Probate

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Probate is a court procedure where the validity of a will is proved or disproved. It involves all estate administration proceedings.[1]

When a person dies, all property, other than property passing directly to others (such as property held in joint tenancy, life insurance proceeds and retirement plans payable to a named beneficiary), may be subject to a probate proceeding.[1]

An estate is generally probated in the county where the deceased owned property. If property is located in another state, additional proceedings are sometimes necessary in that state.[1]

There is no natural right to inherit property. This right exists solely as granted by statute.[1]

Jurisdiction

In the US, probate is governed by each state's laws regarding inheritance and the administration of estates. In 1964 the National Conference of Commissioners on Uniform State Laws drafted a Uniform Probate Code designed to update and standardize the nation's probate code. Twenty states have adopted the code, with the remaining states adopting various sections of the code. [note 1] A wide variety of state courts (commonly district courts, circuit courts, probate courts, or other court) will handle probate. Probate is held in the county court where the deceased had residence. If the deceased holds real property in more than one state, a separate probate proceeding for each property is often required.

Every state offers some kind of shortcut for "small estates". Depending on where the estate is handled, the family may be able to skip probate court altogether or use a shortened, simplified version of probate.[note 2]

Nolo.com spells out three types of probate:[2]

  • Informal probate: Most probates in Uniform Probate Code (UPC) states are informal. This relatively simple process is used when inheritors are getting along and you don't expect problems with creditors. If anyone wants to contest the proceeding, you cannot use informal probate. The process is just paperwork; there are no court hearings.[note 3]
  • Unsupervised formal probate: In UPC states, it is a traditional court proceeding, much like the regular probate described above. It is generally used when there is a good reason to involve the court. For example, if there's a disagreement over the distribution of the estate's assets. You may need to get the court's permission before you sell the deceased person's real estate, distribute property to beneficiaries, or pay a lawyer.
  • Supervised formal probate: The rarest form of probate. It's used only if the court finds it necessary to supervise the probate procedure, such as a beneficiary who can't adequately look after his or her own interests and needs the court's protection. You must get court approval before distributing any property in this case.

The probate process

If an individual dies intestate (without a will) or disposes property by will, the estate will be subject to probate. The basic probate process includes the following steps:

  • Swearing in your Personal Representative (also referred to as executor/executrix or administrator/administratix);
  • Notifying heirs, creditors, and the public of your death;
  • Inventorying your property;
  • Paying bills, taxes, and distributing the estate, which can include the following costs:
  1. Estate administration costs (legal advertising, appraisal fees, personal representative fees, attorney fees, etc.);
  2. Family allowances (For support of family members);
  3. Funeral expenses;
  4. Taxes and other debts (medical bills, etc.);
  5. All remaining claims; and
  6. Whatever is left after creditors get their money is distributed to the beneficiaries named in the will. If there is no will, the laws in your state determine how and to whom the remaining property is distributed. Depending on the complexity of the estate, probate can take from three months to two or more years to complete. [3]

The probate estate

At an individual's death, the property owned by the individual is divided among property that is subject to probate, known as the probate estate, and the non-probate estate for property which can be directly passed on to beneficiaries. In general, assets held in living trusts, assets held in joint tenancy with rights of survivorship, and assets held in entities with beneficial interests (personal retirement plans, employer retirement plans, deferred annuity contracts, life insurance death benefits, payable on death (POD) accounts, and transfer-on-death accounts (TOD)) are not included in the probate estate, provided that beneficiaries are named, and that the estate is not the beneficiary.

One major difference between probate estate accounting and net worth accounting regards the value of indebted property (most applicable to real estate). While a net worth statement values real estate net of the mortgage value (for example a $1,000,000 home with a remaining $750,000 mortgage value would hold a $250,000 equity net worth value), the probate estate values the property without considering the mortgage. Thus the home would be valued at $1,000,000 dollars at probate, and probate fees would be applied to this value.

