PROBATE: WHAT IT IS & HOW TO AVOID IT — PART 1
Unless you've created a proper estate plan, when you die many of your assets must first pass through the court process known as probate before those assets can be distributed to your heirs. Like most court proceedings, probate can be time-consuming, costly, and open to the public, and because of this, avoiding probate—and keeping your family out of court—is a central goal of most estate plans.
During probate, the court supervises a number of different legal actions, all of which are aimed at finalizing your affairs and settling your estate. Although we'll discuss them more in-depth below, probate typically consists of the following processes:
- Determining the validity of your will (if you have one).
- Appointing an executor or administrator to manage the probate process and settle your estate.
- Locating and valuing all of your assets.
- Notifying & paying your creditors.
- Filing & paying your taxes.
- Distributing your assets to the appropriate beneficiaries.
In most cases, going through all of these steps is a real pain for the people you love. It's expensive, can take a long time, and be highly inconvenient, and sometimes, even downright messy.
By implementing the right estate planning strategies, however, you can help your loved ones avoid probate all together—or at least make the process extremely simple for them. To spare your family from the time, cost, and stress inherent to probate, here in this two-part series, we'll first explain how the probate process works and what it would entail for your loved ones, and then we'll outline the different ways you can avoid probate with wise planning.
WHEN PROBATE IS REQUIRED
As mentioned previously, if you fail to put in place a proper estate plan, your assets must go through probate before they can be distributed to your heirs. In general, this includes those individuals who have no estate plan at all, those whose estate plan consists of a will alone, and those who have a will that's deemed invalid by the court.
It's important to point out that even if you have a will in place, your loved ones will still be required to go through probate upon your death. Therefore, if you want to keep your family out of court and out of conflict when you die, you cannot rely solely on a will, and you'll need to put in place additional estate planning vehicles, which we will cover in further detail later.
If you die without a will, it's known as dying intestate, and in such cases, probate is still required to pay your debts and distribute your assets. However, since you haven't expressed how you wish your estate to be divided among your heirs, your assets will be distributed to your closest living relatives based on our state's intestate succession laws. These laws typically give priority to spouses, children, and parents, followed by siblings and grandparents, and then more distant relatives. If no living heirs can be found, then your assets go to the state.
Some states allow estates with a relatively low value to bypass probate and use an abbreviated process to settle the estate. For example, Texas law allows estates with a total value of less than $75,000 to skip probate. In those cases, beneficiaries can claim the estate's assets using simpler legal actions, such as by filing an affidavit or other form.
Additionally, when an individual's debts exceed the value of their assets, or a person has no assets at all, probate is often not initiated, and the estate is settled using alternative legal processes.
HOW PROBATE WORKS
How probate plays out is largely determined by whether or not you had a valid will in place at the time of death. However, even in cases where no will exists, or the will is deemed invalid, the probate process is quite similar. Indeed, once the court appoints someone to oversee the probate process on your behalf, the process unfolds in a nearly identical manner, regardless if you had a will or not.
01 | AUTHENTICATING THE VALIDITY OF YOUR WILL:
Following your death, your executor is responsible for filing your will and death certificate with the court, and this initiates the probate process. From there, the court must authenticate your will to ensure it was properly created and executed in accordance with state law, and this may involve a court hearing.
Notice of the hearing must be given to all of the beneficiaries named in your will, along with all potential heirs who would stand to inherit under state law in the absence of a will. This hearing gives these individuals the opportunity to contest the validity of your will in order to prevent the document from being admitted to probate.
For example, someone might contest your will on the grounds that it was improperly executed (signed, witnessed, and/or notarized) as required by state law, or someone might claim that you were unduly influenced or coerced to change your will. If such a contest is successful, the court declares your will invalid, which effectively means the document never existed in the first place.
02 | APPOINTING THE EXECUTOR OR ADMINISTRATOR:
If you created a will, the court must formally appoint the person you named in your will as your executor before they can legally act on your behalf. If you died without a will, the court will appoint someone—typically your closest living relative—to serve in this role, known as your personal representative or administrator.
