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Is probate mandatory after someone passes away? How could we completely avoid probate?

One of the easiest ways to keep your money out of probate is a payable-on-death (P.O.D.) bank account. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death. As long as you are alive, the person you named to inherit the money in a payable-on-death account has no rights to it. You can spend the money, name a different beneficiary, or close the account.

When you open a retirement account such as an IRA or 401(k), the forms you fill out will ask you to name a beneficiary for the account. After your death, whatever funds are left in the account will not have to go through probate; instead, the beneficiary you named can claim the money directly from the account custodian.

If you're single, you're free to choose whomever you want as the beneficiary. If you're married, your spouse may have rights to some or all of the money. If you have a 401(k) account, your spouse is entitled to inherit the money unless he or she agrees, in writing, to your choice of someone else. If you live in a community property state, chances are your spouse owns half of what you have socked away in a retirement account. (Community property states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin; in Alaska, couples can sign an agreement making some or all of their property community property.) If any of the money you contributed was earned while you were married, that money remains "community property," and your spouse owns half.

The Uniform Transfer-on-Death Securities Registration Act allows you name a person to inherit your stocks, bonds or brokerage accounts free of probate. It is similar to a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what's called "beneficiary form." When the papers that show your ownership are issued, they will also show the name of your beneficiary.

With respect to your car - to name an automobile transfer-on-death beneficiary, all you need do is register the vehicle in a "beneficiary form." The new registration certificate will list the name of the beneficiary, who will automatically own the vehicle after your death. States such as California, Connecticut, Kansas, Missouri, and Ohio offer car owners the option of naming a beneficiary, right on their certificate of registration, to inherit a vehicle. If you do this, the beneficiary you name has no rights as long as you are alive. You can sell or give away the car, or name someone else as the beneficiary.

Several methods of joint ownership, such as joint tenancy, provide a way to avoid probate when the first owner dies.

Many couples conclude that holding title to their major assets in a form of joint ownership that avoids probate is all the estate planning they want to engage in, at least while they are younger. The most attractive features of this strategy are its simplicity and economy. To take title with someone else in a way that will avoid probate, you usually don't have to prepare any additional documents. All you do is state, on the paper that shows your ownership (a real estate deed, for example), how you want to hold title.

Joint tenancy with right of survivorship: Property owned in joint tenancy automatically passes, outside of probate, to the surviving owner(s) when one owner dies. Joint tenancy often works well when couples (married or not) acquire real estate, vehicles, bank accounts, securities, or other valuable property together. Setting up a joint tenancy is simple and free. However, setting up joint tenancy in Texas requires that all joint tenants to sign an agreement. If you wished to set up a joint tenancy bank account, specifying your arrangement on the bank's signature card isn't enough. A bank or real estate office should be able to give you a fill-in-the-blank form that will do the trick.

After one joint owner dies, generally all the new owner has to do is fill out a straightforward form and present it, with a death certificate, to the keeper of ownership records: a bank, state motor vehicle department, or county real estate records office.

Joint tenancy is usually a poor estate planning choice when an older person, seeking only to avoid probate, is tempted to put solely owned property into joint tenancy with someone else. Beware of certain issues…You are giving away part ownership of your property. The new owner has rights that you can't take back. For example, the new owner can sell or mortgage his or her share -- or lose it to creditors. You may have to file a gift tax return. If the value of the interest you give to a new co-owner (except spouse) exceeds $11,000 in one year, you have to file a gift tax return with the IRS (unless you're adding a joint tenant to a bank account to which you deposited the money; in that case, no gift is made until the other person withdraws money). No tax is actually due, however, until you leave or give away a very large amount (currently, more than $1 million) in taxable gifts.

A great many people err on the side of adding a person as a joint tenant to a bank account strictly for "convenience." sake. They want someone to help them out by depositing checks and paying bills. But after the original owner dies, the co-owner may claim that he or she is entitled, as a surviving joint tenant, to keep the funds remaining in the account. In some instances, maybe that's what the deceased person really intended -- it's too late to ask.

Tenancy by the entirety: In certain states, married couples often take title not in joint tenancy, but in "tenancy by the entirety" instead. It's very similar to joint tenancy, but can be used only by married couples. Both avoid probate in exactly the same way.

If you are married (California allows people to register with the state as domestic partners) and live or own property in Alaska, Arizona, California, Nevada, or Wisconsin, another way to co-own property with your spouse is through community property with the right of survivorship. If you hold title to property in this way, when one spouse dies, the other automatically owns the asset. Transferring title to the survivor is simple and doesn't require court proceedings.

Revocable Living Trusts were invented to help people avoid probate entirely. The advantage of holding your valuable property in trust is that after your death, the trust property is not part of your estate for probate purposes. (It is, however, counted as part of your estate for federal estate tax purposes.) That's because a trustee -- not you as an individual -- owns the trust property. After your death, the trustee can easily and quickly transfer the trust property to the family or friends you left it to, without probate. You specify in the trust document, which is similar to a will, which you want to inherit the property.

Trusts are defined and explored in more detail on our trust FAQ pages.

Giving away property as gifts while you're alive helps you avoid probate because if you don't own it when you die, it doesn't have to go through probate. That lowers probate costs because, as a general rule, the higher the monetary value of the assets that go through probate, the higher the expense. If you give away enough assets, your estate might even qualify for a streamlined "small estate" probate procedure after your death. (These procedures are discussed below.)

If you are considering making lots of large gifts, you should know that giving more than $11,000 to any one recipient in one calendar year would require filing a federal gift tax return. You won't actually have to pay any tax now

The creation of a Living Trust that holds legal title to some or all of your property at the time of your death is most commonly used form of avoiding probate. The Trust is a legal instrument that survives you after your death.