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How Can Annuities Help You Avoid Probate?

annuities avoid probate

Estate planning isn’t likely to rank high on your list of fun things to do. Thinking about a post-death legacy and what you wish for loved ones probably isn’t high up there, either.

But having a proper estate plan is beneficial in many ways. It can ensure that your assets are distributed in the manner that you desire after you are gone.

Depending on the size of your estate as well as your state of residence, you may be facing estate taxes on your assets. There are ways that you can reduce that tax liability if you might choose so.

But one legal process can also derail your legacy wishes, tie up your assets for a long time, and lead to family drama that otherwise wouldn’t happen: probate.

The good news? One way that you can avoid probate on some of your assets for certain is if you have money in annuities.

With how they are treated under law, annuities exempt the money within them from this often time-consuming and drawn-out proceeding.

What is Probate and How Does It Affect You?

The probate process is the legal procedure that is used to disperse your assets after you die.

Once your assets have gone through probate, any outstanding debts that you had can be settled, your heirs will have a clear title to your remaining assets, and all other details pertaining to settling your estate will be taken care of.

What Does the Probate Process Involve?

Generally speaking, it’s good to avoid probate if it’s possible. What can happen otherwise?

It can easily take at least six months or longer to complete the probate process. And if your will is contested, it can drag on for over a year.

Probate can also be an expensive proposition. In some cases, the court and other legal fees can equal 4-5% of your total assets, depending upon the amount of appraisals and other administrative fees that are incurred.

Furthermore, the probate process is completely public. Family members and members of the public have access. Even your worst enemy can log on to the county website and get a complete listing of all of your assets that are being handled by the court.

The Biggest Downside to Probate

Perhaps the most important reason that there is to avoid probate is that it can lead to unnecessary conflicts between your heirs and beneficiaries. If you don't clearly spell out where you want certain assets to go, then the question of who gets them can become difficult to answer.

More than one family has been torn apart by one or more relatives contesting the will of the deceased. Then the decision of who gets what will ultimately become the decision of a judge.

In turn, the judge may or may not allocate your assets in the manner that you intended. The emotional cost of contesting a will can far outweigh the financial costs that are involved.

How Can You Avoid Probate and Its Downfalls?

Fortunately, there are several different ways that probate can be avoided. The four chief avenues that leapfrog over this process are:

1. IRAs and Qualified Retirement Savings Plans

The named beneficiary on an IRA or qualified plan will receive the account proceeds without the account going through the probate process. This is true regardless of whom the beneficiary is, even if it is a trust.

2. Joint Savings Accounts with Rights of Survivorship

In shorthand, these sorts of accounts are also known as JTWROS.

Say you have joint accounts with your spouse that have rights of survivorship. Then your joint accounts will be legally retitled in their name only without going through probate after you die.

3. Revocable Living Trusts

This is the most comprehensive form of probate avoidance. Any asset that is titled in the name of the trust will go directly to the named trust beneficiary or beneficiaries without going through probate.

4. Life Insurance and Annuities

The death benefit from life insurance and annuity contracts go directly to the beneficiary without going through probate. This assumes that the life or annuity contract has a designated beneficiary in it.

This death benefit transfer happens regardless of whether the annuity is housed inside an IRA or pre-tax retirement savings plan. Non-qualified annuities are also exempt from probate.

Annuities are essentially contracts between a policyholder and a life insurance company. The beneficiary is literally written into the contract.

You as the policyholder can also specify what percentages of the money in the annuity that beneficiary would receive. For that matter, you can list primary, contingent, and even tertiary beneficiaries on an annuity or life insurance policy.

Just be sure to list at least one beneficiary, because if no beneficiary is listed, then the annuity proceeds will be subject to probate.

Annuities, an Unsung Hero for Probate

Annuities are the only type of instrument available in the financial marketplace today that is inherently exempt from the probate process. Life insurance is the only other instrument to which this applies.

Stocks, bonds, mutual funds, ETFs, REITs, derivatives, CDs, and all other types of investments that sit inside a taxable retail account will be subject to probate. That is, unless the account is titled in the name of a revocable living trust.

But annuities are exempt from probate even if they aren’t part of a trust. Annuities stand alone among other financial instruments in this regard. 

What About Having a Will?

It should also be noted that having a will doesn’t exempt your assets from the probate process. A will can guide your assets through the probate process. However, only a revocable living trust or another of the avenues listed above can exempt your assets from it.

On the other hand, annuities can allow the beneficiary to avoid inheritance taxes in many cases and also use the annuity as their own retirement savings vehicle.

That being said, they might face some sort of income tax bill depending on the situation. Check with your financial professional, CPA, or attorney for personal guidance if this applies.  

Those who do go this route with an annuity can enjoy protection from probate, tax-deferral for growth, and a guaranteed stream of lifetime income, among other benefits.

Annuities and Creditor Protections

Money that sits inside an annuity is also exempt from seizure by creditors in many cases. This usually holds true even if the annuity isn’t housed inside an IRA or qualified plan.

The specific laws regarding this vary a fair bit from one state to another. So, be sure to check with your attorney or tax professional for more information on this. Your financial professional can be a helpful general source of information, too.

They will be able to tell you the circumstances that are necessary for annuities to be exempt from creditors, if there are any (which there are in most cases). Your state insurance department can also have people knowledgeable of these situations.

More Than a Way to Potentially Avoid Probate

Annuities are fundamentally unique financial options. They are the only type of retirement savings vehicle that is inherently tax-deferred and exempt from probate.

Furthermore, there is no limit to the amount of money that can be put into an annuity, unlike with an IRA or qualified savings plan. Consult your financial advisor for more information on annuities and how they can avoid probate and taxes.

Are you looking for a financial professional to help you with your retirement goals and questions? For your convenience, many experienced and independent financial professionals are accessible at SafeMoney.com with just a few mouse clicks.

Use our "Find a Financial Professional" section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and overall situation. Should you need a personal referral, please call us at 877.476.9723.

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