Estate planning is more than just drafting a will—it's about ensuring that your assets are passed on to your beneficiaries as smoothly as possible. One of the main reasons people engage in estate planning is to avoid the probate process, which can be lengthy, expensive, and complicated. In California, probate is often required to validate a will and distribute assets, but with the right planning, you can avoid this process for your bank accounts. Here's how.
Understanding Probate and Its Drawbacks
Probate is a legal process that takes place after someone passes away. It involves validating the deceased person's will (if one exists), paying off any debts, and distributing the remaining assets to the beneficiaries. If there’s no will, California’s intestate succession laws will determine how the assets are divided.
While probate serves a necessary function, it can be time-consuming and costly. Even in straightforward cases, probate in California can take at least nine months, often stretching much longer if complications arise. Moreover, probate fees can eat into the estate, leaving beneficiaries with less than what the deceased might have intended. For these reasons, many people seek ways to bypass probate altogether.
How to Avoid Probate on Bank Accounts
Bank accounts, like other assets, generally go through probate unless steps are taken to prevent it. Two common strategies to avoid probate on bank accounts include joint ownership and designating a beneficiary through Payable-on-Death (POD) or Transfer-on-Death (TOD) accounts.
1. Joint Ownership
One effective way to avoid probate is to add a joint owner to your bank account. Upon your death, the account automatically transfers to the surviving joint owner without going through probate. This is a simple and direct method, but it comes with potential downsides.
For instance, once you add someone as a joint owner, they have full access to the funds in the account during your lifetime. This means they can withdraw money or make decisions without your consent, which could be risky if the relationship changes or if the joint owner faces financial difficulties or legal issues.
Another drawback is that the funds in the account are exposed to the creditors of any joint owner. If they run into financial trouble, your assets could be at risk.
2. Payable-on-Death (POD) and Transfer-on-Death (TOD) Accounts
Designating a POD or TOD beneficiary is another straightforward way to avoid probate. With these accounts, you retain full control over your assets during your lifetime, and the funds are transferred directly to the named beneficiary upon your death.
This method is particularly attractive because it allows you to maintain sole ownership of the account until you pass away, meaning no one else can access or control the funds. However, it’s crucial to keep your beneficiary designations up to date. Life events like divorce or the birth of a new child may require changes to your beneficiary information to ensure your assets go where you intend.
3. Consider the Probate Threshold in California
It’s also important to understand that not all estates in California require probate. As of 2023, if the total value of your estate—including bank accounts—is under $184,500, probate might not be necessary. However, this doesn’t mean your estate is automatically exempt. Other factors, like the type of assets you own, can still trigger the need for probate. Consulting with an estate planning attorney can help clarify your specific situation.
Weighing the Options: Which Strategy is Right for You?
While joint ownership and POD/TOD accounts offer relatively simple solutions to avoid probate, they might not be ideal in every situation. For example, adding a joint owner could expose your assets to unintended risks, while a POD/TOD account might require diligent updates to beneficiary information to avoid unintended consequences.
In some cases, setting up a trust might be a better option. A trust can provide more control over how and when your assets are distributed, protect your assets from creditors, and allow for more complex estate planning needs. However, trusts can be more complicated and costly to establish and maintain.
The Importance of Comprehensive Estate Planning
Avoiding probate on your bank account is an important step in estate planning, but it’s just one part of a broader strategy to ensure your wishes are carried out after your death. A comprehensive estate plan can help minimize taxes, avoid family disputes, and protect your assets during your lifetime and beyond.
Whether your estate is simple or complex, working with an experienced estate planning attorney can help you navigate your options and create a plan that meets your unique needs. Contact Hunsberger Dunn LLP today to ensure that your legacy is preserved and your loved ones are provided for in the way you intend.