During my career, I’ve met several people who have said something similar to the following to me: “I’ve heard that I need to do some planning to avoid probate; however, what is probate exactly? Can you please just give me a good probate definition?”
What is Probate?
Probate is a fancy term for a legal procedure that may take place after someone dies. It is a judicially supervised, orderly process for administering an estate and normally includes the following:
- Verifying that the will is legally valid
- Appointing an executor or personal representative to manage the administrative process and perform certain duties.
- Creating an inventory of the decedent’s property
- Obtaining appraisals
- Paying bills and debts
- Filing tax returns and paying taxes
- Identifying and locating heirs
- Notifying creditors, heirs, and the public of the death
- Transferring ownership (legal title) of the decedent’s property to the beneficiaries (heirs) listed in the will or according to state intestacy laws if there is no will.
Assets that must be transferred via probate form the probate estate. Since state courts oversee the probate process, the exact rules and procedures of probate may vary from state to state.
Misconceptions about Probate
There are many common fallacies about probate. Here are a couple of them that I commonly hear:
- Avoiding probate also means you avoid taxes
- Having a will allows you to avoid probate
- Avoiding probate mean you are released from any legal obligations to creditors.
- Avoiding probate means an estate won’t have any fees.
Probate is unrelated to taxes. For example, avoiding probate doesn’t mean you will avoid federal estate tax. Likewise, having a probate estate doesn’t mean you will also have a taxable estate for estate tax purposes.
Probate is required for any property that passes by will or by intestacy when total probate assets exceed the applicable threshold amount. In order to avoid probate, property must pass by some other legal mechanism or stay under the applicable threshold.
Avoiding probate won’t necessarily get you out of any legal obligations to creditors, and there still could be fees for tax compliance and planning, attorney fees, valuations, etc.
Downsides to Probate
There are some significant downsides to probate. The 3 major negatives about probate are the following:
- The cost of probate
- The delay in beneficiaries receiving their assets
- The publicity
Probate can be expensive and create fees that may otherwise be avoided, such as the following:
- Court fees
- Additional attorney fees
For example, probate fees in certain states could easily total 5% of the value of an estate. If a decedent has a probate estate of $500,000, that’s $25,000 in fees (for mostly clerical work in most cases) that could be avoided with a little bit of planning. These fees generally decrease the amount of money and property that will ultimately pass to the beneficiaries of the estate. Most people would prefer that their beneficiaries receive this money rather than pay it to an attorney or court.
Probate proceedings can take months or even years to complete, depending on certain factors such as:
- The complexity of the estate
- Creditor claims
- Quantity and location of assets
This means that heirs may be waiting a long time to receive their assets. A court must generally approve any transfer of probate assets, whereas non-probate assets may pass automatically to their new owners at death.
Probate is a public process. It is done in a court of law and is a matter of public record, meaning that pretty much anyone could find out what’s going on. Information about assets passing by trust, operation of law, or contract is not normally publicly available.
If a decedent owns real property in multiple states that is all subject to probate, probate proceedings may be required in each of these states. If you think probate in one state can be a hassle, try dealing with it in multiple states!
Many people choose to spare their beneficiaries and heirs from having to go through this process by avoiding probate altogether.
Benefits of Probate
Most people try and avoid probate for the reasons mentioned above as part of their estate planning. However, probate does have its advantages and may even be appropriate in some cases.
For example, probate ensures judicial oversight of the will and the distribution of assets. Probate can be very helpful when there is conflict among creditors or other parties. It can help settle matters as well as bring closure and peace of mind.
Additionally, many states have simplified probate proceedings for small estates, which are generally easier to deal with.
Examples of Assets Subject to Probate
Assets owned individually by a decedent at death that don’t pass to another person by trust (i.e. revocable living trust), contract/beneficiary designation (i.e. life insurance, annuity or 401(k)), or operation of law (i.e. joint tenancy with right of survivorship) may be subject to probate if the applicable threshold is exceeded. For example, a savings account, checking account, brokerage account, or money market account held in your own name may be subject to probate.
Put another way, probate assets are generally those you own alone in your name, while nonprobate assets generally consist of assets you no longer have legal title to (i.e. trust assets), assets that will pass automatically upon your death (i.e. beneficiary designation), and assets owned jointly with others (i.e. joint tenancy with right of survivorship).
Probate assets pass by will or state intestacy laws if there is no will. If you have a will, your will determines who your probate assets pass to. If you don’t have a will, the state will determine who receives this property. A will and intestacy laws generally have no say in how non-probate assets are distributed since they pass by other legal mechanisms.
Other examples of assets subject to probate include:
- Retirement assets and life insurance if the estate is named as the beneficiary or no beneficiary designations have been made.
- The decedent’s share of tenant in common assets.
Examples of Nonprobate Assets
As touched on above, some examples of non-probate assets include the following:
- Assets that pass by contract/beneficiary designation such as retirement assets, annuities, and life insurance.
- Assets owned jointly with right of survivorship
- Assets owned in trust
- Accounts with “payable on death” designations.
When Probate is Required
Many states have a statutory threshold for probate, usually somewhere between $20,000 and $100,000. Probate is not required at all if the value of the probate estate is less than the applicable threshold. However, if probate assets exceed the relevant threshold, all assets passing by will or intestacy must be probated. Property passing by other legal mechanisms doesn’t require a probate proceeding to supervise its distribution.
Additional Probate Information
For additional information about probate and estate planning, take a look at the following books:
- How to Probate an Estate – A Step-By-Step Guide for Executors
- 8 Ways to Avoid Probate
- What To Do When Someone Dies: A simple step-by-step guide for family members, personal representatives and executors
- The Executor’s Guide: Settling a Loved One’s Estate or Trust
What are your thoughts about probate? What steps have you taken to avoid it? Leave a comment below!