Updated: January 13, 2023
Property and assets inherited after your death goes through the probate court if they are included in your will or if you die without one. Avoiding the probate process will save time and money on legal and court fees. There are many ways to do this.
Trusts are one of them, but they can be complicated and expensive to create and manage. In practical terms, using a trust to transfer assets makes the most sense for the very rich or those who live in a state with a low estate tax threshold. Although a trust avoids the probate process, protects assets from creditors, and allows you to control how your estate is used by your beneficiaries, this is usually not reason enough for most people to justify the cost of creating a formal trust.
Although it involves the probate process, a will is still the better choice for the majority of people. It is less complicated, better recognized, and costs less than creating a formal trust for your assets. When you use a will, you can also use the methods in this section to avoid probate when you pass on many of your financial assets without the cost and complexity of a trust.
These documents must have specific legal language and comply with your state’s estate and homestead laws. When naming beneficiaries be sure to identify them by name, not their relationship to you.
Payable or transfer on death accounts are a means for you and any co-owners to directly name one ormore beneficiaries without using your will by filling out paperwork from the institution containing the asset. If you have multiple beneficiaries, you can determine the amount or percentage each beneficiary receives.
Common assets that allow a beneficiary to be named include:
Investments such as stocks and other securities can be passed on this way, but are better handled with a transfer on death registration described below
Other Considerations When Creating a Payable On Death Account.
A Transfer on Death Registration is similar to Payable on Death Accounts and Transfer on Death Deeds. It is the most effective way for you to transfer investments such as stocks and other securities.
Transfer on death registrations are recognized in most states. The beneficiaries must contact the transferring agent and re-register the investment in their name by sending a copy of the death certificate and an application for re-registration with the account number.
A Totten Trust is an informal revocable living trust that is actually a type of payable-on-death account created at your bank for your accounts there. They may be called tentative trusts, informal trusts, or revocable bank account trusts and are recognized in most states. The major goal of the trust is to ensure that your financial assets avoid the probate process.
The transfer on death or beneficiary deed is another way to transfer real estate, possessions, and other property you own by yourself without the probate court being involved, unless your beneficiary dies before you and there is no contingent/backup beneficiary. Jointly owned with the right of survivorship is handled differently.
Florida, Michigan, Texas, Vermont, and West Virginia recognize an Enhanced Life Estate Deed, sometimes referred to as a “Lady Bird Deed” and Ohio has replaced the transfer on death deed with a transfer on death affidavit; both perform a similar function.
These methods avoid the probate process by transferring your property directly to an adult beneficiary after your death. This involves naming beneficiaries on the deed/title. Filling out a transfer on death deed is easy, but certain items and language must be included. Forms are available online.
The transfer on death deed is valid once it is signed and recorded in the public land records office in the county where the property is located. It is not valid if filed after your death.
You can change beneficiaries for the transfer on death deed, modify, revoke, and/or replace it at any time during your lifetime.
After your death, the beneficiary will become the new owner by filing your death certificate with the county where the property is located.
The homestead protection law is designed to protect qualified individual property owners or their families from losing their homestead property to creditors during hard times, such as your death.
Homestead protection laws vary significantly from state to state. Some states have differences between counties, like Florida, while others can vary by territory. There is significant variation among states in how the exemption is applied and how much is protected from creditors.
The primary purpose of equity protection is to assure that your surviving family has both physical shelter and financial protection. These laws can prevent them from needing to sell the residence by allowing a portion of it to be claimed, making that portion of estate off-limits to unsecured creditors — those who make loans without requiring collateral. Protected properties include farms, houses, condos, co-ops, mobile homes, and burial plots. Any unused portion of the homestead exemption can be used for other property.
The equity protection only includes the primary residence or personal property used as a residence (such as a residential trailer), the land it sits on, and any out-buildings or annexes. This does not apply to other property you own even if they are residences, since the law only entitles the owners to one primary residence. For example:
If your surviving spouse moves their primary residence, they must remove the homestead exemption from their former primary residence and refile for the exemption in their new area of residence.
The exemption does not prevent:
The homestead property tax exemption only applies to your primary residence. It allows your surviving spouse to exempt a part of the property’s assessed value, essentially reducing the value of the property used to calculate property/homestead tax. These exemptions can help your surviving spouse and family to stay in the home after their income has been reduced by your death.
The homestead property tax exemption is based on the value of the home. It is available in some states and may provide ongoing reductions in property taxes. In some states every homeowner gets the tax exemption while eligibility in other states depends on income level, property value, age, or if you’re disabled or a veteran.
A homestead tax or property tax exemption is usually based on the local government tax assessor’s office determined value of the home.
The exemption can be a percentage of the property’s value, but is usually a fixed tax deferment.
A fixed exemption makes the reduction in property tax progressive, being more significant to those with less expensive homes.
The calculation of the exemption involves subtracting your state’s exemption from the value of the home before calculating the estate. For example, if the home is assessed at $250,000 and your property tax rate is 1%, the property tax bill would be $2,500. But if you were eligible for a homestead tax exemption of $50,000, the taxable value of your home would drop to $200,000, meaning your tax bill would drop by 20% to $2,000.
If we compare houses using the above calculation where the first $50,000 of the assessed value is exempt from property taxes, when the value of the house increases:
Property tax exemptions are also available to many people based on their age, veteran status, disabilities, income, and head of household status.
Items of personal property, benefits, and wages can be protected from creditors.
Personal property eligible to be exempt include (check your state law for specifics): household furniture and appliances, tools of the trade (such as a building contractor’s pickup truck and power tools), family photos, clothing, musical instruments, burial plots, and/or water rights.
Although these exemptions are available to your surviving spouse and dependent family, these items are covered under the federal and state-specific bankruptcy laws.
Many states allow you to choose between the state or federal exemptions, but you must choose one or the other.
Other non-bankruptcy exemptions mostly apply to government and military personnel benefits, with others for workers in regulated labor markets such as railroad workers, merchant sailors, and longshoremen.