Tom Bodin, a Practice Integration Advisor with Buckingham Strategic Wealth, works with dentists to help them achieve financial freedom through a comprehensive approach to wealth management.
Throughout the year, my colleagues and I have touched on various strategies for estate planning. With the passage of last year’s tax legislation, the estate tax exemption limit in 2018 and subsequent tax years rose to $11,180,000 per person, with a combined limit of $22,360,000 for married couples. The vast majority of Americans will be well under this wealth threshold when they die.
When thinking about estate planning with an attorney and financial advisor, individuals all too often consider this threshold the litmus test for getting serious about their plan. However, the benefits from a properly designed estate plan are not limited to avoiding the federal estate tax. Some of a solid estate plan’s many other benefits include ensuring your wishes are maintained, ensuring your end-of-life care is aligned with your goals, caring for loved ones after your death, and avoiding probate. In this article, I will focus on what probate is and why you may want to avoid it.
Probate is the process in which a state validates a will and provides a forum for estate disputes. While it is largely a clerical process, it is public, expensive and causes significant delays. As documents are gathered and shared through the probate process, they become a matter of public record. Many individuals do not want their estate information available for public consumption. In addition, the probate process is expensive, as state estate taxes, court fees and attorney’s fees can eat away up to 5% of an estate’s value. Finally, the probate process is not quick. In some complicated or disputed estates, probate can take more than a year to complete.
So how do you avoid the costly, time-consuming and public process that is probate? Well, several tools often used in constructing a proper estate plan come with the secondary benefit of allowing an individual to avoid probate:
Trusts: Assets can be titled to a living trust you create versus held as personal property. A living trust does not exclude assets from your estate for federal tax purposes, but, as the trust owns the assets, they are not subject to probate. Upon your passing, your trustee can transfer assets to the identified family member, friend or charity directly. Your trust documents should align with your will.
Pay-on-death accounts: Your bank and retirement accounts can be converted to payable-on-death accounts. This is accomplished through completing a simple form that identifies your beneficiary. Some states allow you to title vehicles and real estate deeds as transfer-on-death.
Joint-ownership property: There is a variety of ways to title property in two individuals’ names (generally you and your spouse). When the first individual dies, the second takes full ownership. Depending on the state and type of property, this can be done through joint tenancy with right to survivorship, tenancy by the entirety, and/or titling as community property.
Gifts: If you don’t legally own an asset at the time of your passing, it is excluded from your estate and probate. There are, however, restrictions on gifting. In 2018, the gift exemption amount is $15,000. A larger gift must be reported on your tax return and will be applied against your estate’s total exemption. Still, gifting can be a great way to avoid probate and see your heirs or charity make use of the gift during your lifetime.
At the end of the day, there is little need to allow your estate to pass through probate. A thoughtful estate plan will accomplish your end-of-life goals and ensure your assets remain intact through the process.