How to Avoid Probate for 18 Asset Types
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Contents
- How Does a Will Fit into Probate?
- "Do I Need a Trust to Avoid Probate?"
- How to Avoid Probate on Bank Accounts (domestic)
- How to Avoid Probate on Bank Accounts (foreign)
- Domestic Real Estate (in-state where you're resident)
- Domestic Real Estate (out-of-state)
- Foreign Real Estate
- Different Legal Systems = Different Options
- How to Make Different Legal Systems Work Together
- Precious Metals (domestic)
- Precious Metals (international)
- Cryptocurrency (domestic)
- Cryptocurrency (international)
- Domestic Investment Accounts (retirement)
- Domestic Investment Accounts (non-retirement)
- Domestic Life Insurance
- International Life Insurance
- Private Interest in a Domestic Limited Liability Company (LLC)
- Private Interest in a Domestic Corporation (S-Corp and C-Corp)
- Private Interest in International Businesses
- Vehicles, Boats, Planes, and Other Larger Assets
- Personal Belongings / Everything else
- The Best Way to Avoid Probate in the US?
- If you need help with international estate planning...
No one likes to think about death. But if you have a family, friends, or charities that you care about and want to leave things to when you pass, it’s important to plan.
Early in the estate planning journey, you’ll learn about something called probate – a very public and often expensive legal process that hands over your assets to the next generation according to your wishes.
In our practice – especially with the higher net worth families and individuals that make up most of our clients – how to avoid probate entirely is a big topic.
That’s what this article is about. I’ve compiled a list of all sorts of different asset types – both domestic and international – and what you need to do to avoid probate for that asset class.
How Does a Will Fit into Probate?
A will is a foundational legal document that specifies how you want your estate to be handled when you pass. It will:
Set a legal representative (called an executor or personal representative) who will be responsible for following the terms of your will.
Honor any specific requests on how you want to deal with specific assets.
Specify how to take care of any underage children.
List other important details and wishes.
If you don’t have a will, your property will be divided according to the state law relevant to such things.
Most people want to avoid this, and a will does so. But it doesn’t help you avoid probate.
"Do I Need a Trust to Avoid Probate?"
There are various tools available, but yes, the most basic tool is a simple living trust formed in the state where you live and own assets. You’ll see it pop up in the list below quite a bit.
If you own assets in other states or countries – as many of our clients do – you will need to look at additional planning based on a number of factors, including the value of those assets.
So with that said, let’s jump in…
How to Avoid Probate on Bank Accounts (domestic)
Bank accounts generally do not avoid probate by default. If a bank account is in your name when you die, it usually goes through probate according to your will or state law if you have no will.
However, unlike other assets, there are non-structured options to bypass probate. They include:
Payable-on-Death (POD) Designation: By naming a beneficiary on the account, the funds go directly to that person upon your death. This avoids probate.
Joint Ownership: If you own the account jointly with right of survivorship, the surviving owner gains control without probate.
Trust: Placing the account in a trust can bypass probate. The trust holds the account, and the trustee handles distribution. (If you manage the trust while you’re living, then your “successor trustee” – who is often the same as your executor – will take over.)
How to Avoid Probate on Bank Accounts (foreign)
In some countries and certain banks, you’ll be able to specify a Payable-on-Death designation. Other countries and banks won’t allow this, especially in civil law countries that follow forced heirship rules.
Forced heirship rules specify which heirs are required by law to receive assets in a certain order. With the exception of Louisiana, the concept doesn’t exist in the US.
Depending on the jurisdiction, some ways to get around this include:
Corporate Structure: Open the account in a corporate name, then do the estate planning at the corporate level rather than with the bank. Sometimes you can use a US structure. Other times, it’s better to use a local company to hold the assets.
Trust: If the account is in a common law country, you can use a domestic or offshore trust to hold the account. If in a civil law country, you can use a local structure that is then owned by your domestic or offshore trust.
Domestic Real Estate (in-state where you're resident)
To avoid probate on domestic real estate, you have plenty of options including:
Joint Tenancy with Right of Survivorship: By adding a co-owner like a spouse, other relative or a friend, the property automatically transfers to the surviving owner(s) upon your passing. This is available in all states.
