Avoiding Probate on Bank Accounts
The ability to avoid the probate process to pass on assets after death is often one of the primary motivations behind estate planning. The legal process of probate, which validates a deceased person’s will (if there is one), is lengthy and expensive, and can substantially delay the distribution of an estate to the intended beneficiaries as well as reducing what they ultimately receive. Like other assets, bank accounts are generally subject to probate. However, there are exceptions that can allow the account to pass to your chosen beneficiary directly, without the hassle of probate.
Understanding Probate
In probate, an executor is appointed to collect and inventory estate assets, pay estate debts, and distribute remaining assets to the beneficiaries according to the terms of the validated will. If no will exists, the person is said to have died intestate, and intestate succession laws will determine who receives the deceased’s assets. The executor is also responsible for filing a final personal tax return for the deceased and paying any outstanding taxes from the estate. In California, completing probate takes at least 9 months for a simple estate, and can be much longer.
The total value of an estate can play a role in determining if probate is required. As of 2023 in California, this threshold is $184,500.
Exceptions Allowing Bank Accounts to Avoid Probate
Two common ways to avoid probate on your bank accounts are holding the account jointly or designating a beneficiary for the account. It’s important to understand potential drawbacks to these methods to determine which will be most appropriate for your circumstances. Some of the most common drawbacks as compared to a trust are 1) losing a step up in basis on the entire asset, 2) subjecting your assets to the joint owner’s creditors, 3) inability to hold and manage the asset after death, and 4) inability to access assets when the main owner is incapacitated. However, the probate avoidance techniques below may be suitable in certain cases where there are not several competing concerns and the alternative is doing nothing.
Joint ownership: Having a joint bank account with one or more parties (for example, a parent having a joint account with an adult child or children) allows the funds to go directly to the remaining owner(s) without going through probate. Potential drawbacks to this strategy include that the money will be fully accessible to all owners during your lifetime, ceding significant control over the funds, and that those funds are exposed to the creditors of any party named on the account.
Payable-on-death (POD) accounts: This designates a beneficiary to whom funds from the account will be disbursed upon the account holder’s death. You retain full control over the account during your lifetime. However, it is essential to periodically review and, if necessary, to update beneficiaries to keep information current.
Transfer-on-death (TOD) accounts: This type of designation transfers ownership of the account to the named beneficiary on the death of the owner. As with a POD account, ownership of the account remains solely yours. But again, outdated beneficiary information can produce unintended outcomes. For instance, if an ex-spouse is still the named beneficiary when you die, they could inherit money you intended to go to your children or other heirs.
Which approach makes the most sense varies by individual. Consulting with an experienced estate law attorney can help you determine how to proceed in your circumstance, as well as aligning the treatment of affected accounts with your overall estate planning goals and strategies.
The Value of a Comprehensive Estate Plan
A well-crafted estate plan can do more than simply keeping your estate out of probate. It can avert potential disputes between your heirs, minimize your tax liability, designate someone to act on your behalf if you are incapacitated, and lay out your preferences for medical treatment in the event of a serious accident or illness. Whether your estate is simple or you have a family business or complex assets to hand down, putting an estate plan in place will help ensure that your wishes are carried out as you intend.
The expert estate law attorneys at NM Law can help you understand the legal tools at your disposal to accomplish your estate planning goals and create a comprehensive plan that secures your legacy. To learn more about how the right estate plan can protect your bank accounts and other assets, contact us here to schedule your consultation.
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