a designated beneficiary, you would not want to designate your estate as the beneficiary in most instances, as this would pull the assets into your probate estate.
When it comes to real estate, it is important to understand how your property is titled. If the property is solely owned at the time of death, then it becomes a probate asset. You can keep your property out of probate by titling it appropriately, in one of the following three ways:
Ancillary probate is defined as a secondary proceeding required when tangible property is owned outside of the decedent’s resident state, including real estate or personal property. The downside being that you now need to deal with a second probate proceeding, including paying a second attorney in another state to handle the probate filings with the county in which the property is located. The three methods mentioned above would all work in the same way for this out-of-state property, but it’s important to remember to put something in place sooner rather than later if you have a home in another state.
How Can I Pass My Business to the Next Generation and Avoid Probate?
A business interest can pass ownership outside of probate by including either a transfer of death designation on your ownership certificate or including the language in the entity operating agreement. At the time of death, the ownership can be transferred to the intended beneficiary via a transfer of ownership transaction. You can also transfer your business interest to a living trust to avoid probate.
Personal property items with legal titles, such as cars and boats, can be transferred at death to the intended beneficiary if a transfer on death designation was made with the title office, similar to real estate.
In certain states, if no designation is made, the surviving spouse can still gain ownership outside of probate by taking a death certificate to the title office and completing a surviving spouse form. Each state has their own requirements related to the number of vehicles that can be transferred and/or a dollar value limitation. Or in some cases, titled personally property might end up being one of the few assets that do go through probate. The temporary nature of owning a car makes it more difficult to avoid probate on the car(s) one might happen to own at death.
Personal property items without legal title tend to get forgotten. To make sure these assets avoid probate, talk with your attorney about drafting an “assignment agreement.” This document is a legal contract that allows you to transfer your rights in the stated property at death to another party, such as your children or to your living trust. This approach would allow the assets to avoid probate.
Individuals can give away a certain dollar amount of assets as gifts during their lifetime free from gift tax. The caveat is that IRS requires taxpayers to annually report any such gifts on a gift tax return, which is IRS Form 709. Only gifts over a threshold amount need to be reported on the annual 709 filing, which is $18,000 per donee in 2024. Married couples file separate returns, so each spouse can gift $18,000 per donee without filing a 709. Form 709 effectively operates as a running total of amounts given over time. No gift tax is due as long as the total gifts over time are less than the lifetime estate and gift tax exemption. For 2024:
Note that one of the biggest tax changes in the last decade is scheduled to expire at the end of 2025. The Tax Cuts and Jobs Act (TCJA) of 2017 created a big advantage for taxpayers in terms of the estate and gift tax, as it nearly doubled the lifetime estate and gift tax exemption. However, on January 1, 2026, the exemption will revert to the 2017 amount, adjusted for inflation — roughly, $7 million. From a tax planning perspective, this gives individuals with large estates the opportunity to take advantage of the additional lifetime exemption of $6.6 million or so available until the end of 2025 and avoid significant estate and gift tax on some assets in the future. If you’re in this situation, we recommend discussing this further with your advisers as soon as possible given the short window until expiration.
There are a variety of options available to help you plan for and anticipate the unexpected. It is important to give yourself time now to review your estate documents, asset ownership and beneficiary designations so your overall estate plan is in good order when it comes to avoiding probate and estate taxes as much as possible. Consult your tax and legal advisers to discuss what methods will serve you the best to carry out your wishes.
Contact Laura Sefcik, Gary Dunn or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.