Written by Tony Chiaramonte on 09/04/2020

What Assets Must Go Through Probate?

One of the primary purposes of an estate plan is to ensure that people have a say in what happens to their assets after they pass on. A second, equally important function of estate planning is to preserve the estate’s value by reducing the amount of estate tax and fees associated with the probate process. 

Probate is the legal process in which a court recognizes an individual's death and distributes their property as outlined in their will. The probate process can be both time-consuming and expensive. However, not every asset in an estate is a probate asset. 

Individuals may be able to simplify the process for their surviving spouse or other beneficiaries by creating a comprehensive estate plan. While the probate process can be complicated, this guide will clarify many of the common questions surrounding probate. 

What happens during probate?

After someone dies, a copy of their last will and testament is presented to a probate court. This will is a legal document that outlines a person's wishes regarding how their assets should be distributed upon their death. A will also designates an executor, or a person who manages the estate property until the court makes its final distributions.

The court first validates the will of the deceased person — known as a ‘decedent’ — and then appoints a personal representative, known as the executor of the estate. Typically, this will be the same person named in the will. The executor’s responsibility is to distribute the estate’s assets according to the terms specified in the will. 

However, if someone dies without a will, the court must appoint an outside administrator as a personal representative. After naming an administrator or executor, the court provides that person with letters of administration that allow them to fulfill the necessary responsibilities. 

From there, the probate process typically follows these steps: 

  1. The executor locates all the decedent's assets, including bank accounts, real estate, vehicles, personal property, and investments. For a while, these assets remain in the exclusive control of the executor.

  2. The executor arranges for an appraisal of estate assets to determine their value at the time and date of the person’s death, then presents an inventory of assets to the court. 

  3. The executor provides notice of the decedent's passing to all creditors. Creditors have a limited amount of time to make a claim against the estate for any debts they are owed.

  4. The executor arranges to pay off the decedent's creditors with assets from the estate. If necessary, the executor will liquidate assets. 

  5. The executor must file taxes on behalf of the decedent for the year in which they died. All taxes are paid out of the estate account. 

  6. The probate court distributes the remaining estate assets to beneficiaries according to the decedent's will. The executor may need to obtain court approval before distributing assets. 

If someone dies without a will, they are said to have died "intestate." In this situation, state intestate laws prescribe how the decedent's assets will be divided. However, the estate still needs to go through the formal probate process. Thus, whether someone dies with or without a will has no bearing on whether their estate is subject to probate. 

Common types of probate assets

probate asset is one that cannot pass on to an heir or another beneficiary (someone who receives benefits or assets) without first going through formal probate proceedings. Probate is the default process when it comes to the distribution of assets. However, certain other assets can pass directly to a beneficiary. 

When it comes to determining which assets must go through the probate process, the answer has less to do with the type of asset, and more to do with how each asset was owned. For example, certain assets pass directly to a beneficiary upon the decedent's passing. These non-probate assets include:

  • Life insurance proceeds

  • Bank accounts with payable-upon-death designations

  • Jointly owned bank accounts

  • Retirement accounts and annuities

  • Some forms of real estate ownership

  • Property that is held in a trust

The above assets can transfer automatically to the beneficiary or co-owner upon the decedent's passing. This can significantly simplify the process of transferring ownership. Of course, it is critical that beneficiary information is current and accurate, and complies with state law. 

For example, in community property states, a surviving spouse is entitled to half of anything the other spouse adds to their retirement account during the marriage. If a decedent failed to name their spouse as a beneficiary on their retirement account, the surviving spouse would have a claim to half of those assets, which can send the entire account into probate. 

Assets that do not fit into one of the non-probate categories will be lumped together into the decedent's estate and go through the formal probate process. Common types of probate assets include:

  • Individually held bank accounts

  • Separately held investment accounts

  • Real estate held as tenants-in-common

  • Vehicles

  • Business interests

  • Other personal property

In general, an asset that is held individually and without beneficiary designations is considered a probate asset. 

Problems in passing assets to a beneficiary through probate

The probate process is similar for a small estate or a large estate: The executor takes an inventory of the estate assets and debts, pays off creditors, then distributes the remaining assets according to the will. However, several other issues can complicate the process, most often legal or financial rules that conflict with the process of probate.

For example, an annuity generally doesn’t go through the formal probate process. When an annuity owner dies, the company that provided the annuity should automatically pay the named beneficiary either the amount remaining in the annuity or a guaranteed minimum payment, whichever is greater. 

However, if the annuity holder fails to name a beneficiary, or the beneficiary designation information is incorrect or outdated, the annuity may need to go through probate. This can increase the amount of estate tax that must be paid and delay the transfer of ownership. 

Another complicating factor is when a beneficiary named in a will dies during the probate process, before receiving their inheritance. In this situation, the general rule is that the assets left to the deceased beneficiary will become a part of that person's estate. 

