“Probate.” The word itself is enough to strike fear into the hearts of elderly individuals and their loved ones. It conjures images of lengthy delays waiting for wealth to be transferred and bitter disputes among family members. Plus, probate is open to the public, so all your “dirty linen” may be aired. The reality is that probate doesn’t have to be so terrible, and often isn’t, but both property owners and their heirs should know what’s in store.
Probate process explained
For starters, be aware that probate is predicated on state law, so the exact process varies from state-to-state. This has led to numerous misconceptions about the length of probate.
On average, the process takes no more than six to nine months, but it can run longer for complex situations in certain states. Also, some states exempt small estates or provide a simplified process for surviving spouses.
In basic terms, probate is the process of settling an estate and passing legal title of ownership of assets to heirs. If the deceased person has a valid will, probate begins when the executor named in the will presents the document in the county courthouse. If there is no will — the deceased has died “intestate” in legal parlance — the court will appoint someone to administer the estate. Thereafter, this person becomes the estate’s legal representative.
With that in mind, here’s how the process generally works, covering four basic steps.
First, a petition is filed with the probate court, providing notice to all the deceased heirs and beneficiaries under the will. Typically, such notice is published in a local newspaper for the general public’s benefit. If someone wants to object to the petition, they can do so in court.
Second, the executor takes an inventory of the property owned by the deceased, including securities, real estate and business interests. In some states, an appraisal of value may be required. Then the executor must provide notice to all known creditors. Generally, a creditor must stake a claim within a limited period of time specified under state law.
Third, the executor determines which creditor claims are legitimate and then meets those obligations, along with paying any taxes and other debts that are owed by the estate. In some instances, state law may require the executor to sell assets to provide sufficient proceeds to settle the estate.
Fourth, ownership of assets is transferred to beneficiaries named in the will, following the waiting period allowed for creditors to file claims. If the deceased died intestate, state law governs the disposition of those assets. However, before any transfers take place, the executor must petition the court to distribute the assets as provided by will or state intestacy law.
Frequently, the will provides for the creation of a testamentary trust to benefit heirs. For instance, a trust may be established to benefit minor children who aren’t yet capable of managing funds. In this case, control over the trust assets is transferred to the named trustee. Finally, the petition should include an accounting of the inventory of assets, unless this is properly waived under state law.
Planning to avoid probate
Besides certain assets that automatically are exempt from probate (see the sidebar, “What assets skip probate?” on page X), you may be able to avoid the process with advanced planning. The easiest ways to do this is through the initial form of ownership or use of a living trust.
With joint ownership with rights of survivorship, you acquire the property with another party, such as your spouse, and then the property automatically passes to the surviving joint tenant upon the death of the deceased joint tenant. This form of ownership typically is used when a married couple buys a home or other real estate. Similarly, with a tenancy by entirety, which is limited to married couples, the property goes to the surviving spouse without being probated.
A revocable living trust is often used to avoid probate and protect privacy. The assets transferred to the trust, managed by the trustee, pass to the designated beneficiaries upon your death. Thus, you may coordinate your will with a living trust, providing a quick transfer of wealth for some assets. You can act as the trustee and retain control over these assets during your lifetime.
Achieving all estate planning goals
When it comes to probate planning, discuss your options with family members to develop the best approach for your personal situation. Also, bear in mind that avoiding probate should be only one goal of your estate plan. Your estate planning advisor can help you develop a strategy that minimizes probate while reducing taxes and achieving your other goals.
SIDEBAR: What assets skip probate?
Your will controls the disposition of most assets you own, but not all assets have to go through probate. A few notable exceptions include funds in a qualified retirement plan, such as a 401(k) plan, or traditional and Roth IRAs. These pass to beneficiaries listed in the plan or IRA documents. Similarly, life insurance proceeds go to beneficiaries named in the proper forms (unless the estate is named). These designations supersede any provisions in a will.
Other property in a payable-on-death (POD) form — such as certain securities, bank accounts and U.S. Savings Bonds — automatically pass to beneficiaries without going through probate.