Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.
Updated on Monday, July 27, 2020
Planning for what happens to your money and assets after you die can be a depressing subject. No one really wants to think about the end of their life, but creating a will and making plans to physically and financially take care of your family after you’re gone is important.While you’re creating an estate plan, it is important to understand the probate process, which could put a snag in your carefully laid plans. Below, we look at everything you need to know about probate.
What is probate?
When you create a will, you outline how you would like your assets and possessions to be passed down. It’s your decision how you would like to divide your assets among friends and family. However, when it’s time for your will to be executed, it will likely need to go through the probate process.
Probate is a legal process that executes a person’s will. The goal of the process is to distribute your assets and possessions to your beneficiaries and pay off any debt owed. Typically, the probate process follows the wishes of a last will and testament. However, if there is no will, the deceased’s assets will be distributed according to state law.
Not every asset needs to go through the probate process. Typically, only property or shares of property held solely in the deceased’s name go through probate. Other assets, such as life insurance, retirement accounts that name a beneficiary, or property co-owned with a spouse likely don’t need to go through the probate process.
What does the probate process look like?
The probate process happens within a probate court. Though probate laws vary by state, the process often starts by filing a petition with the probate court to either admit the will to court and approve the executor or assign an administrator if there is no will. Once filed, the beneficiaries of the deceased person are notified. Additionally, the public receives a notice in an effort to notify any other parties that may have a claim to the deceased’s assets.
After an executor is appointed, they take an inventory of the estate. This inventory process only includes the property that is covered by probate laws. They will also notify creditors. Creditors will only have a limited amount of time to file a claim against the estate. The time limit varies by state. In Delaware, for instance, the claim must be presented within eight months. Typically, the estate must wait until this waiting period has passed before transferring any property to the beneficiaries.
The representative for the estate will proceed to pay all debts owed to creditors and any other outstanding bills before proceeding. If necessary, the representative has the authority to sell estate property in order to fund these payments.
Finally, the administrator will be allowed to transfer the assets of the deceased to the beneficiaries according to the will. If there is no will, then the property will be divided based on state laws.
How much time and money does probate require?
According to Edward A. Smith, a California attorney who specializes in estate planning, “Probate is not always advantageous to the heirs of an estate because the process is costly and can take longer than a year to conclude.” Let’s take a closer look at the challenges.
The cost of probate is a combination of factors, including court fees, attorney fees, representative fees, appraisal fees, bond fees, accounting fees and more. Total costs vary by state, but fees alone can consume up to 5% of an estate’s value. Depending on your estate size, that could mean thousands of dollars that your beneficiaries will never receive.
Not only is the process expensive, but it’s also time-consuming. In some states, it can take years. In other states, like Florida and California, the average process takes between six to eight months. The process will depend on the complexity of the will in addition to state laws and court requirements.
3 ways to avoid probate
Avoiding probate may be a good way to ensure a better transition for your family after your passing. Consult with a legal professional to see if you can avoid probate in your specific situation. The following ideas may also help simplify things:
1. Name beneficiaries on your accounts. Most bank accounts, life insurance policies, 401(k) plans, IRA accounts, pensions and stocks will allow you to name a beneficiary. You simply have to fill out the necessary paperwork in advance. If you choose to do this, then the asset could pass to the beneficiary without going through the probate process.
2. Hold property jointly. If you have the ability to own property jointly with your spouse or significant other, then that asset could avoid probate. However, there may be other ramifications to this decision, so you will need to decide if owning property jointly makes sense for your situation.
3. Create a living trust. A living trust is one alternative to a last will and testament. According to attorney Thomas Simeone, “The best way to avoid probate is to create a living trust while you are alive; this places all of your assets in a trust. You remain the trustee — meaning you have complete control over the assets — while you are alive. But when you pass away, you will not own any assets; instead, they are owned by the trust.” The fact that the assets are already in a trust helps your family to avoid the probate process.
Probate can be an expensive and time-consuming burden to your beneficiaries after you pass on. It’s important to understand the consequences of probate before planning your estate. Consult with a legal professional to find the best option for you and your family.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.