One of the most common questions that I hear from clients is, “How can I avoid probate?” The answer surfaces in understanding what is probate.
Probate is the process of court supervised administration and distribution of an estate. The process is handled after a funeral and issuance of the death certificate. The Will is submitted to the county register of wills and after proof of the will’s authenticity by two witnesses, the executor takes an oath pledging to faithfully follow the will’s instruction.
The degree of formality necessary to open the estate, as such, is dependent on whether the will has witnesses and previously executed affidavits to the will in the presence of a notary when the decedent signed the will. If properly executed, it will streamline the probate process. The county filing fee is based on a sliding scale increasing with the value of the asset base of the estate.
The estate administration involves the following six steps:
Step 1: Opening the Estate.
If you left a will, your executor’s first job is to submit the original copy to the probate court having jurisdiction; that would be the court in the county where you lived. This is usually routine, but if there is a will contest—that is, someone disputes that your will is valid, or that this is your last will—or if there are complications, a lawyer’s help definitely will be necessary.
To “open the estate,” the executor completes certain forms that notify the court and interested parties of your death. At this stage, the executor may have to choose among several types of probate: supervised, unsupervised, and small-estate. This decision is important, and it may be a good idea to get your lawyer’s analyses of the pros and cons of the options.
Step 2: Collecting the Estate’s Assets.
The next step is to inventory the assets of the estate. A lawyer might be helpful in differentiating the property that passes through probate from the property that is out of the probate process.
For assets that do pass through probate (assuming they are held in sole ownership), the value of stocks and bonds depends on their value on the date of death. The same is true of cash bank accounts. The value of other forms of property, such as real estate, antiques, collections, and art objects, may have to be set by professional appraisers.
Step 3: Managing the Estate’s Assets.
If you owned a business, income-producing real estate, or an active portfolio of stocks and bonds, your executor might well have to take on the responsibility of managing this property. That’s why it’s a good idea to specify in a will that the executor has the authority to retain certain kinds of property in the estate, continue running the business, buy or sell real estate, borrow money, and take advantage of tax savings. All of these decisions may have significant legal dimensions, and the executor may benefit from legal help.
Step 4: Handling Taxes.
Your executor must notify the IRS of his or her appointment by applying for a separate taxpayer ID number for the estate. The executor must file a form to pay the federal estate tax for estates whose value exceeds the threshold. There are also state inheritance taxes to pay.
The executor must also file some income tax returns. A personal return covers income the deceased person earned in the tax period before dying. This final income tax return (Form 1040) is due by April 15 of the year after the year of death, unless the executor obtains an extension. A return for the estate covers income earned by the estate while it is being administered, such as through dividends, royalties, income from the sale of property, and so on. Taxes may have to be paid before money and other assets can be distributed to the beneficiaries. The executor has many decisions to make regarding how and when to pay taxes, a number of which could significantly affect the amount of taxes that are due.
Step 5: Closing the Estate.
This process can be accomplished informally or formally. Ultimately, the executor will need to show that all interested parties—including creditors—received timely notice of the death, that the time period in which claims can be filed against the estate has passed, and that all valid claims (including taxes) were paid. A final accounting—the totaling up of all the estate’s assets, minus expenses—will also be required. The final accounting will also indicate the amounts to be distributed to beneficiaries.
Step 6: Distributing the Assets.
The general pattern is that all the assets are not paid out to beneficiaries until the court has approved the executor’s filings regarding assets, claims, taxes, and so on. The probate process can be completed either informally or formally. If the heirs are all in agreement, the estate heirs can settle administration and distribution informally, i.e. without court approval, with a written settlement agreement and agreement to release the personal representative/executor from further liability.
If the personal representative/executor thinks the heirs many not be in agreement, if there are problems with creditors, or there is fear of asserted claims, then the executor can settle the estate by filing a formal accounting with the court. The court shall review the actions of the executor and approve a proposed schedule of distribution. All parties of interest are placed on notice of the filing and file objections to the accounting in the court. A final order ultimately settles any creditors and/or beneficiary claims.
Property that avoids probate: Not all property needs to go through probate. Here’s a list of things that don’t:
- Property in a trust
- Property that is jointly held
- Death benefits from insurance policies, the government, and employers and other benefits controlled by contract
- Property given away by gift before you die
- Money in a pay-on-death account
- Retirement accounts with a named beneficiary
- Transfer-on-death beneficiary deeds
- Deeds with reserved life estates
Attorney Matz can outline the duties, responsibilities and rights of a personal representative/executor and provide legal assistance in the handling of an estate.
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