Tenancy by the Entirety: This only applies to married couples in about half of the states in the US. It ensures that when one spouse dies, the surviving spouse automatically inherits the property without probate. A few states that recognize this form of ownership extend it to other assets, including bank accounts.
Transfer-on-Death (TOD) Deed: A TOD deed lets you name a beneficiary who inherits the property upon your passing, similar to the POD on bank accounts. This option is available in states like California, Texas, Florida, and Missouri.
Community Property: Several states, especially in the western US, are “community property” states. In those states, a married couple is presumed to jointly own assets (including real estate) that either or both spouses acquire during marriage. Examples include Arizona, California, and Washington. There are a few exceptions, but in general, in those states, a surviving spouse automatically receives that portion of the community property assets deemed owned by the deceased spouse.
Which options are available to you depends on different factors including what state you live in.
Watch Out for Homestead Exemption Protection
Many states have something called Homestead Exemption protections. If you’re sued and lose, a certain amount of equity as defined by the state will be protected. In some states, it’s unlimited (hi there Florida and Texas!). In others, it’s effectively nothing (Kentucky and Tennessee come to mind).
If you transfer real estate into a structure, you might lose this protection. Check with your state rules on such things. A basic living trust is acceptable in most cases but things like an LLC might not be.
Domestic Real Estate (out-of-state)
By and large, the options available to you when you own a property out-of-state are the same as in-state. However, because there’s no homestead exemption on offer, an LLC is often worth a look for asset protection and estate planning purposes.
That LLC would need to fit into your larger planning, however.
There can also be legal, compliance and tax complications when a structure set up in one state owns property in another.
Foreign Real Estate
We do a lot of work with clients who own foreign real estate outside the US. And of any asset category, this is probably the hardest to plan around… and the one that trips up many a client.
That’s because, unlike more mobile assets like stocks, bonds, metals, or even collectibles, real estate is, by definition, rooted to the ground.
Most governments consider such assets theirs to regulate, and foreigners who wish to own real estate there are expected to follow the rules of that country, and their legal system.
Different Legal Systems = Different Options
The trouble is, there are many different legal systems out there. We live in a common law country – the old law of England.
Many of the countries where our clients buy property are civil law countries – based on the old law of ancient Rome, updated substantially under Napoleonic France as his armies marched across Europe in the late 18th and early 19th centuries.
(Indeed, many continental Europeans and their former colonies use a civil law system to this day for this reason.)
Then there’s religious law, which dominates the legal system of some countries. Islamic (Sharia) and Jewish (Halakha) might be the most well-known.
There’s customary law, which features mostly in the rural areas of some countries. That’s the law of traditional practices and customs.
And then there are hybrid systems that have elements of two or more systems. Different aspects of the law are dominated by different legal systems. For example, the Philippines has a mix of old Spanish civil law and American common law thanks to history over the past few centuries.
When it comes to estate planning, a common law structure like a trust is rarely recognized for estate planning in a civil law country. Places where customary law is used might not recognize any structure at all.
How to Make Different Legal Systems Work Together
That’s why we often ask clients if they plan to keep their foreign real estate for the heirs or sell it during their lifetime. If it’s for their heirs, we have to plan at the local level to avoid probate, and then find a way to integrate that local planning into the US side of things.
It’s doable most of the time, but not always. And not getting it right can be very expensive. That’s why planning ahead of time is so important.
An Expensive Mistake
Earlier this year, a couple in their 70s signed up for our planning. Over the years, they had amassed real estate assets in more than 10 countries and didn’t want to inconvenience their heirs by making them go through probate in all of these places.
They were sold an expensive offshore trust that was supposed to hold all these real estate properties. But they weren’t sure how to use it and asked us for help.
Trouble was, with the exception of two properties, all of these assets were in civil law countries. A common law offshore trust just wouldn’t work.
We did come up with a solution, however. But it wasn’t cheap. To implement a proper solution that completely avoided probate – and pay the “penalties” for having done it the wrong way in the first place (i.e. transfer taxes) – would have cost nearly $200,000. If they had come to us before they had bought, it would have been closer to $50,000 for set up. Still a lot, but a lot less.
