Skipping the probate process

Probate is the name for the formal court process through which your estate is passed on to your heirs after death. Depending on where you live, it could be a relatively quick process or it could be long and drawn out — up to 18 months in some states, and perhaps longer. By making sure that your assets are titled in a manner that skips this process entirely, you may save your heirs a lot of time, effort and money.

Certain types of ownership allow you to pass control of your assets to a joint owner, such as a spouse, without having to go through probate. These include:

• Joint tenancy with rights of survivorship (JTWROS)
• Joint tenancy by the entirety

Not all types of joint ownership function this way. For instance, if an asset is titled as joint ownership with “tenants in common,” the surviving owner does not automatically take ownership of a deceased owner’s share of the asset — the ownership is determined by the decedent’s will.

Some states have homestead statutes that protect spouses from forced sales by creditors of their primary residence and may require that the family home pass to the surviving spouse. These rules may also cap tax increases. So, it is a good idea to check the state's homestead rules. You may also transfer ownership of your assets to a trust that you’ve created. Upon your death, the trust assets would pass directly to your beneficiary without the need for probate. For example, consider a parent who purchases a new house, valued at $1.5 million, in California. The title is held as the sole owner and the will is relied on to pass the home on to his three children. Upon his death, the children needed to go through the probate process to take ownership of the home, resulting in a minimum probate fee of $28,000. (If their father had a personal representative who also chose to take a fee, the cost could be as high as $56,000.) In order to complete the transfer, either the man’s estate or his children needed to come up with a significant amount of money. Had the man established a trust for the purposes of holding the title to the property, however, he could have avoided the probate process — and this fee — altogether.

Minimizing taxes

Depending on how an asset is titled, it may be eligible for a “step up” in basis when it is transferred. The basis is the original value of the asset in question; the difference between the basis and the value of the asset when it is sold is subject to capital gains taxes. The basis of assets that are held in an individual’s name (“sole ownership”) or as community property is “stepped up,” that is, increased, to match the value of the asset at the time of transfer. This means that the inheritor will only have to pay taxes on any growth in the value of the asset that occurs after the transfer, should they choose to sell it. Other forms of ownership may only be entitled to step up a portion of the basis upon transfer, depending on the circumstances.

A balanced approach to planning

It’s important to consider the long-term implications of putting assets in a trust before choosing this path. By titling your assets in the name of an irrevocable trust, you are ceding ownership of them. This may make it difficult, if not impossible, for you to use those assets as collateral in the event you should need to borrow in the future. When designing the trust, work with your attorney to ensure that you’ve considered your future needs and have drafted documentation that is flexible enough to accommodate them. Once an irrevocable trust is established, you typically cannot make changes to the terms of the trust.

Issues such as these, where your estate plan may conflict with your present or future needs, demonstrate the importance of working with advisors who are able to help you develop a well-balanced plan. In the case of your home, you may find that not all mortgage lenders allow title to be held in a trust or LLC. A thoughtful, experienced wealth manager can work closely with your trust and estate attorney, your accountant and your banker to devise a financing strategy that ensures you are able to successfully navigate this complex territory without undermining any aspect of your plan. Together, you and your advisors can evaluate your assets, choose the appropriate titling strategy for each of them and conduct regular reviews to determine whether updates must be made to incorporate new assets or changing circumstances.

At BNY Mellon Wealth Management, we can partner with you and your advisors to identify the asset titling solutions that might best suit your needs. Our experienced team — which includes wealth managers, wealth strategists, residential mortgage bankers and private bankers — works together to understand your broader objectives and to provide customized mortgage solutions that maximize your tax advantages.