Minimizing Your Probate Assets without a Revocable Living Trust

To get the most out of this blog post, you must first understand the differences between probate and non-probate property, the differences between Wills and Revocable Living Trusts, and whether you need to (or should) avoid probate. Go ahead and get up to speed on those...this post will wait!

When clients ask me how to avoid probate, I always point out that entirely avoiding probate is often impossible due to a few things (mostly refunds of bills and taxes requiring advance payment) that you cannot control before death. The better question is how to minimize probate, as that is something within your control. Minimizing probate is possible by creating a Revocable Living Trust and/or by maximizing strategies that keep assets out of probate. The following is a list of common asset types and the way(s) you can keep them out of probate.

REAL PROPERTY: Individually owned real property is not usually subject to the probate/estate court process in North Carolina (meaning the value of the real property is not automatically subject to the probate/estate court fee calculation). Even though real property is not a probate asset, it follows the directions provided in your Will (or, if you didn't have a Will, goes to your legal heir(s) following intestacy laws, more on that here). Real property deed/title transfer happens with the assistance of your Executor. There are two exceptions where real property becomes subject to the probate/estate court process. First, you can use your Will to specify that you want your Executor to sell the real property (and specify what should happen with the sale proceeds). Second, if your estate is insolvent (meaning there are more debts than assets), the Court can pull real property into the estate for sale to pay debts.

JOINTLY OWNED VEHICLES: There are two kinds of jointly owned vehicles in North Carolina. Type 1: jointly owned vehicles with right of survivorship (the title will show the vehicle owners' names with "JTW" after both names). JTW stands for "joint tenants with." JTW means that when the first owner dies, the other owner(s) automatically becomes the 100% owner, and the vehicle is not subject to probate. Type 2: vehicles owned in equal shares (the title will show the owners' names without "JTW"). When one owner dies, their ownership share is subject to probate, and does not automatically go to the other owner(s). There is an easy way to change to JTW ownership: complete the North Carolina DMV form MVR-620 (easy to find with a quick internet search) and submit it to the DMV (ask what the fees are in advance).

What if the vehicle is only in one name? When the named owner dies, the vehicle is subject to probate. If you want to change this, you need to proceed a bit differently: (1) Complete the back of the title as if you are selling it ("First Re-Assignment of Title by Registered Owner"), (2) Complete the "Purchaser's Application for New Certificate of Title," writing both names, followed by JTW (example: Carter Client JTW and Parker Partner JTW), and (3) Complete the North Carolina DMV form MVR-620 (as noted above). Submit these forms to the DMV (ask what the fees are in advance). Possible tax wrinkle to consider: If you are adding your partner (not spouse) to the title, you are giving them a gift equal to 50% of the fair market value of the vehicle. In some instances, this may require filing an IRS Gift Tax Return; more information about this is available here.

FINANCIAL ACCOUNTS: You can turn most financial accounts into non-probate assets by creating "Pay on Death" (POD) designations with the financial institution. You'll need to proactively ask the financial institution for the form/paperwork to do this (it's rarely offered up front and can be hard to find on some websites). Adding a POD to your bank account functions like a beneficiary designation for an IRA or life insurance policy. You can name multiple POD recipients to divide the account between two or more people. There are a few drawbacks you should consider before naming a POD. First, North Carolina law (NCGS § 56C-6-7) governs the rules for PODs. One of the rules states you can name more than one person as a POD, but if you name an entity (such as a non-profit organization), they must receive 100%. Second, there are often final expenses to pay after a person dies, typically addressed during the probate/estate case. The easiest asset to pay such bills is the deceased's individually owned bank account(s) that become probate/estate property after death. However, if all your bank accounts have PODs, your Executor may have to sell assets (like vehicles and real property) to pay these bills. Third, when you name multiple people as PODs for an account with investments, they must make joint decisions about liquidating the account, which may include selling stocks at a loss, tax consequences, and early liquidation penalties. Are you thinking of naming someone as a co-owner on your financial account? Consider the risks first, more here.

PRE- and POST-TAX IRAs. Distributions from IRAs are always non-probate assets (unless the beneficiary is your estate). Keep in mind: Beneficiaries of your pre-tax IRAs must pay income tax on the distributions (at their own tax rate). Post-tax IRAs (like ROTH) are not subject to the same taxes, since you paid income tax on these funds before you deposited them in the IRA. Additional tax considerations apply for IRAs paying to a Revocable Living Trust.

LIFE INSURANCE POLICIES. Life insurance policy proceeds pay directly to the named beneficiary (or beneficiaries), and are always non-probate assets (unless the beneficiary is your estate). And these payments are not taxable to the recipient.

529 ACCOUNTS/PLANS. These are tax-advantaged savings plans designed for future educational expenses, authorized by Section 529 of the Internal Revenue Code. A common concern about 529s is that the funds can only be used for qualified education expenses (learn more about what these are here). Still, 529s offer significant tax benefits (interest on investments accumulates free of federal tax, and federal taxes are due for funds used to pay for allowed expenses). Thoughtful 529 investors plan for what happens if the owner or beneficiary dies, more on that here.