The legal process of probate often gets a bad rap, primarily because it can be expensive and laborious. However, probate exists to protect all parties involved in the distribution of a decedent’s assets.
The probate process refers to a court-supervised property transfer – under certain conditions – upon a person’s death. Property subjected to probate doesn’t pass to an heir by ownership/designation. The process of probate does; however, in certain states, make the decedent’s last will public record. The probate process includes –
- The determination –
- If a will exists and if it is valid and enforceable.
- Of the decedent’s beneficiaries/heirs.
- Of the decedent’s assets’ value.
- The management of the remaining financial responsibilities of the decedent.
- The transferring of assets as determined by the decedent’s Last Will & Testament, or state law, if the decedent died intestate (without a will).
Three main types of assets transfer without the need for probate. Assets passing without probate are distributed faster than property distributed through probate.
Jointly Owned Property
Jointly owned property that is held with right of survivorship passes immediately and automatically to the surviving owner(s). There are several ways co-owners can jointly own property that creates the ability to add the right of survivorship clause to the deed –
- Joint Tenants with Right of Survivorship (JTWROS)– married couples, in certain states, holding joint ownership in their primary residence do so as community property – which implies the right of survivorship. Many states now also recognize domestic partnerships as valid unions, but not all states automatically recognize JTWROS by marriage or any other reason.
- Tenancy by the Entirety – this type of real property ownership is only available to those couples who are recognized by law. It works similarly to the JTWROS in that upon the death of one owner; the surviving owner immediately receives ownership of the deceased individual’s interest.
Designated Beneficiary Accounts/Assets
- A bank account that contains a payable on death clause.
- Investment accounts/cars/boats that contain a TOD Beneficiary (Transfer on Death)
- Life Insurance with cash value that has a listed a beneficiary (that is not the decedent’s estate).
- Retirement Accounts with a Beneficiary.
Trusts are legal instruments that are used to allow individuals to bequeath assets without the need of a lengthy and costly probate process. There are several types of trusts – each with a designed-specific purpose.
- The Revocable Trust – is a trust that is created during an individual’s lifetime that can be revised or modified during the trust maker’s lifetime.
- The Irrevocable Trust – this type of trust, as its name implies, cannot be revised or modified once created, but are valuable legal instruments when passing large estates as they offer unique tax savings aspects.
- A Charitable Trust – this type of trust is a financial planning technique that sets forth income for the trust-maker (or their defined beneficiary) during their life, but the assets are transferred to charity.
Do the probate processes apply to an estate considered to be ‘small,’ or is there a simplified probate process?
Should a Small Estate Go to Probate?
The majority of states acknowledge that probate can be a complex and costly legal process that is unnecessary when needing to transfer/settle what is deemed a modest estateor an estate designed to pass outside the probate process.
Small Estate Benefits
In terms of probate, small estates offer some distinct advantages. As such, when a decedent’s estate (i.e., the deceased individual’s remaining property) is valued and falls beneath a state’s determined limit, the decedent’s assets can be distributed amongst the decedent’s named beneficiaries and heirs.
Certain state jurisdictions may impose additional restrictions on small estates that wish to avoid probate. For example, some states may require that the beneficiaries are the decedent’s spouse or children to avoid probate. For instance, in Kentucky, the probate value threshold is $15,000 (with other restrictions), whereas, in Pennsylvania, the threshold is $50,000 – also with specific limitations and restrictions.
Steps to Determine if an Estate is ‘Small’ in Terms of Probate
Calculate the total value of your individual property. Depending on the specific jurisdiction/state, this can include–
- Investment Accounts.
- Bank/Savings Accounts.
- Real Estate Holdings.
- Business Interests.
- Personal Effects –
- Electronics, etc.
Calculate, and then subtract the value of any of this property that may have a co-owner or a defined beneficiary. Consider these examples of an asset that would not be included in determining the value of one’s estate –
- If you possess a whole life insurance policy – with a cash value and a listed beneficiary – the policy’s value will not be a part of the estate’s value calculated for probate purposes.
- Real estate owned as community property
Finally, determine if your estate’s value exceeds your state’s small estate threshold.
Although there are many times when it is prudent to avoid probate – to conclude that a simplified probate process is most suitable for a specific estate, there are times when probate may be beneficial in protecting an estate from unscrupulous creditors or disputes initiated by beneficiaries.
Making decisions after losing a loved one can be challenging, which is why it is important to understand the options and laws that will impact how an estate’s assets will be distributed, without leaving things to chance.