How to Avoid Probate
Obtaining probate so that the assets of a person who has died can be passed on to their intended recipients (the “beneficiaries”). It can be a slow, frustrating and expensive process. Six to nine months delay is not at all unusual, and it can be a lot longer. This is my understanding of the situation:
Probate can be expensive – how to avoid it!
You may wonder what on earth a probate firm is doing teaching you how NOT to need our service. The answer is simple. We offer a wide range of estate planning services which
can take you from cradle to grave and enable you to look after your children, grandchildren, great-grandchildren and beyond. So if we can help a few people save money on probate, some of them (or their heirs) will come to us for our other services and become lifelong clients.
Should you wish it, we can help you through this process and prepare a plan for you, but a number of these steps are pretty simple. They are not in any particular order.
Small Estates
Many modest estates will find that the banks etc will release assets on proof of death, sight of the Will or to the spouse – it is at their option, and they will not pay out if there is uncertainty until a Grant of Probate or Letters of Administration is obtained. But sometimes you can use payment of the funeral bill to reduce a balance to under the particular institution’s limits (bottom of page). BUT only by arrangement before the bill is paid, and they will only release the money to the undertaker. They will NOT reimburse anyone else who pays – that means they will probably have to wait for the Grant of Probate or Letters of Administration.
1) Inheritance Tax
Is the big bugbear of those with substantial assets, and Community Care Tax regularly wipes out the assets of people who are not particularly well off. We have separate sites and guides on both subjects.
2) Use Trusts to Avoid Probate – of increasing benefit.
This way of at least sidestepping probate with the home is becoming increasingly beneficial with worsening delays in probate being granted: with a Trust in place, the property can be sold immediately, so just the interest on then depositing the money in a savings account for a year would probably more than cover the cost of the Trust. So while later life trusts won’t avoid care fees, they will allow an immediate sale to take place when the time comes. It works best with properties significantly under £325,000 or £650,000 for a couple.
Trusts are a bit like companies: they are separate legal “people” from you. So if you put assets in a trust, you don’t own them any more. Depending on the purpose and structure of the trust, you may still control or benefit from the assets. But as far as probate is concerned, the people you have appointed to manage your trust (the “Trustees”), and the assets in your trust do not need probate so they can be dealt with immediately, in one of the many ways you can find in our booklets. That said, your executors will need to complete part of the IHT 400 to give details of the Trust. I have one, partly for this reason, and partly as our family is blended, and clearly, someone might sweep my gorgeous (but younger) wife off her feet and (clearly in her grief at losing such a wonderful husband) be enveigled into a predatory marriage with a younger man who could end up with all my hard-earned “wealth” (not really the right word!) Equally, I could be swept of my feet should my wife die first. We each have our own trusts, with family trustees to ensure the right thing is done, though in some families professional trustees might be safer. (Forgive my sense of humour.)
Trusts should also be used to hold life insurance policies and often for life insurance-based investments.
Trusts are NOT necessarily outside your estate from the point of view of Inheritance Tax, or from creditors if things go wrong, unless you have good advice early enough.
3) Give it away to avoid Probate
Give your assets away during your lifetime. That means REALLY give them away – if you retain any benefit, it won’t work. Sounds like an easy way to do it and usually works well – as long as you do it far enough in advance and keep enough for you to live on. There are very complex rules on Inheritance Tax which can go back as much as 14 years to pull your gifts back into the Inheritance Tax net and land the unsuspecting beneficiary with a large tax bill. But if the amount you give away in a 7-year period exceeds the current Nil Rate Band of Inheritance Tax you may end up paying lifetime gift tax at half that rate though some of the other suggestions will give you extra leeway.
You also need to be careful if there may be creditors.
4) Joint Ownership: another way to avoid probate.
JOINT OWNERSHIP WARNING: not everyone understand joint ownershio correctly, and many accounts are transfered fraudulently to joint signatories: just because someones name is on account does not necesarily mean they own it. So if your daughter is made a joint signatory of your account for convenience, that does NOT give her any ownership rights. To hope to establish the status of a joint owner she would need to be a contributor to the account. This a very fine point, and this is not legal advice, just a gentle warning that such cases need care.
