Let's say you want the money in your savings account to go to your son Rob upon your death. All you need to do is put the account in your name, with a notation that you own the account "as trustee for the benefit of Rob Stewart."
Rob won't have any rights to the money in the account while you're alive. But when you die, he will automatically own whatever funds are in the account. No probate will be necessary; the bank will turn over the funds to him when presented with a copy of your death certificate and proper identification.
Pay-on-death accounts are also known as informal bank account trusts, Totten trusts, and bank trust accounts.
All you need to do is name a beneficiary to receive any funds still in the account at your death. The beneficiary will get the funds without probate. The only restriction is that to avoid penalties, after age 70 you must withdraw a certain amount from the account every year. The amount is refigured every year, based on your life expectancy.
As long as you keep your gifts less than $10,000 per recipient per year, you will not be assessed federal gift tax. Even if the gift you make is taxable, the gift tax won't become due until your death, and then only if the amounts you gave away and leave at death total more than $600,000.
Gifts of life insurance on your own life are a particularly good way to transfer a chunky asset but pay a skinny tax. The gift tax is assessed on the cash value of the policy when you give it away, not on the much greater proceeds it eventually pays. To get the estate tax savings, however, you must give the policy away at least three years before your death and scrupulously follow other IRS rules on gifts of insurance policies.
Joint tenancy can work well as a probate-avoidance method for property you acquire with someone else or if you transfer property you already co-own (or are buying) with someone into joint tenancy.
But making someone else a joint tenant of property you own alone, just to avoid probate, is often a bad idea. The new owner could sell his or her half-interest, or the new owner's creditors could go after it. And you may be in trouble if you change your mind and decide you want the property to go to someone else at your death. You've given up your rights to the half-interest the new owner owns.
For people in their seventies or eighties, there is another big disadvantage of adding someone as a joint tenant: The new owner misses out on the potentially huge income tax break.
If you leave property to someone at your death, the property gets a "stepped-up" tax basis. The basis is the amount from which taxable profit is figured if the new owner ever sells the property. Here's the formula: selling price - basis = taxable profit.
When property is transferred at death, the basis goes up to the value of the property at your death. This is good because the higher the tax basis, the lower the taxable profit when the property is sold.
But if you give away property while you're alive, by making someone a joint owner of your property, the tax basis of that half of the property isn't "stepped up" at your death--it stays what it was when you acquired the property. This means that if the property goes up substantially in value before your death, the owner will owe a big tax when it is eventually sold.
An example shows the difference it can make to wait until death to transfer the property.
Example: The tax basis in Ellen's house is $120,000, the amount she paid for it years ago. She puts her house into joint tenancy with her daughter, which means her daughter already owns half the house before Ellen dies. When Ellen dies, the house is worth $200,000. But only the half that is transferred at death gets a stepped-up tax basis from $60,000 to $100,000. So the new basis is $160,000. If the daughter sells the house later for $230,000, she will owe tax on $70,000.
If, however, Ellen transfers the house to her daughter at death, her daughter's tax basis will increase to $200,000, its value at Ellen's death. If she sells the house later for $230,000, her taxable profit will be only $30,000.
Notice: The information provided is of general nature and is not intended to replace the advice and counsel of an attorney.