The importance of naming proper beneficiaries for various property arrangements for reducing the probate estate is highlighted in the following table. [4]

Property Named Beneficiary Unnamed Beneficiary
Retirement Plan (IRAs,401(k),et.al.) Non-Probate Probate
Life Insurance death benefit Non-Probate Probate
Property held in a living trust Non-Probate
Payable on death (POD) bank account Non-Probate Probate
Savings Bonds registered in payable on death form Non-Probate Probate
Securities registered in transfer-on-death (TOD) form Non-Probate Probate
Co-owned U.S. savings bonds Non-Probate (see note)
Property held in joint tenancy with right of survivorship Non-Probate (see note)
Property owned as tenants by the entirety with a spouse (not all states have this form of ownership) Non-Probate (see note)
Real estate subject to a valid transfer-on-death deed (allowed only in some states) Non-Probate
Property held in community property with right of survivorship (allowed only in some community property states) Non-Probate (see note)
Wages, salary, or commissions (up to a certain amount) due the deceased person Non-Probate
Pension plan distributions Non-Probate
Cars or boats registered in transfer-on-death form (allowed only in some states) Non-Probate
Vehicles that go to immediate family members under state law Non-Probate
Household goods and other items that go to immediate family members under state law Non-Probate

Note: Property (usually real estate) held in various forms of joint tenancy (or community property) with survivorship are not probate assets when the first spouse dies. However, since the property is no longer jointly owned, the property can be subject to probate upon the death of the surviving spouse.

Probate costs

Probate incurs costs. These costs include emotional and time costs in addition to the measurable financial costs. Probate's financial costs vary from state to state and are related to both the size and complexity of the probate estate. In general, probate costs are estimated to range between 3% and 8% of the estate value. [5] A handful of states (California, Iowa, Nevada, and Wyoming) have set fee schedules for probate costs, while other states use "reasonableness" or judicial discretion as the standards for probate fees. Attorney fees are often negotiable, although grieving survivors are often ill-suited for negotiating sessions.[6]

The following table breaks down the fixed schedule probate costs for California:

Percentage Estate value
4% on the first $100,000
3% on next $100,000
2% on the next $800,000
1% on the next $9,000,000
0.5% on the next $15,000,000
reasonableness for amounts in excess of $25,000,000

Avoiding probate

Given the costs, delays, and emotional toll of probate many people will seek to avoid the procedure. Keep in mind that the following property entities avoid probate: [7]

  • Assets held in a revocable living trust;
  • Assets held in joint tenancy;
    • Joint Tenancy with a Right of Survivorship;
    • Tenancy by the Entirety;
    • Community Property with a Right of Survivorship;
  • Retirement accounts;
  • Payable on death accounts (POD;
  • Transfer on Death Registrations (TOD).

The following table provides information regarding probate avoidance options available in US states.

State State State State State
Alabama Georgia Massachusetts New Mexico South Dakota
Alaska Hawaii Michigan New York Tennessee
Arizona Idaho Minnesota North Carolina Texas
Arkansas Illinois Mississippi North Dakota Utah
California Indiana Missouri Ohio Vermont
Colorado Iowa Montana Oklahoma Virginia
Connecticut Kansas Nebraska Oregon Washington
Delaware Kentucky Nevada Pennsylvania West Virginia
D.C. Maine New Hampshire Rhode Island Wisconsin
Florida Maryland New Jersey South Carolina Wyoming

Keep in mind that joint property will pass to the joint owner on the first joint owner's death, but the asset will be subject to probate on the second joint owner's death unless the property in retitled into a non-probate entity. For real estate, naming non-spouse beneficiaries (usually the children) is often not recommended since the surviving spouse would now be liable to the children's creditors, and because the joint tenancy is irrevocable. An alternate strategy is to place the real estate in a revocable living trust. For jointly held savings bonds, the inheriting spouse can avoid probate costs be re-registering the savings bonds with a payable on death form (or hold them in a revocable living trust). Similarly, a joint bank account can be retitled as a payable on death account (or held in a revocable living trust).

One instance where probating an estate might prove beneficial is a situation where an estate has a large number of creditors. The probate procedure will place a time limit for creditors to make their claims on the estate. In this situation, an estate representative might decide to place a limited amount of estate assets sufficient to pay creditors into the probate process, while keeping the rest of the estate's assets in the non-probate estate.

Also, even if a decedent's estate is removed from probate, the estate must pay legitimate creditor claims and taxes due (both income and estate and/or inheritance taxes). Thus an estate representative should delay distributing the estate to beneficiaries until these claims are satisfied.

See also

Notes

  1. The states adopting the UPC include Alaska, Arizona, Colorado, Florida, Hawaii, Idaho, Maine, Michigan, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, Utah, and Wisconsin. Summary of State Probate Attorney Fee Requirements as of 6/9/2010
  2. Probate Shortcuts in Your State contains a list of probate "shortcut" laws for each state.
  3. How the Probate Process Works: Information for Executors contains detailed information on the informal probate process.

References

External links

General guides
Legal links
Vanguard links