Probate is the process through which a deceased person’s final affairs are handled. When someone dies, even if there is a last will and testament, property isn’t automatically transferred to the new owners, and debts aren’t automatically paid. It all happens manually through the probate process (sometimes simply referred to as “probate”), which is a legal process that takes place in a local probate court in the county where the deceased person lived.
In the probate process, which can last for a year or even more, the probate court makes several important determinations, including: whether there is a valid will, what property is in the estate, what debts and taxes need to be paid, and who is entitled to receive the property that remains after obligations are satisfied.
How does probate work?
During the process, the deceased person’s financial and other obligations are settled, and property is formally transferred to whomever is entitled to receive it. Someone has to manually do all of these things (under the supervision of the probate court ). That someone is the “executor”. In order to do the job (for example, to access bank accounts and pay debts), a person must have legal authority (otherwise he’d be turned away at the bank). This authority comes from being an executor.
Starting the probate process
In order to be appointed as executor, someone must “open the estate” of the deceased person in the local probate court and ask to be appointed as executor. Usually, the person named as the executor in the will (if there is one) does this work. If there isn’t a will naming an executor, family members will agree on someone who should do it. If family members cannot agree, the probate court will decide who has priority based on state law.
When a will is first submitted to the probate court, the court must determine whether it’s valid. This alone can be a bit of a process and may require testimony from the people who witnessed the will signing. If there is no will, probate may still be required for the deceased person’s property to be distributed to the proper heirs. Once it’s determined that the will is valid (if there is one), or that there isn’t a will (if there isn’t one, or if the one offered to the court is held invalid), that’s when the probate process really begins.
Managing the estate
Over an average of 8 to 12 months, the probate court will work with the executor to take an inventory of estate assets, settle the estate’s debts, and then distribute the remaining assets. Throughout the process, the executor must regularly file all kinds of legal and financial documents to keep the court updated and get its approval before taking certain actions. Because there’s so much legal documentation and interaction with the court, executors are usually represented by a probate attorney. Many states even require the executor to be represented by an attorney.
Distributing the remaining property
Once any debts or financial obligations are settled, the probate process generally ends with the deceased person’s remaining property being distributed. Who gets what depends on whether the deceased person had a valid will, or if they died without a will or estate plan (known as dying “intestate”). If the person had a valid will, then the probate court will order that the property be distributed according to the terms of the will. If the person died intestate, then the property would be distributed according to state law. These laws of “intestate succession” can sometimes result in property passing to family members who the deceased person would not have chosen.
Probate is a long, expensive hassle — even when you have a will and your wishes are clear. Your executor may spend hours upon hours every week dealing with the estate. And the people intended to receive your property must wait for many months while the process plays out. Meanwhile, the value of the estate is decreasing as estate funds are used to pay attorney’s fees.
The best estate plans will avoid probate altogether. Probably one of the most common estate planning mistakes is thinking that a will avoids probate — wills do not avoid probate. Probate can be avoided in a number of ways, and a single estate plan may make use of several different ways of avoiding probate.
The estates of most people include some financial accounts, a home, and then household items. Household items can usually be handled informally and do not have formal title. That leaves financial accounts and the home. And if these can be kept out of probate, the process can be avoided altogether!
Probate vs. non probate assets
To understand probate avoidance, it is critical to first understand what property is “probate property”, and how to make it non probate property.
Probate property is basically any property that is not owned or held in any kind of special way. It will have to pass through the probate process.
A basic example of probate property is all of the personal items owned by someone and kept in his home. Unless some kind of estate planning is done, these personal items are simply owned and held by the owner alone, and not subject to any sort of special arrangement (a will does not count as a special arrangement). So, these items are probate property and upon the death of the owner must pass through the probate process. Another good example of probate property is a house in the sole name of the owner, with no special form of ownership — no special arrangement. When the owner dies, the house must pass through the probate process.
Non probate property
Non probate property, by contrast, is property that will bypass the probate process because it is held under a contract or some other particular kind of legal arrangement. Non probate property does not have to pass through the probate process; it can pass directly to people named in a contract or other non-will document.
A good example of non probate property is a home that is held in the name of a husband and wife, where the deed of the home specifies that they are “joint tenants”. Joint tenants means equal owners of the whole (they are not each 50% owners — together they are 100% owners). When one joint tenant dies, the other joint tenant is “automatically” the full owner. So, property held in joint tenancy is non probate property.
Another good example of non probate property is life insurance policy proceeds. These are not just owned outright, but are controlled by a contractual arrangement between the policyholder and the insurance company. When the policyholder dies, the proceeds generally will not need to pass through probate; they can be transferred directly to the beneficiaries of the policy
Turning probate property into non probate property
An important part of good estate planning is turning property into non probate property, so it can go directly to the intended persons and avoid the probate process. Different types of assets can be turned into non probate property using different instruments.
Financial accounts – beneficiary designations
Most financial accounts can easily be made into non probate property. For example, you can instruct your bank to pay account funds over to a specific person or persons when you die. This is called making a “beneficiary designation”, or making the account a “pay on death” account. Your bank will ask you to fill out some forms, and then the account will become subject to those forms, in a private arrangement between you and the bank. When you die, beneficiaries can simply present your death certificate to the bank and collect the funds — much better than having to go through the probate process.
