What Is Probate?

Probate is the legal process through which a court makes sure that property is distributed to beneficiaries. The court’s concerns are to assure that valid creditors are paid and all assets are properly distributed in accordance with the individual’s will.

Many people belive that probate is to be avoided at all costs. It is true that some states have antiquated probate statues, hefty and mandatory fees for executors and lawyers, and probate systems mired in politics. However, many states have adopted probate reforms. In addition, many states allow small estates to be settled without going through the probate process.

As a senior, you need to familiarize yourself with the probate process in the state where you live. Do not assume that probate is to be avoided. Instead, take the time to discuss probate with several experienced estate planning attorneys. There are many valid differences of opinion on how to handle estate planning in each state.

The Probate Process

When a death occurs, most states require that anyone who possesses the decedent’s original will must file it with the court of the county in which the decedent resided. After the will is filed, the personal representative (executor), heirs, creditors, or other interested persons may then petition the court to begin the probate process.

Appointment of a Personal Representative

Typically, the county court appoints a personal representative (executor) to settle the senior’s estate based either on whom he or she nominated in the will or by statutory priority. The court then issues written documents giving the personal representative the authority to manage the estate, which consists of the right to:

  • Find and gather the estate assets;
  • Pay legitimate creditors;
  • File and pay estate and income taxes;
  • Distribute assets to the designated recipients.

To pay creditors of the estate, the personal representative may have to notify them of the time period in which they can submit claims against the estate. States have specific rules about how these notices are to be made and how long the estate must remain open for creditors to file claims. Sometimes this notice may be a classified newspaper advertisement.

Only after all valid debts are resolved is it appropriate for the personal representative to distribute the remaining assets of the estate to the beneficiaries and inheritors. The personal representative will be expected to provide an accounting of how the estate assets were spent.

Settlement Time

A personal representative can complete a small and simple probate in about six months in many states. More complex estates that do not meet their state’s definition of “small” may take a year or longer to settle. However, within this time frame:

  • Estate debts and federal estate taxes must be paid within the nine months of the date of death;
  • Beneficiaries or inheritors who wish to disclaim part or all of an interest in an estate must do so within nine months of the date of death.

The time it takes to settle an estate is affected by the personal representative’s experience in business and legal matters and ability to communicated with professionals for help with accounting, financial, tax, or legal issues, as well as the simplicity or complexity of estate assets. For example, if they only assets in the estate are personal property, these will be easy to distribute. However, if the deceased senior is being sued, the personal representative will need to manage the lawsuit, complicating the administration of the estates.

Settlement Costs

The costs of probate include fees to the court, attorneys, accountants, the personal representative, and other agents working to account for and distribute the estate’s assets, pay creditors, and file taxes. Probate costs vary widely and depend on each state’s probate laws and rules. However, it is not unusual for probate costs to be 2 to 3 percent or more of the estate.

Cost of Setting a Revocable Living Trust

If the senior has a fully funded revocable living trust in his or her estate plan, the estate will not go through probate, but it will still have to pay for the administrative tasks required to settle the trust. These tasks are similar to probate. They include gathering assets, resolving debts, and paying taxes. However, given this, having a revocable living trust may still result in fewer settlement fees when compared to the costs of probate.

Cautions about Serving as a Personal Representative

Many personal representatives take on their duties unaware of the personal liabilities they may incur for extremely complicated financial, legal, and tax matters. Common errors that inexperienced personal representatives make are the premature distribution of estate assets and the failure to provide funds to pay estate taxes.

“The executor’s job is to identify the estate’s assets. As executor, you are responsible for paying off all of the estate’s liabilities, including taxes, and if you let these obligations slide, the IRS can come after you personally to pay overdue taxes, plus interest and penalties.”

Rather than risk errors because of a lack of knowledge and experience, it is wise for personal representatives to hire experienced accountants, attorneys, and other financial services professionals to ensure proper management of the complicated financial, legal, and tax issues involved with estate settlement. This will avoid unnecessary hassles and minimize estate costs.

This is especially true when a personal representative is required to transfer a closely held business that is part of the decedent’s estate. When a closely held business is part of an estate, it often restricts the estate’s liquidity, which in turn may affect how quickly creditors can be paid and the remainder of the estate settled. Determining the best way to transfer a closely held business is prepared to find a qualified manager for the business while the estate is being settled. In addition, finding a buyer for the business may require offering significant discounts on the sale price. These problems become even greater if the business needs to be sold in time to provide the cash to pay estate taxes.

Property Excluded From Probate

Property that is not included in the estate’s probate process, because it is not controlled by a will or state intestacy laws, includes a residence owend with at least one other individual and titled property owned as joint tenants with rights of survivorship, tenants by the entirety (a special form of joint tenants with rights of survivorship only available to a husband and wife in some states), and testamentary trusts, revocable living trusts, and irrevocable trusts. It also includes property left to a beneficiary-for example, life insurance policies and qualified retirement plan accounts.

The Function of Titled Property in an Estate Plan

Seniors can use property titles to exclude their property from probate. But they should be sure that they are using this estate planning tool correctly. For example, even though seniors may instruct in their wills that their properties are to be divided equally among their children, if they are not titled correctly, the children will not inherit them.

The property titles that legally supersede the instructions in a will and are therefore not included in probate are: joint tenants with rights of survivorship and tenants by the entirety (a special form of joint tenants with rights of survivorship only available to a husband and wife in some states). These property titles also take legal precedence over the terms of trusts and beneficiary designations. Following is more detail about each type of ownership.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.