Probate: What It Is -- and How to Avoid It
Probate is the legal process that includes filing a deceased person's will with a court, locating and gathering the assets owned at death, paying all final debts and taxes due -- and, eventually, distributing the property that remains as the will directs. If someone dies without leaving a valid will and without setting up any of the other ways to pass property discussed below, the property will be distributed according to a formula set out in state law.
How probate works
- Taking the will to court: During probate, the will must be brought to a local court, where it will be examined to be sure it's authentic and properly signed and witnessed, and that it complies with all other state requirements.
- Who can receive property: If your relative dies without a will or with an invalid one, also known as "dying intestate," the court will determine who's entitled to take any property under state law. While state laws vary slightly, most specify that the property goes according to a hierarchy: first to a surviving spouse, then to any children, and finally to any surviving parent, siblings, nieces and nephews, and next of kin.
- Administering the estate: The probate court will order the executor, who is named in the will, to administer that will. If there is no will, the court will appoint an administrator. The executor or administrator will be charged with a number of tasks: inventorying the property your family member owned at death, having it appraised if necessary, notifying relatives and known creditors about the death, and publishing a notice in the local newspaper that's intended to ferret out unknown relatives and creditors.
After final debts and creditors are paid, the property will be passed to the survivors. The entire process generally takes 9 to 18 months -- although some probate procedures drag on for several years before the property is finally divvied up and distributed.
Advantages of probate
Despite the common laments about probate being a costly and confusing procedure that's long on paperwork and delays and short on satisfaction, in some situations it may actually be helpful. For example:
- Probate sets an absolute deadline by which creditors must file formal claims against an estate or be forever barred from collecting -- useful if your relative faced big debts or the possibility of a large court judgment.
- Probate makes the process of dividing up a person's assets transparent, since the public can generally get access to a will once it's filed in probate court. This can be handy when survivors feud over property to which they feel entitled -- a situation that crops up all too often. Facing a will's written directives can sometimes help calm the greedy or overanxious.
Disadvantages of probate
Time and money are the two big drawbacks to probate, and they're the common reasons that are given for making every effort to avoid it.
- It typically takes nearly a year or more from the first contact with a probate court until property is finally distributed to survivors.
- The entire procedure is often costly in itself -- usually involving fees for attorneys, appraisers, accountants, and the probate court. Of these, the biggest bite goes to probate lawyers, who can take a set percentage of the fair market value of the property just for completing and filing the required paperwork.
- All these costs are paid from estate property, and they generally eat up 5 percent or more of its total value. For example, if your relative owns $400,000 worth of property at death, probate fees alone are likely to run $20,000 or more.
Ways to avoid probate
Prompted by consumer outrage over the delays and high costs imposed by probate, courts, legislatures, and state governments h ave devised a number of ways for property to change hands after death without having to go through probate. If your family member doesn't have one or more of these methods in place, explain why she might want to consider them.
- Payable-on-death accounts: Also called Totten trusts, tentative trusts, and revocable bank account trusts, payable-on-death accounts allow those who own financial accounts to name specific beneficiaries to automatically take the remaining amount when they die. Banks, savings and loans, and credit unions all offer these accounts or can add named beneficiaries to an existing account at no extra charge.
- Named beneficiaries on retirement accounts: An entire generation of retirement accounts -- such as IRAs, Keoghs, 401(k)s, and 403(b)s -- came into being while your relative was likely still in the workforce. Such accounts can specify a beneficiary and a backup to receive any remaining funds at death without requiring a court proceeding.
- Transfer-on-death registrations: A law called the Uniform Transfer-on-Death Securities Registration Act allows people to register an individual to take their stocks, bonds, and brokerage accounts at death, without probate, similar to a pay-on-death account. This simplifying law has been adopted in every state except Louisiana and Texas.
In a few states -- including California, Connecticut, Kansas, Missouri, and Ohio -- a car owner can also register a vehicle so that a named beneficiary automatically takes title to it at death.
And laws in Arizona, Arkansas, Colorado, Kansas, Missouri, Nevada, New Mexico, and Ohio also allow real estate to be transferred through transfer-on-death deeds.
- Joint ownership: In most states, property will avoid probate if title to it is held jointly. When one property owner dies, the surviving joint owner or owners indicated on the ownership documents automatically get the deceased owner's share -- again, without involving the probate courts. Houses, large bank accounts, and other property of value are good candidates for joint ownership that avoids probate. However, the property will pass through probate when the last surviving owner dies unless he or she has taken steps to transfer it though some other probate-avoiding method.
Depending on the state and type of property involved, joint ownership is called "joint tenancy with right of survivorship," "tenancy by the entirety," or "community property with right of survivorship."
- Living trusts: Living trusts, also called revocable living trusts , were created for the express purpose of avoiding probate. The concept is simple: During life, property owners complete a declaration that transfers property such as real estate, stocks, and bank accounts to a trustee.
The trustee is often the same person who created the living trust -- and he or she remains free to use, spend, or sell it while alive. At death, the property in the living trust passes automatically to the person or people named as "successor trustees." A living trust operates much like a will, except that the property owner must go through the legalities of transferring ownership of property to the trust. The other important difference: Probate is not required when ownership of the trust property shifts to the successor trustee.
- Simplified procedures for small estates: Many state laws provide that a small amount of personal property can be transferred free of probate, or processed through a greatly simplified procedure. The definition of "small" varies widely among the states, from a low of $3,000 to a high of $150,000. Also, in some states, certain kinds of valuable property -- such as cars and real estate -- are excluded from the total.
You might have to do some sleuthing to find out the legal rules for your relative's state. Begin an Internet search by entering the name of his state and the terms court and probate in the browser. Be sure to go to the official court site, not one operated by someone trying to sell probate-avoidance services.