This isn’t always the best way when you take into account tax and other issues but you can put property (real estate) into joint tenancy with your spouse with rights of survivorship The surviving owner will automatically inherit the property at death. But do bear in mind that the transfer of ownership is a gift for Inheritance Tax purposes, and it also then forms part of the other person’s assets.
Example: your wife has died, and you put your home into a joint tenancy with your son. Consequences:
a) If your son divorces or goes bankrupt, half of your home will be available to his creditors or could form part of a divorce settlement.
b) The gift uses up part of your Nil Rate Band tax allowance for IHT purposes and depending on your previous gifts and the value of the house could result in an immediate charge to lifetime IHT, and a full charge if you die within 7 years.
5) Pensions and Death in Service Benefits
Always make sure that you have formally told your pension company and/or your employer where you would wish any death benefits to go. Otherwise they may just be paid into your estate and then potentially be reduced by Inheritance Tax. If your spouse doesn’t need the money, then leave it to your children or grandchildren to skip a generation and avoid unnecessary Inheritance Tax and probate costs.
6) Spend it all!
If you don’t have any assets, probate won’t be required – though there could still be an Inheritance Tax bill which your beneficiaries would have to pay, because (as mentioned above) the tax man can go back up to 14 years. Anyway, it is very difficult to time spending it all correctly!
7) Tax-Exempt Giving
It may help in avoiding probate by going below taxable levels, though 1 & 2 are only of modest assistance. But 3 and 4 can have a substantial impact as long as you in no way benefit from the gifting:
- Each individual can give away up to £3,000 a year and
- an unlimited number of £250 gifts – but not to anyone who has part of the £3,000 allowance and only one £250 per person per tax year..
- Gifts out of normal income: best established by regular giving but ONLY if it does not reduce your standard of living, and your executors can prove it, so good record keeping is important.
- Giving away up to the Nil Rate Band each, and then surviving a further 7 years at which point you get another allowance.
- Gifts to political parties which gained more than 150,000 votes in the most recent General Election.
- Gifts to UK charities – a gift in your Will or 10% of your estate will currently reduce the IHT rate on the balance to 36%.
The Taxman only counts the gift as being made once it ends up in the possession of the beneficiary – so a cheque is NOT a gift – the gift only happens when the cheques has fully cleared and is in the beneficiaries bank account. BEWARE GIFTS IN LATE MARCH or EARLY APRIL.
8) Gifts out of Normal Income
This is the loophole the wealthy love – you can give away as much as you like if it is:a) on a regular basis andb) does not reduce your standard of living.Careful records need to be kept to prove both aspects, as you won’t be around to create them!
9) More ways to avoid probate.
You can’t always probate, but here are a few more small tips for making it less expensive:
a) Don’t hold shares or (some) ISA’s when you die. Probate is pretty much always required then – there is no harmin asking your provider waht the situation is with them. Especially not overseas and in particular US based shares (and many “British” companies are actually based in the US.) Talk to your adviser about ways of simplifying your holdings as different firms have different requirements.
b) Keep your savings in accounts that won’t require probate before they are released – banks and building societies have different limits which typically range from £5,000 to £50,000. So spread it around, and be careful that you don’t have two accounts with “different” firms which turn out to be part of the same group. And always keep well below the limit to allow for interest.
c) Joint accounts can avoid probate (though sometimes wrongly where only one signatory has contributed or the second signatory is just there for convenience and has no legal claim to the funds) but if either partner loses mental capacity they will be frozen until the bank is satisfied that the remaining joint owner has the legal authority to continue to use the account, and that may mean no access for as long as 6 months plus a large legal bill if Lasting Powers of Attorney are not in place and registered.
We’ll try to add more ideas to this page as time goes on – your comments are most welcome! If you would like some professional help, use the form below.
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