We regularly use the term “estate” when discussing planning and estate tax issues. However, we are speaking about a taxable estate in these circumstances. A “probate estate” is very different from a taxable estate, and is legally administered by state law.
The term “probate” is one you may have heard and might associate with negative connotations, but you don’t fully understand what it is. For some, the term conjures images of lengthy delays waiting for wealth to be transferred and bitter disputes among family members. Others, because the process is open to the public, worry about their privacy being invaded. A will is a public document, and copies can be requested by anyone. It is even worse when someone dies without a will or trust. This is why we know so much about Aretha Franklin, Prince, and Marilyn Monroe’s estates
For starters, be aware that probate is predicated on state law, so the exact process varies from state to state. This has led to numerous misconceptions about the length of probate. The process can take sometimes no more than six to nine months, but often it can run longer for complex situations, especially when real estate or business entities are involved. Court dates are often difficult to procure. Distributions and sales of rental property may subject to court approval. Fortunately, some states, including California, exempt small estates and provide a simplified process for surviving spouses. Under current California law, probate estates of $166,250 do not need to be probated.
In basic terms, probate is the process of settling an estate and passing legal title of ownership of assets to heirs. If the deceased person has a valid will, probate begins when the executor named in the will presents the document in the county courthouse. If there is a will, the estate must be probated, unless the estate falls within the small estate exception. If there’s no will — in legal parlance, the deceased has died “intestate”— the court will appoint someone to administer the estate. Thereafter, this person becomes the estate’s legal representative.
With that in mind, here’s how the process generally works. First, a petition is filed with the probate court, providing notice to the beneficiaries named in the deceased’s will. Typically, such notice is published in a local newspaper for the general public’s benefit. If someone wants to object to the petition, they can do so in court.
The executor takes an inventory of the deceased’s property, including securities, real estate and business interests. In California, an appraisal of value will be required. Then the executor must provide notice to all known creditors. Generally, a creditor must stake a claim within a limited time specified under state law. The executor also determines which creditor claims are legitimate and then meets those obligations. He or she also pays any taxes and other debts that are owed by the estate.
Ownership of assets is then transferred to beneficiaries named in the will, following the waiting period allowed for creditors to file claims. If the deceased died intestate, state law governs the disposition of those assets. However, before any transfers take place, the executor must petition the court to distribute the assets as provided by will or state intestacy law.
When to Consider Probate
People who may want to consider probate are those who have a lot of debt. This is because probate limits the amount of time that a creditor can go after any debt that someone owes. Once probate is over, creditors can’t collect outstanding debts from heirs after the estate has already been dispensed. In cases where there is no probate, a creditor can actually go after beneficiaries and sue for money that was owed to the creditor from the estate. This can happen long after the money has already been dispensed to the beneficiaries. Probate is also a good idea for people who want to make sure that their last will and testament will be handled exactly how they want it to be handled. This is ideal in cases where there may be a lot of fighting between beneficiaries. Contact our Family Wealth and Individual Tax Group to help you implement the right techniques.