That’s a bit of a dirty secret in the foreign real estate game. Most salespeople are happy to sell you a plot of land in Panama, Paraguay, or Portugal. But they don’t either know or don’t care about the tax and planning issues for US clients. They just want to sell the thing.
That’s why it’s so important to find the right professionals to help you buy international real estate. We help clients with that – reviewing deals they’ve been presented with, helping them negotiate, working with local lawyers to minimize cost and compliance issues. If you’re looking for help with a foreign real estate purchase, feel free to get in touch.
Precious Metals (domestic)
From an estate planning perspective, domestic holdings of gold, silver, platinum and palladium are treated the same as any other domestic asset and subject to probate.
For these assets, the easiest way to avoid probate is to convey them into a structure—e.g., an LLC or living trust.
Precious Metals (international)
The picture when you hold precious metals internationally is a bit more complicated. In some cases, if you hold precious metals in a foreign safe deposit box, it will be considered a personal possession and is usually treated as if you owned it at home. (In other words, the foreign jurisdiction has no say over the assets.)
However, if you hold it with a company that is regulated as a Foreign Financial Institution, your holdings may be subject to probate in the country where the license is held. There may (or may not) be an exception for an account held jointly with someone else, especially if that person is your spouse. But otherwise, in those cases, you will need to look at structures either domestically or internationally.
Cryptocurrency (domestic)
Cryptocurrencies like Bitcoin or Ethereum are treated as personal property for estate planning purposes and are subject to probate unless proper planning is done.
To avoid it, you will use the same tools as with precious metals—convey it into a structure.
Cryptocurrency (international)
The rules are broadly similar to that of precious metals held internationally. If you hold it personally—say the private key and seeds—in a foreign safe deposit box, the laws of where you live will apply. It will go through probate by default.
If you hold it in a foreign cryptocurrency exchange, it may be subject to the probate laws of the country in which it’s registered.
In both cases, you’ll probably need to use structures.
Domestic Investment Accounts (retirement)
Retirement accounts generally don’t need to go through probate. Instead, when you set it up, you choose a beneficiary to whom you want it to go to when you pass. In that sense, it’s quite easy.
However, if you’ve ever been the beneficiary of a retirement account, you know that there are certain rules you, as the receiver, have to follow. What those rules are depends on the account type and your relationship to the deceased.
Domestic Investment Accounts (non-retirement)
Generally, domestic investment accounts with a local broker will be subject to probate. However, there are options.
In some cases, you might be able to set up a payable-on-death or transfer-on-death arrangement, similar to a bank account.
You could also set up a joint brokerage account with right of survivorship, with the other person gaining control of the assets when you pass.
Structures like trusts and LLCs can also be used to avoid probate.
Domestic Life Insurance
There are many flavors of life insurance but one thing they do tend to share in common is the ability to avoid probate entirely. You simply say who you want to receive the proceeds when you pass.
When you do, that beneficiary gets the money.
International Life Insurance
International life insurance policies usually avoid probate. You say who you want to be your beneficiary when and upon your passing, that person gets either the death benefit or access to the investment (depending on how the policy is set up).
Just be aware that international regulations and tax laws can vary. Careful planning is key.
More than almost any other structure, international life insurance policies offer the most scope for tax-deferred and tax-free opportunities. They also offer extraordinary asset protection and can be a key part of probate-free for estate planning. This is especially true of Private Placement Life Insurance.
Private Interest in a Domestic Limited Liability Company (LLC)
Estate planning for a domestic LLC can offer a lot of flexibility. Ownership interests can be transferred easily, often avoiding probate with proper planning.
Multi-member LLCs generally bypass probate if structured correctly. The membership interest of a deceased member is generally divided among the surviving members. But check your LLC’s operating agreement to make sure.
However, assets in a single-member LLC (where you’re the only owner/member) may be treated as personal assets and could require probate unless specific estate planning steps are taken.
Private Interest in a Domestic Corporation (S-Corp and C-Corp)
Estate planning for private shares in domestic corporations are typically subject to probate without additional planning. You’ll need to get the shares out of your own name to avoid it.
Private Interest in International Businesses
Having an offshore company can be complicated depending on how Uncle Sam sees them. With these things, there are two factors at play.
