What is Subject to Probate?
Is there any way to avoid probate? I just went through a year and a massive amount of money as the executor of my late uncle’s estate. We had to deal with claims against his estate. My niece decided to challenge the will. I had to wait months to get final authority to re-title his assets so they could be sold. The court costs and attorney fees were outrageous. I had to open a special banking account, file tax returns and on and on.... I would like to spare my heirs this nightmare. Even after going through all of this, I am still not sure what is subject to probate and how it can be simplified.
Basically, everything is subject to probate unless it is in a living trust or it can be titled in the name of a second owner or beneficiary so that it goes automatically to them if you pass away. I'll discuss more about this at the end of this article.
But, first some background about the process of probate. As you know from being an executor, you had to gather assets, value them and sell them to meet the claims against the estate. The bank account you opened in the name of the estate was proper recordkeeping for the income and receipts for the estate. You would, of course, pay expenses from the same account and distribute funds to the beneficiaries. You had to secure a federal identification number for tax purposes since the estate becomes an entity unto itself. You were responsible for a myriad of tax returns. In your particular case (which isn’t unusual) you also had to deal with the emotional trials of angry relatives who challenged the validity of the will. It is a time consuming and draining process in many cases.
If it is any consolation, some estates can take two years to wrap up. If federal estate tax returns are involved, they can slide into a third year. Distributions can hang on for a protracted period of time, especially when it is difficult to find beneficiaries. The first distribution usually takes from six to eight months from the time of death. Some states are more humane, especially with a spouse and minor children, and allow immediate distributions.
You were subject to the supervision of the probate court in the distribution of your uncle’s assets. This includes determining if the will was valid, paying debts and taxes from the estate, any expenses incurred in the administration of the will and finally distributing what’s left over to heirs. You had to submit your uncle’s will to the probate court. It was their job to insure that his property was distributed according to his wishes as stated in the will. It may not seem like it, but the primary benefit of the probate process is to handle claims from creditors, disputes and challenges to the will, and to insure the probate laws are followed. A primary purpose of the probate process is to protect the estate from prematurely distributing assets to wrong people (i.e. relatives instead of creditors).
Fortunately, your uncle had a Will. As his executor, your job was to carry out you uncle’s final wishes as outlined in the Will. When there is a Will, the legal term for the probate process is testate proceedings. When there is not Will, then things become very complicated. In the instance where someone dies intestate (without a Will) the court takes over distribution of property. An administrator is appointed and, because there is no Will to provide direction or list beneficiaries, the court will distribute assets according to state law. Priority is usually given to a spouse, and then to surviving children.
In the instances where the estate does not exceed a certain value, in some states, the probate process can be reduced through Short Form Probate. With the exception of Montana and North Carolina, all states have a Small Estate Administration. They differ on what qualifies. This streamlined approach can save money and time in distributing the property in an estate. In many instances, it requires the consent of the heirs before allowing the Short Form Probate process.
The easiest way to avoid the probate process is by establishing a living trust. Transfer all of your assets to the trust while you are alive. This is called funding a living trust. A living trust has its own provisions; it does not necessarily end upon your death. The trust becomes the titleholder to your property. It is not necessary to re-title assets out of the name of the deceased. The successor trustee distributes the assets in the trust to the beneficiaries as specified in the trust document.
Another way to avoid probate is by naming beneficiaries on your assets. Life insurance, pension plans, retirements accounts, bank accounts and the like can be made payable to a specific beneficiary. If done properly, they will not be governed by the Will and will not require probate. Likewise, property owned jointly with survivorship rights pass to the survivor automatically and are not subject to probate.
Probate can also be avoided by establishing POD (paid on death) designations on bank accounts. A TOD (transfer on death) on brokerage accounts, IRAs and 401Ks will also prevent probate proceedings and pass directly .
Your first-hand knowledge of the probate nightmare is reason enough to insure your beneficiaries avoid the same pain. Hopefully you will seek assistance from a qualified professional who can help you set up these methods for avoiding probate to maximize your estate and to spare your heirs from suffering through the same probate experience that you had.
Here's how to avoid probate.
You can read all about my executor story at How to Probate an Estate.
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