Do I Need a Trust to Avoid Probate?
12 Jan Do I Need a Trust to Avoid Probate?
Probate is a long and costly process that places an unnecessary burden on your loved ones. If you want to avoid probate in Arizona, you’ll need more than just a will in your estate plan. Wills are always subject to probate, and that is why we often advise our clients to set up a living trust. As long as it is properly funded, a trust will avoid probate, sparing your family that financial and emotional strain.
There are several other options besides a living trust if you want to avoid probate. However, they only apply to certain assets and in specific situations. We explain in more detail below.
How to Avoid Probate in Arizona
Rights of Survivorship
The state of Arizona recognizes the rights of survivorship—in a nutshell, this means that any jointly owned property automatically goes to the survivor if the other person dies. Any assets that qualify as community property or are held in joint tenancy will automatically be exempt from probate.
Community Property
If you are married and your spouse outlives you, they automatically get full ownership of any property that you acquired during your marriage. For example, if Joe purchased a classic car during his marriage, ownership will transfer to his wife after he dies. Or, if he purchased a home while they were married, his wife would inherit the house even if her name was not on the title.
Joint Tenancy
This type of exemption works much the same way as community property, but does not require marriage. If you co-own any titled property with another person (meaning both your names are on the title) they will automatically assume full ownership if they outlive you. So if Joe wants to leave his house to his son, Carl, he can title the house in both their names. Ownership will automatically transfer to Carl without the need for probate.
However, we do not recommend entering into a joint tenancy agreement. One drawback is that since the asset belongs to both parties, they are equally responsible for mortgage payments. Additionally, under joint ownership, the house would be vulnerable to lawsuits, divorce proceedings, collectors, etc., aimed at either one of the co-owners. Placing your assets in a trust offers a lot more protection.
Beneficiary Deeds
Another way that Joe could transfer ownership of his home to his son would be to prepare a beneficiary deed. This move can help you avoid probate as well as the gift tax. Like you would with a living trust, you retain full ownership of the asset until your death. You can rent, sell, or mortgage the property if you choose, and you can also revoke the beneficiary deed at any time.
The only drawback to beneficiary deeds is that the beneficiary needs to be at least 18 years of age. So if Joe’s son Carl is still a minor, Joe will need to set up a trust that can manage the asset on Carl’s behalf.
Transfer on Death Deeds
This term is synonymous with beneficiary deeds, but it can apply to many types of assets besides real estate property. Assets like vehicles, securities, and bank accounts can all avoid probate (and gift taxes) as long as you fill out the right forms.
For example, the Arizona Motor Vehicle Division has a beneficiary designation form that will automatically transfer ownership of your vehicle if you die. Let’s say that Joe wants to leave his classic car to his nephew, Zac. To avoid probate, all Joe has to do is fill out a “transfer on death” deed that names Zac as the next owner of his car. But once again, Zac would have to be 18 to inherit. If Zac is underage, Joe will need to place the car in a trust instead.
Gifts
Another way to avoid probate is to make financial gifts during your lifetime. This can also be a good strategy if you want to reduce the size of your estate in order to avoid federal estate taxes. As of 2023, you can gift up to $17,000 dollars ($34,000 for married couples) to any individual tax-free each year.
So, hypothetically, Joe could give each of his children up to $17,000 each year without incurring the gift tax. Or if he and his wife want to make a charitable gift to their favorite museum, they could donate up to $34,000 together. But if they want to exceed that limit or leave the bulk of their estate to the museum, they could also set up a charitable trust that names the museum as beneficiary.
Small Estates
In Arizona, probate is only required for estates with personal property totaling $75,000 or more, and real estate property valued at $100,000 or more. If your estate is close to this threshold, you can avoid probate by placing your assets in a trust or by giving gifts.
If your estate falls below this threshold, it will not be subject to probate as long as the executor files a small estate affidavit. However, it’s still a good idea to prepare beneficiary deeds for any eligible assets to make the transfer of ownership go more smoothly. And if you have any family heirlooms you’d like to pass down, it helps to prepare a will that includes a personal property memorandum.
Estate Planning Experts in Arizona
If you’re trying to figure out how to avoid probate, you should consult an estate planning expert. DIY estate planning may seem like a good idea in the moment, but it can cause all sorts of legal complications down the road. To secure your family’s future and give them peace of mind, it’s important to have a sound estate plan that has been reviewed by a legal professional.
The team at Phelps LaClair can advise you on how to best avoid probate in Arizona. We can also help you prepare any legal documents you need or set up a living trust to protect your assets. Schedule a free consultation today to learn more.
Photo by Susan Weber on Unsplash used with permission under the Creative Commons license for commercial use 1/08/2024.