- The first is the legal structure. From an estate planning perspective, this is fairly straightforward—a domestic structure can be used to hold an interest in a foreign structure that allows for the assets in that foreign structure to avoid probate.
- The second factor—taxes—is a lot more complicated. Because Uncle Sam doesn’t recognize many structures formed in other countries that aren’t available in the US (i.e. most civil law structures), taxes can be a problem. There is the potential for double taxation if not done properly. And compliance can be a headache.
But here are some general principles in the broadest sense:
Foreign LLCs
The default US tax treatment of most foreign entities is taxation as a foreign corporation. That’s not usually a good choice except in a few select circumstances.
However, the IRS does allow some foreign structures to be taxed as a disregarded entity (one owner) or a partnership (more than one owner).
Unfortunately, Uncle Sam has decided many foreign entities don’t qualify. Except for ones that are broadly similar to what we know as LLCs, GmbHs, SARLs, and SRLs.
Foreign Corporations
Foreign corporations you control are subject to very complex tax rules and in most cases don’t work well for US clients. They do have their uses in limited situations, but they are best done with the help of a specialized professional. Some examples include AGs, SAs, Ltds., and Ptys.
From an estate planning standpoint, shares in a foreign corporation you don’t control can be inherited just like any other asset. But you’ll need to check the rules of the country in which the corporation is formed to find out the best way to do it.
Trust-like Structures
Trust-like structures in civil law countries (e.g. Stiftungen, Anstalten, Fundaciónes de Interés Privados) aren’t generally recognized under US tax law. How they are taxed will depend on how they are drafted but the two options are foreign trust and foreign corporation.
If you have the choice, we suggest having them drafted as a foreign trust, if only to avoid the pain of dealing with the complex tax situation that comes with a foreign corporation.
In some places, there are ways to get the best of both worlds—using the equivalent of a “civil law trust” but with a much easier compliance and tax situation on the US side. However, this is also a highly specialized area that needs to be done properly by an expert.
Vehicles, Boats, Planes, and Other Larger Assets
Larger assets, such as vehicles, boats, and planes are automatically subject to probate without extra planning.
In some places, you may be able to use a transfer-on-death (TOD) designation to avoid probate.
Other times, an entity will be needed.
And if the assets are “domiciled” in a foreign jurisdiction at the time of passing, there may be additional wrinkles under local law.
I know I sound like a broken record at this point, but assets like these need proper planning to avoid surprises.
Personal Belongings / Everything else
Personal belongings, like furniture, jewelry, art, or collectibles, are also automatically subject to probate unless you have proper planning.
One thing we’ve noticed is the tendency to put “the big stuff” in a structure and ignore all “the little things” that actually do add up to something when viewed from an estate perspective.
That’s why, if you’re going to use a US trust for estate purposes, consider also setting up a pour-over will. At the time of passing, everything you own domestically will “pour over” into the trust, ensuring that none of your assets go through probate.
International assets, on the other hand, may have to go through a local probate process, similar to foreign real estate. In such cases, you’ll need to do more planning to avoid that.
The Best Way to Avoid Probate in the US?
Throughout this article, I’ve given you some ideas on how to avoid probate for different sorts of assets.
Different strategies will work better for different clients living in different states (where local law takes precedence in such situations).
But generally, for domestic assets held domestically, with no asset protection needed, here’s what we recommend:
A basic living trust written under the laws of the state you live in.
A pour-over will to ensure none of your personal belongings owned directly by you accidentally go through probate.
A Durable Power of Attorney that ensures someone can manage your financial affairs if you can’t make the decision on your own.
An Advanced Healthcare Directive (or Medical Power of Attorney) that sets out your medical preferences and appoints someone to make the decisions if you can’t do so on your own.
If you own assets in other states, you’ll want to plan for those separately under the laws of that state.
And if you own assets internationally, you’ll want to work with an expert to properly set things up before you buy that asset. Planning after the fact can be expensive.
If you need help with international estate planning...
Feel free to book in a free, no obligation call with one of our Senior Associates. We’ve seen a lot over the years and know how to manage the structure and tax issues that come with foreign investments. You can book here.
About The Author
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We have 40+ years experience helping Americans move, live and invest internationally…
Need Help?
We have 40+ years experience helping Americans move, live and invest internationally…
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