What Is the Probate Process and Why Is It Important for Estate Planning?

A critical part of your estate plan should include probate.

Probate can be an expensive and time-consuming process, depending on the state and other factors. The largest expenses some estates face are probate and its related costs. Fail to account for this in your estate plan and 3% to 5% or more of your estate might disappear.

Probate is the process of ensuring that your debts are paid and legal title of your assets is shifted to the appropriate heirs and beneficiaries. Each state sets its own probate process, but the general outline is very similar around the nation. These laws are included in the estate’s probate codes and regulations for intestate succession when a decedent dies without a will.

Probate can take time depending on the state in which the estate is located, but contrary to the claims of vendors selling living trusts and other products, most probate proceedings are not expensive or prolonged. The executor or administrator of the estate presents the probate court with an inventory of the estate’s assets and liabilities. A notice is published to give other creditors an opportunity to make their claims. The debts are paid and proof presented to the court.

Then a schedule of how the net assets will be distributed to the beneficiaries is presented. If the court approves and no one challenges the plan, the estate is distributed.

As long as the estate is in probate, the executor is handling the assets. That could include paying the bills for and providing spending money to your spouse and other loved ones. In a few unusual cases, probate drags on for years.

The executor can reject claims if she thinks they are not legitimate. The creditor might put in a request for the court to have a probate judge determine if the claim should be paid.

The executor files the decedent’s final personal income tax returns for the year in which he died. Then she decides if the estate is liable for any estate taxes. Taxes due are paid from estate funds, which sometimes necessitates liquidating assets to raise the money.

Estate taxes are usually done within nine months of the decedent’s date of death.

While a friend or relative can be appointed executor of the estate without a fee, a lawyer’s help often is needed. Traditionally, the lawyer who drafted the will is named executor, and states often allow the executor or lawyer helping the executor to charge a percentage of the estate as a fee. Now, some states outlaw the percentage fee. Many lawyers will do the work at an hourly rate. To ensure the hourly rate, however, reach an agreement with the lawyer as part of your estate plan and put the agreement in the will.

If a person passed away without a will or didn’t identify an executor in one, the probate court assigns an administrator to manage the probate process. This role usually falls on the next of kin.

All of your assets are not required to go through probate. For example, 401(k) plans, individual retirement accounts (IRAs) and pensions with listed beneficiaries don’t need to go through the probate process. The assets in these accounts automatically transfer to the named beneficiary following the original account owner’s death. There are a number of strategies that will help you avoid the costs and delays of probate. Almost everyone knows a probate horror story involving a friend or family member. Before deciding to avoid probate, however, consider a few points.

Have your lawyer explain the probate process in your state, how long it should take, and what the cost would be. You might not want to bother avoiding probate.

For a long time I lived in Virginia, close to the Maryland border. Most lawyers in the area know both Virginia and Maryland law. Virginia simplified its probate process some years ago. For most estates, probate is relatively fast and low cost. The costs of trying to avoid probate in Virginia might exceed the costs of probate. Maryland, however, still has the old probate laws. It is time-consuming and expensive for most estates. Local lawyers often recommend probate-avoidance in Maryland but not in Virginia.

If probate-avoidance is for you, there are several strategies to consider.

Estate Planning Probate Strategy #1

Retirement plans. Qualified retirement plans are not subject to probate or covered by your will. Ownership of the plan is transferred according to the beneficiary statement on file with the plan sponsor. This includes IRAs and 401(k)s.

Estate Planning Probate Strategy #2

Annuities and insurance. These insurance products also avoid probate. The money goes to whomever you designated as beneficiary with the insurer.

Estate Planning Probate Strategy #3

Joint property. Property that is held as tenants in the entirety or joint title with right of survivorship passes to the surviving owner without being subject to probate. These forms of ownership might apply only to real estate and financial accounts, depending on the state. Not all states recognize both types of title, so have an estate planning lawyer check how your property should be titled.

Estate Planning Probate Strategy #4

Living trusts. This is the main way to avoid probate. A trust is created, usually with you and your spouse as co-trustees. All or most of your property is transferred to the trust. During your lifetime, the property is managed almost the same as before the trust was created. At your death, the terms of the trust determine who gets the property. The probate court is not involved.

With a revocable living trust, you can explicitly detail how you want to divide this property among heirs in your trust document.

A living trust can cost hundreds of dollars or more to create. In addition, title to all your property must be officially transferred to the trust. This includes real estate, financial accounts, cars, and anything else that has a legal title. Property without a legal title recorded anywhere, such as household furnishings, is transferred by the declaration establishing the trust and the schedule of assets attached to it.

There are many living trusts that aren’t effective because the work of transferring title wasn’t done. Financial services firms often want a copy of the trust document on file and might require that their own form be completed. In addition, after one of the spouses has died, financial services companies will require detailed information before transferring title to or accepting directions from the new trustee.

Estate Planning Probate Strategy #5

A person can convert their banking accounts into pay-on-death accounts. A person typically needs only to sign a form from his or her financial institution and designate a beneficiary. After the person dies, this account transfers directly to the beneficiary without having to go through the probate process.

A person can also give away property and assets as gifts while alive. For 2019, a person can gift up to $15,000 in cash or property to any individual without worrying about the gift tax. However, if you give more than $15,000 to one person during the year, you need to report it on Form 709. This form is used to report taxable gifts and allocate the lifetime use of a taxpayer’s generation-skipping transfer tax exemption.

Because of the cost and inconveniences of living trusts, you should be sure that probate in your state is worth avoiding before choosing to avoid probate.

Avoiding probate is not the only way to reduce estate costs. Being organized and having complete records helps.

Whether or not you choose to avoid probate, be sure you have a will. All property cannot be covered by probate-avoidance strategies. The will should designate who will receive any property that goes through probate. Likewise, check the beneficiary designations on your retirement accounts, annuities, and insurance policies. For example, if the will includes bequests to minors, the executor might be responsible for establishing a trust to accept possession of bequests. Minors can’t own their own property.

Simplifying your estate is another good move. A complicated estate increases expenses and delays. If you have hard-to-value or hard-to-sell assets, consider getting rid of them soon. Real estate also complicates an estate. Any collectible or illiquid asset also gums up the works.

For example, the executor needs to make sure that property taxes are paid, insurance is up to date, and any mortgage payments are paid. Otherwise, the property may be  lost or go into foreclosure.

As I’ve frequently recommended in the past, create a notebook with a letter of instructions for your executor, inventory of your assets, list of important contacts and the location of all important documents and items. Also include a copy of your latest will, tax returns and financial account statements.

Each states’ laws are different. It is a good idea to consult an attorney to decide whether a probate proceeding is necessary, whether the fiduciary must be bonded and what reports must be prepared.

Finally, don’t leave surprises for your heirs. Surprises tend to result in bad feelings and contested estates. An estate contest will deplete your estate much more than taxes or probate.