In some cases, the court might require your executor to post a bond before they can serve. The bond functions as an insurance policy to reimburse the estate in the event the executor makes a serious error during probate that financially damages the estate.
03 | LOCATING & VALUING YOUR ASSETS:
Once probate begins, the executor must identify, locate, and take possession of all of your assets, so they can be appraised to determine the total value of your estate. This includes not only those assets listed in your will and other estate planning documents, but also those you may have not included in your estate plan. This is why keeping a regularly updated inventory of your assets is so important.
Any assets the executor is unable to locate will end up in our state's Department of Unclaimed Property. Across the U.S., there is more than $58 billion (yes, that's billion with a ‘b') of assets stuck in state Departments of Unclaimed Property. Fortunately, this is easy to prevent when you work with us. As your attorney, we will not only help you create a comprehensive asset inventory, we will make sure this inventory stays updated throughout your lifetime.
In the case of real estate, although the executor is not expected to actually move into your home or other residence, he or she is required to ensure that your mortgage, homeowners insurance, and property taxes are paid while probate is ongoing. These and all other debts can be paid from your estate.
Once all of your assets have been located, the executor must determine their value, which is typically done using financial statements and/or appraisals. From there, the combined value of all of your assets is used to estimate the total value of your estate.
04 | NOTIFYING & PAYING YOUR CREDITORS:
To ensure all of your outstanding debts are paid before your assets are distributed, the executor must notify all of your creditors of your death. In most states, any unknown creditors can be notified by publishing a death notice with your local newspaper.
Creditors typically have a limited period of time—usually one year—after being notified to make claims against your estate. The executor can challenge any creditor claims he or she considers invalid, and in turn, the creditor can petition the court to rule on whether the claim must be paid.
From there, valid creditor claims are then paid. The executor will use your estate funds to pay all of your final bills, including any outstanding medical and funeral expenses.
05 | FILING & PAYING YOUR TAXES:
In addition to paying all of your outstanding private debts, the executor is also responsible for filing and paying any outstanding taxes you owe to the government at the time of death. This includes personal income and capital-gains taxes, as well as state and federal estate taxes, if your estate is valuable enough to qualify.
That said, the federal estate tax exemption for 2023 is currently set at $12.92 million for individuals and $25.84 million for married couples, so most families won't have to worry about estate taxes. And for those who do exceed that threshold, there are several strategies you can use to reduce the size of your estate to avoid these taxes.
Any taxes due are paid from estate funds. In some cases, this may require liquidating assets to raise the needed cash. As your trusted attorneys, we will not only support you during your lifetime to implement tax-saving strategies to minimize your tax bill, but we will also work with your loved ones following your death in the same capacity to ensure the wealth and legacy you've built provides the maximum benefit to those you leave behind.
06 | DISTRIBUTION OF YOUR REMAINING ASSETS:
Once the court confirms all of your debts and taxes have been paid—which typically requires the executor to file an accounting of all transactions he or she engaged in during the probate process—the executor can petition the court for authorization to distribute the remaining assets in your estate to the beneficiaries named in your will, or according to state intestate succession laws, if you didn't have a will.
Once all assets have been distributed, the executor must file a petition with the court to close probate. If all creditors and taxes have been paid, your assets have been distributed, and there are no other outstanding issues to be addressed, the court will issue an order formally closing the estate and terminating the executor's appointment.
KEEP YOUR FAMILY OUT OF COURT & OUT OF CONFLICT
As your firm, one of our primary goals when creating your estate plan is to keep your family out of court and out of conflict no matter what happens to you. Yet, as you can see, if your family has to go through probate, your estate plan falls woefully short of that goal, leaving those you love most stuck in an unnecessary, expensive, time-consuming, and public court process.
Fortunately, it's easy for you to spare your family the burden of probate with proactive planning. Next week, we'll look at the ways you can do just that in the second part of this series. Until then, if you haven't put an estate plan in place or have one that would force your family to go through probate, work with us, Stovall & Associates, for a Life & Legacy Planning Session.
Next week, in part two, we'll discuss the estate planning strategies that you can use to avoid the need for your loved ones to go through probate.
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