Whether you recently experienced the loss of a loved one or are learning how to best prepare and plan your own estate, you've likely come across the term and may be wondering, "What is probate?" It's important to understand what probate is and how the process works. This article explains what probate is, the probate process, when probate is and is not used, and how to avoid probate.
What is probate?
Probate is the legal process that takes place after someone dies in order to prove the deceased's last will and testament and carry out the deceased person's estate, which may include resolving debts, selling assets, or distributing any remaining assets to heirs. If there is no will and testament, the probate court will designate a personal representative to manage the probate process, which will be court-supervised.
The probate process if there is a will
If the deceased party had a will and testament, the person identified as the executor is responsible for handling the estate through the probate process and needs to submit a death certificate to the local probate court within 30 days from death. The court then begins the process of validating the will and testament.
Once the will and testament is proved legal, the probate judge will grant the executor legal rights to carry out the estate of the deceased monitoring the process throughout. The executor is responsible for estimating the value of the assets, paying creditors, and distributing assets to the rightful heirs.
So if there is a will, the probate steps are as follows:
- The executor submits the death certificate to the probate court within 30 days from death.
- The court examines the validity of the will and testament.
- Once the will and testament is validated, the judge grants legal rights to the executor.
- The executor carries out the deceased person’s property and estate with periodic supervision from the court.
- The executor values assets, settles debts, pays taxes, and distributes any remaining money or assets to the rightful heirs.
The probate process if there is not a will
If there is no will, the probate court judge will appoint a personal representative to act as the executor of a will would. The court is responsible for handling the valuation of assets as well as the disbursement of assets or money to creditors and heirs.
When there is no will, the probate process can be complicated because there is no paperwork indicating what assets belong to what heirs. Having the court track down heirs can also be challenging, especially if there is no surviving spouse and the next of kin is located in a different state or country.
Many executors choose to work with a probate attorney to help them navigate the probate process and complete the required paperwork, notify creditors, file taxes, and distribute assets, although it's not required.
Assets need to be first located and then formally appraised to determine their value, which is typically done based on the date of death. This valuation will be used to settle the estate and distribute any money to creditors or heirs.
Notifying and paying creditors
Creditors are required to be notified after death within a specified period of time, which varies from state to state. The creditors can file a claim within the probate court, which can be disputed and taken through the court.
Executors are not personally responsible for the debt unless they co-signed, but they are responsible for helping settle the debts on behalf of the estate. This could include selling a property to pay off the mortgage, or if the executor or heirs wish to keep the property, taking over the costs associated with the property, such as the mortgage payment, property taxes, or insurance premiums.
Filing and paying taxes
The executor is responsible for preparing and filing final tax returns to the Internal Revenue Service (IRS) and, depending on the estate, may require multiple tax filings such as income tax returns, estate tax, or state inheritance tax, if applicable. Although, estate taxes typically apply to larger estates which, as of 2020, includes assets valued over $11.58 million.
Distributing assets or money to heirs
Once creditors, taxes, and fees have been paid on behalf of the estate, any remaining money or assets are distributed to heirs. Spouses or joint property owners are the first in line for property distribution. Barring any joint owners or surviving spouse, assets will be split among all surviving children before any other relatives are examined.
Probate can be time-consuming and expensive
The probate process can be lengthy, taking several months to several years depending on the state, whether there is a will, and whether it is contested by the heirs. The more that is outlined in the will, the easier the probate process will be. Ideally, all personal assets of value and any property should be included in the will with designated beneficiaries and a designated executor.
Probate can also be costly. There are court filing fees, creditor notice fees, appraisal fees, tax preparation and filing fees, and possibly attorney fees, all of which are taken from the proceeds of the estate.
When is probate necessary?
Each state has different laws relating to probate, often using community property laws to determine whether probate is required and what assets are required to pass through probate. If the value of the estate is above a specified amount, as defined by the state, probate is required even if there is a will. For example, in Rhode Island, estates valued over $15,000 are required to go through probate, yet in Florida, only estates valued over $75,000 are required to go through probate.
Estate planning basics often include taking the proper steps to avoid probate. Doing so can reduce the burden for your surviving heir(s) while reducing costs, fees, and taxes involved in the probate process. There are several steps you can take before death to avoid probate.
Payable on death accounts
Bank accounts can be converted into payable on death (POD) accounts with a designated beneficiary. Any funds remaining in your account upon death are automatically transferred to the beneficiary, as long as they are alive.
Own assets in an IRA, HSA, 401k or trust
Probate does not have to be a costly or timely burden you or your loved ones have to endure. Assets that are held in a trust like a revocable living trust, or in alternative savings account like an HSA, self-directed IRA, solo 401k plan, or traditional 401k plan, are not subject to probate. It's important to have your trust documents include joint survivorship, which means the property is instantly transferred to a surviving spouse upon death.
Building wealth in these special accounts, or transferring any real estate into a trust prior to death, is one of the easiest ways to protect your assets and avoid probate.