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What is probate?
Probate is the legal process of distributing a dead person’s assets. When someone dies, he or she usually leaves behind assets to distribute and debts to pay. Even among those who have a will detailing who gets the furniture, the house and the stocks, the assets go through probate.
When an estate goes through probate, the executor, who is either named in the will or appointed by a judge, files paperwork in probate court to start the process. The executor must first prove to the court the validity of the deceased person’s will and provide the court a list of that person’s property and beneficiaries. The court then decides whether or not to sell the assets to pay debts and taxes before distributing assets to the beneficiaries of the estate. During this process, the executor is also the manager of the assets.
An extended probate process reduces the amount of money left over for beneficiaries because the estate must pay court and attorney fees.
Those who want to avoid probate have a few alternatives for passing along what they own without the court’s involvement:
- Revocable living trust is a written agreement similar to a will that transfers ownership of property to a trust and names a trustee to manage one’s property. The property that belongs to the trust does not go through probate, and the trustee has the ability to transfer it to the deceased’s living relatives. Some people use a trust to manage money designated for minor children in the event of a parent’s death.
- Payable-on-death account (POD): Sometimes referred to as a “totten trust,” a POD account stipulates who receives the assets of a checking or savings account, security deposit, savings bond, or certificate of deposit after the original owner’s death. To establish a POD account, the account holder completes a form for the bank. When that person dies, the bank immediately transfers the assets to the beneficiary and the funds do not go through probate.
- Joint tenancy: When two or more people equally own property together or share a lease, they may choose to establish joint tenancy. This agreement, noted on the deed or lease, transfers the full ownership and responsibility of the property to the surviving owner if one of them dies, even if the couple is not legally married or related. Married couples have the ability to own property under a similar structure called tenancy by the entirety, which gives them equal ownership in the property until one of them dies or they divorce.
- Gifts: One final way individuals can avoid probate is to give away their property before they die. Those who choose to give away assets as gifts before they die reduce the taxes the estate must pay, lower probate costs, and can determine whether the beneficiaries are capable of managing the remaining assets. With this information, they may choose to create a trust that provides more control over the assets and rewards beneficiaries for responsible financial behavior.
Probate is a necessary process for anyone who holds assets alone, instead of with another person. The probate court also selects a guardian for minor children and makes sure all assets go where they are supposed to, according to state law and the deceased person’s will. Some people want to avoid probate because the process can take months or even years. A lengthy probate process may pose a problem to heirs who need money from the estate.
Use this simple calculator to estimate how much your savings will grow over time.