Probate is the name for the formal court procedure used to pass your estate on to your heirs after your death. The probate court will transfer the title of assets held in your name to your beneficiaries and give your executor the authority to administer your estate and carry out the terms of your will. Though it is typically a straightforward process, it's important to be mindful of the rules around the types of assets that are subject to probate, and of the complications that may arise.
The Probate Process
When you draw up a will, you choose someone to manage your estate and distribute your assets. Depending on the state you live in, that person might be called an executor, a personal representative or an administrator. Following your death, that person will file your will in court and ask to be formally appointed as the legal administrator of your estate. Once the court appoints your executor, he or she will collect your assets and file an inventory with the court. Then, the executor will:
Notify your beneficiaries and creditors of your death
Collect income from your assets
Pay your debts, expenses and taxes
Distribute the balance of your estate to your beneficiaries In most states, probate is completed when the final account of the disposition of your assets is filed by your executor and accepted by the court.
Not All Assets are Subject to Probate
The law recognizes two types of assets that can be passed to your beneficiaries: probate property, which is subject to the jurisdiction of the probate court, and non-probate property.
Generally, only assets that you hold in your name alone must go through probate. Examples include real estate, stocks, bonds and bank accounts. These assets are transferred according to the terms of your will.
In contrast, non-probate property passes to your beneficiaries outside the probate process. This includes assets that are transferred according to the terms of a contract — for example, the form you fill out when you set up a retirement plan naming your beneficiaries. Other non-probate property includes life insurance proceeds, transfer-on-death accounts and assets held in a living trust. After your death, your named beneficiaries receive these assets without going through probate.
Property you hold as "tenants in common" is a special case. This type of property is owned by two or more people, but is not jointly held. Each co-owner — known as a co-tenant — has a separate interest. That means that such property is treated in probate like an asset you hold in your name alone. Your individual share does not automatically go to the surviving tenant, but instead goes through the probate process and is transferred according to the provisions of your will.
In some states, probate is relatively quick and efficient; in others, it can be complicated, expensive and time-consuming. In the probate process, the disposition of your estate falls under the supervision of a court, which can sometimes act unpredictably. Consider these points:
The probate process involves a number of costs, including administrative expenses, filing, and newspaper and estate administration fees. These costs vary from state to state. For example, estate administration fees are set by statute in some states. In other states, these fees are unregulated.
In some states, probate can take up to 18 months and sometimes substantially longer.
In most states, a special probate court oversees the disposition of your estate. The actions of your executor must get court approval.
Lack of Privacy
Your probate file discloses the property you owned, what your estate was worth and the names of your beneficiaries. In most states, the file is a public record that anyone can ask to see. In those states, the only way to keep your financial affairs private is to avoid probate.
Can Joint Ownership be Used to Avoid Probate?
Joint tenancy involves co-ownership of assets by two or more people. For example, you and your spouse may own your house as joint tenants. Joint ownership is attractive because when one of the joint tenants dies, the other automatically acquires the deceased person's interest in the property without having to go through probate.
Because of this automatic transfer, many people think of joint ownership as a way to avoid probate. But joint tenancy simply delays probate until both tenants have died.
Joint ownership also has some disadvantages. For example, if you and your spouse own your house jointly and your spouse is incapacitated in some way, you could have trouble selling or refinancing it. You might have to petition a court to appoint a representative for your spouse, adding expense and delay. This problem can be avoided if both of you execute a durable power of attorney, a document that names someone to represent each joint owner's interests in a situation like this. That representative has the authority to sell property and take out loans on behalf of the incapacitated joint owner.
Probate in Multiple States
Your estate is normally subject to probate in the state where you're a permanent resident. But if you hold real estate or other tangible property in another state, it may have to go through probate there as well. Unless you plan carefully, your estate could be subject to probate in all the states where you own property.
Next: Understanding Estate Taxes
Probate provides a legally binding way to transfer assets to your heirs and appoint someone to represent you after your death. But it can take time and cost a lot of money, including possible estate taxes. It's worth exploring alternatives, such as living trusts, joint property ownership, and investments, such as retirement accounts, that go to beneficiaries without probate or taxes.
In the next part of our estate planning series we'll explain how you may be able to minimize, or even eliminate, your estate tax bill when transferring assets.