Beneficiary designations can be made on any kind of financial account, including simple bank accounts, general investment accounts, retirement plans, and more. Most financial institutions have a well-defined process for handling this; many of them even make it a standard part of their signup process. So, it is a good idea to set beneficiary designations at the time of setting up a retirement account or larger financial plan. It is important to keep beneficiary designations updated, because the people you designated at the time you created the account may not be the same as you have in mind today.
Beneficiary designation forms are simple, fill-in-the-blank forms that allow you to name the people who should receive a given account. The forms typically must be filled out at the financial institution. Some financial institutions with more modern business processes allow you to set beneficiary designations entirely online. In any case, the institution will process your form and update the details of the account, and then the account becomes non probate.
Real Estate – Title, Transfer on Death Deeds, Trusts
Real estate can also be made into non probate property. Sometimes real estate even starts out as non probate property, because of how title is held (that is, the way the deed is written).
As discussed above, when a deed to a home specifies that the owners are “joint tenants”, it means they are equal owners of the whole (they are not each 50% owners — together they are 100% owners). When one joint tenant dies, the other joint tenant is “automatically” the full owner. So, property held in joint tenancy is non probate property. Note that when the second of two joint tenants dies, there is no longer another joint tenant to automatically become the owner, so the home would be probate property.
In addition to joint tenancy, some states have other forms of holding title to real estate that create a non probate arrangement — usually for married couples.
Title to real estate is set in a deed. When someone first becomes the owner a piece of real estate, there is usually a deed that gave them that real estate. The deed specifies the form of ownership.
Once someone is already the owner, he can write a new deed to change how title is held. For example, a senior who is the sole owner of a home may decide he wants to leave the home to his daughter, but he doesn’t want her to have to go through probate. He can write a deed to himself and his daughter as joint tenants. This way, she becomes an owner today, along with him, and when he dies she’s automatically the full owner — no probate. He could also write a deed just giving her the home outright, with the understanding that he’ll live in it until he dies. In this case, the home doesn’t have to go probate, but not because it’s non-probate — it’s just not even his anymore, so not in his estate when he dies.
Note that usually deeds must be filed — “recorded” — in the county where the property is located.
Transfer on Death Deed
The simplest and easiest way to make real estate into non probate property is with a transfer on death deed.
A transfer on death deed, sometimes called a “beneficiary deed”, is an instrument that states who should receive a piece of real estate upon the death of the current owner(s). It’s a 1- or 2-page document that is recorded in the county where the real estate is located.
A transfer on death deed can be revoked (cancelled) or replaced anytime, and has no effect until the death of the owner. Once the owner dies, the beneficiaries just need to record the owner’s death certificate with the county where the property is located, and they become the new owners. No probate!
Unfortunately, not all states have transfer on death deeds, so individuals use other tools to keep real estate out of probate — most popularly, trusts.
A trust is an arrangement where someone (the “trustee”) has title to property (that is, legal ownership of the property), but must manage it for the benefit of someone else (the “beneficiary”). For example, a cash gift to a young child might actually be left to a relative who will own the property as trustee and manage and distribute it for the benefit of the young child. The person who gives property to a trust is called the “grantor” or “settlor”. It is common for large gifts made in wills to be made in the form of a trust. A dying grandmother who wants to pay for college for her young grandson probably won’t just leave him the money outright; she may leave the money to his parents as trustees.
Some people have the idea that trusts are just for rich people (they think of the phrase “trust funds”), but that’s not right; trusts, especially revocable living trusts, are an estate planning device used by all kinds of people.
Revocable Living Trust
A revocable living trust is one that can be revoked and that is made while the grantor is living. It is a popular tool for probate avoidance that works as follows.
Imagine someone owns a home, some jewelry, and some antiques, and he wants to leave it all to his three children, but he doesn’t want them to have to go through probate. Also, he doesn’t want to give up these things today — he thinks he may be around for a while yet. He can create a revocable living trust to hold this property. While he is alive, he will be both the trustee and the beneficiary, and he can do whatever he wants with the property (after all, the trust is revocable). When he dies, though, the trust’s estate planning purpose takes effect. Another trustee, designated by the grantor before his death, steps in (privately — no probate) and distributes the property to the grantor’s children, who are the new beneficiaries. The trustee who steps in (the “successor trustee”), can be a regular person (for example, the same person who might have been picked to be executor), or can be a professional who works at a financial institution (an “institutional trustee”). Like executors, trustees have a legal fiduciary obligation to act properly for the beneficiaries.
Regardless of the terms of a trust, its key feature is that property in the trust will not have to go through probate.
A trust is usually created with a legal document called a “declaration of trust”. Trusts are extremely flexible documents. Unlike wills, which are submitted to a probate court and are meant to be carried at out once (over several months) under the court’s supervision, the directions of a trust are carried out privately, so trusts can get more creative and stretch over an indefinite period of time (for example, until a child reaches age 30, or has a first child of his own, but only if the trustee believes he’s being a good person).
In addition to the declaration of trust document, which creates the trust, property must be transferred into the trust. In the case of real estate, the transfer is done by a deed.
Transferring other kinds of property into the trust depends on the property. For example, to transfer a bank account into a trust, the title owner of the account would need to be changed to the trust.