Probate is the court process that oversees the administration of your estate after you die. It involves proving the validity of your will (if you have one), appointing a personal representative (also called an executor), identifying and notifying your heirs and creditors, paying your debts and taxes, and distributing your remaining property according to your will or state law (if you don't have a will).
Probate can be costly, time-consuming, and public. Depending on the size and complexity of your estate, probate can take months or even years to complete, and consume a significant portion of your estate's value in fees and expenses. Probate can also expose your personal and financial information to the public, which can invite unwanted scrutiny, disputes, or fraud.
Fortunately, there are ways to avoid probate or at least reduce its impact on your estate. Some of the most common methods are:
- Creating a living trust, which allows you to transfer property to a trustee, who holds it for the benefit of one or more beneficiaries. Property in a trust does not go through probate, as it is not considered part of your estate.
- Naming beneficiaries on your bank accounts, retirement accounts, life insurance policies, and other assets that allow you to do so. Property that passes by beneficiary designation does not go through probate, as it is not subject to your will.
- Owning property jointly with someone else, with rights of survivorship. Property that is jointly owned with rights of survivorship automatically passes to the surviving owner upon the death of the other owner, without going through probate.
- Giving away property during your lifetime, either as gifts or charitable donations. Property that you no longer own at the time of your death does not go through probate, as it is not part of your estate.
Another important goal of estate planning is to minimize taxes that may be imposed on your estate or your beneficiaries. Some of the taxes that may affect your estate are:
- Estate taxes, which are federal and/or state taxes levied on the value of your estate when you die. The federal estate tax exemption for 2024 is $14.2 million per person. Some states also have their own estate taxes, with lower exemptions and rates than the federal tax.
- Income taxes, which are federal and/or state taxes levied on the income generated by your estate or your beneficiaries from your property. For example, if you leave a retirement account to your beneficiary, they will have to pay income taxes on the distributions they receive from the account.
- Capital gains taxes, which are federal and/or state taxes levied on the increase in value of certain assets when they are sold or transferred. For example, if you leave a house to your beneficiary that has appreciated in value since you bought it, they will have to pay capital gains taxes on the difference between the sale price and the original purchase price when they sell it.
There are also ways to minimize taxes or defer them to a later date with proper estate planning. Some of the most common methods are:
- Creating a living trust, which allows you to transfer property to a trustee, who holds it for the benefit of one or more beneficiaries. Property in a trust can avoid or reduce estate taxes, income taxes, and capital gains taxes, depending on the type and terms of the trust.
- Making charitable donations, either during your lifetime or at your death. Charitable donations can reduce your taxable income and estate value, as well as provide income tax deductions and estate tax credits.
- Using life insurance policies, either as a way to pay for potential taxes or as a way to increase the value of your estate without increasing your tax liability. Life insurance proceeds are generally not subject to income when paid to a beneficiary.
- Taking advantage of the annual gift tax exclusion, which allows you to give up to $18,000 per person per year (in 2024) without triggering any gift or estate taxes. This can reduce your taxable estate and provide immediate benefits to your loved ones.
If you have any questions or want to start creating or updating your estate plan with these strategies in mind, please click here to schedule your Life and Legacy Kickoff Meeting with Attorney Robinson.