There are three basic ways that you can own property: in your individual name, in joint names with others, and through contract rights. Whether or not a particular asset that you own at the time of your death will need to be probated will depend entirely upon how it's titled.
Title by Contract
This type of ownership can take on various forms: payable on death ("POD") or transfer on death ("TOD") designations; in trust for ("ITF") accounts; Totten trust accounts; life insurance policies; retirement accounts and annuities; and Revocable Living Trusts. In general, these types of assets will avoid probate due to the contractual relationships between the parties.
- Payable on Death Designations - POD, TOD, and ITF accounts as well as Totten trust accounts are recognized in many states by banks and investment companies. The account owner can choose one or more people to receive the assets remaining in the account when the owner dies, although in some states the beneficiaries will be required to receive equal amounts.
POD, TOD, and ITF accounts as well as Totten trust accounts will avoid probate since all that the named beneficiaries will need to do is produce a death certificate in order to gain access to an account. If all of the named beneficiaries predecease the account owner, however, then the account will become a part of the owner's probate estate.
- Life Insurance - A life insurance policy consists of contractual rights among the policy owner, insured, and beneficiary in an agreement with the insurance company. The policy owner pays the insurance premiums for a fixed period of years and if the insured dies during the period, then the insurance company agrees to pay the named beneficiaries of the policy a specific dollar amount.
A life insurance policy with at least one beneficiary who survives the insured will avoid probate. All the named beneficiaries will need to do is turn in the original life insurance policy with a death certificate in order to receive the insurance proceeds. If all of the named beneficiaries predecease the insured, however, then the insurance proceeds will become a part of the insured's probate estate. Aside from this, if the named beneficiary of the policy is a minor, then probate and/or guardianship will be necessary.
- Retirement Accounts and Annuities - Retirement accounts, such as IRAs and 401(k)s, consist of contractual rights between the owner and named beneficiaries in an agreement with the retirement account custodian. Annuities consist of contractual rights among the owner, annuitant, and beneficiary in an agreement with the annuity company.
Upon the death of the owner of a retirement account or owner or annuitant of an annuity, the named beneficiary will become entitled to receive the remaining balance of the account. These types of assets will avoid probate since all the named beneficiary will need to do to claim the account is produce a death certificate. As with other types of contractual accounts, however, if all of the named beneficiaries predecease the account owner, or if the beneficiary is a minor, then the balance of the account will become a part of the owner's probate estate.
- Revocable Living Trusts - A Revocable Living Trust consists of contract rights among the Trustmaker, Trustee, and Beneficiaries. In the typical situation, when the trust is created the Trustmaker, Trustee, and Beneficiary will be one in the same person. The trust agreement will cover three phases of the Trustmaker's life: while the Trustmaker is alive and well, if the Trustmaker becomes mentally incapacitated, and after the Trustmaker dies.
During phase one, the Trustmaker will fund the Revocable Living Trust with his or her individual assets and designate the trust as the beneficiary of life insurance, retirement accounts, and annuities. The Trustee (who is also the Trustmaker) will then manage, invest, and spend the trust assets for the benefit of the Beneficiary (who is also the Trustmaker and Trustee).
If the Trustmaker becomes mentally incapacitated, phase two of the trust will take over and the Disability Trustee will step in and manage, invest, and spend the trust assets for the benefit of the Beneficiary (who is the Trustmaker but no longer the Trustee).
Upon the Trustmaker's death, the Administrative Trustee will step in and collect any insurance proceeds, retirement accounts and annuities, pay all of the Trustmaker's final bills, debts, and taxes, and then distribute the balance of the trust funds to the final beneficiaries named in the trust agreement.
Because the trust agreement covers all three phases of the Trustmaker's life and the trust will continue to live on after the Trustmaker dies through the actions of the Administrative Trustee, all of the Trustmaker's property held in the name of the trust at the time of the Trustmaker's death will avoid probate. If, however, the Trustmaker fails to fund any property into the name of the trust prior to death, then those assets held in the Trustmaker's individual name and outside of the trust will become a part of the Trustmaker's probate estate.
