23 Jan 2017

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understanding probate: and how to avoid it

Probate generically refers to the process of winding up one’s life affairs, and distributing property to loved ones. But as a legal matter, not all assets are distributed through the court process of probate. What is probate and why do people want to avoid it? Read on and find out.

What is Probate?

Probate is the legal process of petitioning the court to declare that a will is valid and appointing an executor to oversee the estate. The executor is the person chosen to carry out the wishes of the decedent. And the will provides instructions for what’s to be done.

But probate only affects property that passes under a will, and not all property does. Assets that pass under the will are known as “probate assets.” They are typically assets titled in the decedent’s name alone. Common examples include:

  • Personal property such as furnishings, jewelry and collections.
  • Bank accounts or deeds to real estate, in the decedent’s name alone.
  •  An interest in a business.
  •  A life insurance policy, IRA, or investment account with no named beneficiary.
  • An account which names the estate as a beneficiary.

Assets that pass to the next rightful owner by operation of law – and not per instructions in a will – are called “non-probate” assets. These include things like bank accounts, IRAs, life insurance and other financial accounts with a designated beneficiary. It also includes property held in joint names – like bank accounts or real estate.

For example, if a husband and wife, Mark and Joan, own a home jointly, the house will pass to the surviving spouse. Even if Mark writes a will that leaves the house to the children from his first marriage, the bequest will fail. The house will go to his wife, whose name is on the deed. A prenuptial agreement may change the result in some cases.

If you don’t designate beneficiaries for your life insurance, financial accounts or IRAs, the assets are left to your estate and go through probate. It’s essential to properly complete forms connected with these accounts. For example:

  • If you open a bank account, the bank will have you complete forms, including naming a beneficiary. If you name a beneficiary, the account will go to this person when you pass away and will not be part of your probate estate.
  • With life insurance, if you name a beneficiary on the insurance form related to your policy, the policy benefits will be paid to the beneficiary and not your estate.

Probate vs. Non-Probate Assets: Why it Matters

Whether property is classified as a probate asset or non-probate asset can have important consequences for a number of reasons including:

  • Non-probate assets can be distributed to beneficiaries more quickly.
  • Medicaid can seek reimbursement from a Medicaid recipient’s assets at death. In New York State, Medicaid only seeks recovery against probate assets.
  • Probate assets and contents of a will are made public. Non-probate assets are shielded from public scrutiny.
  • It is easier for creditors to collect from probate assets.
  • Probate requires legal notice be given to heirs who would have inherited if you pass away without a will. This may alert them to consider challenging the will with the hopes of receiving an inheritance.

Typically the transfer of non-probate assets is only challenged if there is fraud.

What Does Probate Entail?

Probate usually begins with the filing of a court petition by the person named as the executor, requesting: (1) appointment as the executor and (2) declaration that the will is validly executed. A document referred to as “letters” is issued which legally appoints the executor to act on behalf of the estate.

As part of the probate process, the will becomes a public document. Those who are beneficiaries under the will, and those who would have inherited had there been no will, must be given “notice of probate.” They are required to sign-off and consent to the probate process. If they do not, a hearing may be held. If heirs are unhappy, or believe there was fraud or a problem with the will, litigation will follow.

While state probate fees in New York are not high, lawyers are involved each step of the way. The paperwork and red tape can take months to complete, even if there are no problems. This becomes even more expensive. Avoiding probate saves money!

With estate planning, one thing is quite clear: you can put plans in place up until the day you die, and only then does it become too late. Make sure that your assets are titled in a way that can save you and your beneficiaries unnecessary probate costs.

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