There are four ways to transfer property at the death of the owner. Only one is through probate. The other three are the result of an arrangement or disposition made by the deceased during his lifetime but designed to cause a transfer upon his or her death. These transfer methods include: (1) contractual arrangements, such as life insurance, where the promise of the other party to the contract involves a payment or transfer to beneficiaries designated by the deceased upon his or her death; (2) joint ownership, where upon the death of one of the joint-owners the jointly held properly passes to the other; and (3) living trusts.
1. Contractual Arrangements
Contractual arrangements that can avoid probate include life insurance policies and company benefit plans, although the average person tends to overlook these items as possible probate-avoidance vehicles. When you pay insurance premiums, for instance, you're transferring funds to the life insurance company and the company agrees to pay the death proceeds to your named beneficiary. Meanwhile, assuming that you retain ownership of the policy, you can have access to it's cash value (if it's a whole life policy) during your lifetime, and upon your death the proceeds are paid directly to your beneficiary without the need for the probate process. There is, in effect, a legal contract between you and the insurance company, so no court or other outside party needs to be involved to authorize payment of the proceeds to the person named (unless you name your estate as the beneficiary).
Generally speaking, there are four reasons that you would name your estate as beneficiary of your life insurance policies: to make the proceeds available to contestants of the will and creditors of your estate; to increase the probate costs and attorney fees; to be sure that there will be a substantial delay before your beneficiaries receive any money; and to ensure that the proceeds will be subject to estate or inheritance taxes. In other words, there are no good reasons that you should name your estate as the beneficiary of your life insurance policies.
Another example of a contractual arrangement that avoids probate would be certain company benefits that are paid after the employee s death, under an agreement or contract between the employee and the employer. For instance, a contract might provide that upon the employee's death his (or her) spouse will receive $20,000 per year for five years. These amounts are paid directly to the spouse (or other named beneficiary) and do not pass through probate, since there was a contractual agreement to pay them to a specific person or persons after death of the employee.
2. Joint Ownership
Joint ownership of property is probably the most popular way of avoiding probate and transferring property at death, though this popularity may not be entirely justified. The basic operating principle behind a joint tenancy between two owners is that on the death of one, the survivor automatically owns the entirety of the jointly held property. In a way, it can be thought of as a sort of inheritance (though it is not an inheritance by law).
From a legal standpoint, a valid joint tenancy is not a transfer at death at all, but rather the result of a lifetime transfer that vests (or becomes) the property of the succeeding survivor by operation of law. In other words, the property really already belonged to the survivor, subject only to the claim of the other joint tenant. The property, therefore, is not inherited because it is already owned. When a joint tenant dies, his interest and any claim he might have held in the joint property disappears, so the property – which already belonged to the survivor subject to the claim of the deceased – is now the survivor's free and clear of any claim. This transfer of ownership is said to take place automatically by operation of law and therefore needs no outside action or verification by probate courts, lawyers, deeds, or the like. It can be quite a smooth transition from one tenant to another, assuming, of course, that there are no objections. Unfortunately, where money and emotions are concerned, this is hardly always the case. The fact of the matter is that joint tenancies suffer as many challenges inside the courts as they enjoy popularity outside because the creators of the joint tenancies treat them in such an arbitrary fashion. This, in turn, makes them quite vulnerable to attack.
Using joint tenancies to avoid probate can be quite risky. They not only invite litigation when there's even the slightest question of the deceased's intent, but (depending on the size of the estate) they can also produce extra taxes and administrative (probate) fees – the very things that it was hoped the joint ownership would avoid. For example, it's quite possible (and not at all uncommon) that a disgruntled heir or an aggressive executor can take the position that the jointly held property should be probated because it was not a 'true' joint tenancy.
Another risk of joint tenancy is the simultaneous death of the joint owners. Basically, such an occurrence would have the effect of converting the joint tenancy into a tenancy in common. This would result in one-half of the property passing through the probate estate of each joint tenant, bringing about extra fees, delays and taxes, unless the will or trust of one of the joint tenants contained a provision dealing with simultaneous death.
3. Living Trust
Simply stated, a living trust is a trust created during your lifetime that usually provides for the disposition of assets that are contained in the trust at the time of your death. For instance, you could structure your living trust to pay out all income to you during your lifetime and, upon your death, whatever is left in the trust would transfer to your spouse. Since there has been a lifetime transfer of the property to the trust, and since the trust provides what is to be done with the property upon your death, there would be no need for the probate court to be involved in the transfer of those assets after you move on. For a more in-depth discussion of this topic, please read the article Living Trusts.