Of course, if the terms of a will require that a recipient must be alive to receive their inheritance, then the beneficiary’s death would make them ineligible to receive it. The inheritance at issue would not become a part of the deceased beneficiary's estate. 

These are some of the many types of legal and financial complications that can make estate planning and the probate process difficult and time-consuming. The help of an attorney familiar with these factors can make the process immensely easier.

How to plan your estate

Estate planning is crucial to preserving the value of an estate and ensuring the efficient distribution of the estate’s assets to heirs and other beneficiaries. Anyone interested in creating or modifying an estate plan should consult with a dedicated estate planning attorney. 

The essential component of an estate plan is the will. In it, a person outlines how they want their assets distributed upon their death; they also name the executor who should execute the terms of the will. 

However, wills have their limitations, one being that a will does nothing to avoid the probate process. Other helpful estate planning tools are important to consider, trusts being perhaps the most essential. 

trust is a legal term referring to a three-party relationship based around the ownership and distribution of property. The three parties involved in a trust are:

  • The settlor, who initially owns the property and sets up the trust;

  • The trustee, who oversees the trust and carries out its terms;

  • The beneficiary, whom the trust is intended to benefit by passing down assets.

Almost any type of property can be a trust asset, including real estate, cars, boats, artwork, and other personal property. 

Trusts are versatile, and skilled estate planning attorneys use trusts to meet a wide range of client needs. However, the terminology used to describe trusts is notoriously confusing. Below are some of the most common types of trusts:

  • Living trust: A trust that is created during the settlor's lifetime

  • Revocable trust: A trust that can be modified or dissolved by the settlor at any point

  • Irrevocable trust: A trust that, once set up, cannot be modified or dissolved

  • Revocable living trust: A trust set up during the settlor's lifetime that can be amended or dissolved by the settlor before their death. A revocable living trust is often used to avoid probate. 

  • Irrevocable living trust: A trust set up during the settlor's lifetime, that cannot be amended or dissolved by the settlor at any time prior to their death. Irrevocable living trusts are often used to transfer assets and shield them from incurring an estate tax. 

  • Testamentary trust: A trust created during the settlor's lifetime but that will not take effect until the settlor's death. 

Over time, the needs of an individual or family will change, and an estate plan must reflect these changes. For example, an established estate plan should be modified to account for any of the following life events:

  • Birth or adoption of a child

  • Purchase of real estate

  • Formation of a business

  • Entering into a new marriage or relationship

  • Changes to beneficiaries

  • Illness or disability 

  • Moving to a new state

  • Changes in tax laws

Even if things have not changed significantly in a person’s life, all estate plans should be reviewed by a knowledgeable estate planning attorney every three to five years. 

Laws periodically change and can frustrate the purpose of even the most well-crafted estate plan. By reviewing an estate plan every few years, an individual can ensure that their plan complies with the most recent changes in the law and accurately reflects their changing needs. 

Working with an estate planning attorney

The importance of working with a skilled attorney to create an estate plan cannot be overstated. Certainly, there are many online options for do-it-yourself (or DIY) estate planning. However, there also are several concerns with the DIY approach. 

First, DIY wills lack the customization that an attorney can provide. Wills, trusts, and other estate planning tools all work together to form a comprehensive estate plan. The effectiveness of any will or trust is limited to the extent that it does not integrate with the other elements of an estate plan. DIY estate planning software and websites do not allow this level of customization. 

DIY estate planning tools are also generic in their application, and fail to take state-specific laws into account. This can jeopardize the effectiveness of an estate plan. 

Another benefit of working with an estate planning attorney is that the plan can be easily accessed when needed. Once created, estate plans should be kept in a safe place. However, it is also essential that the right people have access to the plan. Locking estate plan documents in a safe to which no one knows the combination is about as useful as having no estate plan at all. 

The best place to keep an estate plan is with the attorney who created it. Estate planning attorneys routinely hold copies of their clients' estate plans to facilitate in carrying out their clients' wishes.  

Given the importance of devising and preserving a comprehensive estate plan, cost should not be a prohibiting factor when considering an estate planning attorney. Besides the value of this service, most people find that working with a skilled estate planning attorney is less expensive than they initially thought. 

For example, having a lawyer draft a will can range from as little as $300 to upwards of $1,000. However, more commonly, clients opt for estate planning packages that include a full complement of services custom-tailored to their needs. 

Many estate planning lawyers will charge a flat fee, depending on a client's specific needs. However, if an hourly rate is preferred, the typical range usually starts at around $150/hour and up, depending on the attorney's location and experience. 

When planning for the financial future of loved ones, few things are more important than devising a comprehensive will to anticipate and address the probate process and distribution of your assets to your beneficiaries. Taking action with a qualified estate planning attorney today can make things easier for your loved ones tomorrow and in the future.

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