Since the passing of my father, I have thought a lot more about the probate process and whether it is helpful or not. He passed unexpectedly, without a will, and left my sister and me with the responsibility to settle his estate. While I have not had a completely negative experience with the Probate process, I cannot help but wonder if any of it is necessary. Some situations may be easy enough for probate, but at what point should a person create a healthy estate plan to avoid issues like Probate?
What is Probate?
Probate is a public court process to settle and administer the estate of a deceased person. While not required, legal representation (like an estate planning attorney) is usually tasked with helping the surviving family members complete the estate. Attorneys are not required to complete the probate process, but those who self-represent must pay careful attention to follow all the state laws. As with any legal proceedings, it is recommended to get competent representation to help you complete the process.
In Kentucky, any estate under $30,000 can file to avoid the probate process. Above $30,000, paperwork must be filed to open the estate with the court system, and then a period of at least six months begins. The first two months of the process involve submitting the will (if there is one) and an inventory of the estate’s assets. From that time, the executor or administrator will then collect all assets, pay all debts, receive any income, pay any taxes, and distribute the remaining funds to the heirs. Afterwards, the final process is to file to close the estate, which cannot be submitted until after 6 months. While the process in Kentucky must take at least 6 months, depending on the assets, the different states involved, and even the number of heirs, it likely could take much longer.
The process is generally faster if someone has a valid will, rather than if someone does not. If one dies without a will, the rules for the court system to determine who receives the inheritance can become very complicated. Especially with blended families, it could be a very likely situation that certain descendants (or spouses or parents) get disinherited due to the distribution laws. In Kentucky, the intestate succession (dying without a will) would likely give only 1/2 of the probate assets to a surviving spouse, and the other half to either the children, parents, or siblings (in that order). Ultimately, the question becomes: Who do you want to determine where your money goes?
Should You Try to Avoid Probate?
There are three main reasons why someone may want to avoid probate. The first reason is the optimal direction and desired result of the assets. Passing away with a will is better than no will, but both situations require a judge to sign off that an executor will distribute the funds correctly. Usually, most people would prefer to decide for themselves where their estate should go, instead of the court system. This is the basic concept of estate planning, where assets are deliberately titled, beneficiaries listed, trusts set up, and other planning strategies are used to ensure the money goes where you want it to.
The second reason is to speed up the entire process. Beneficiary forms are a great example of this. For most financial institutions, providing a death certificate is sufficient to distribute any account with an attached beneficiary form. Usually, this is related to retirement accounts, but could also include brokerage accounts with a Transfer-On-Death beneficiary form on file. These accounts, by definition, are not included in the estate or probate and automatically distribute to whomever you named as a beneficiary. As a result, after supplying the death certificate, the assets can usually be distributed within days or weeks, much faster than the probate approval process.
The third reason is the privacy aspect of an estate. The Probate process is a public process with the court system, so technically, anyone has access to all the submitted information. This could be especially difficult if you are worried someone may want to contest your will or claim they deserve your inheritance (despite whatever your will says). It is not hard to imagine a scenario where the parent puts the “responsible child” in charge of the estate, and another “less-responsible” child (or half-sibling, or stepsibling) tries to challenge the responsible one. Sometimes, the value of privacy around accounts and assets is simply to keep out those who do not need to know.
What Can You Do?
If you decide that probate is something you want to avoid, the goal is to reduce your probate estate. In Kentucky, that goal is below $30,000. Therefore, all other assets need to be set up correctly to remove them from Probate. The easiest starting point is to attach beneficiary forms to all of your accounts. Retirement accounts, bank accounts, investment accounts, etc., all can have designations or “transfer-on-death” forms to go directly to individuals in the event you pass away. Review all of these accounts to make sure they are going where you desire.
Then come all the other assets, such as your home, rental properties, businesses, etc. This is where a living trust can benefit the estate plan. Retitling all of these assets from your name into a trust will remove the assets from your estate when you pass away. The purpose of the living trust is to give you full access and control over your assets while living, and switch to “irrevocable” immediately after you pass. This will allow anything in the trust to bypass probate and instead follow the distribution rules of the trust.
Also, one of the easiest ways to reduce the assets that require post-death management is to simply give them away before you die. For those who plan to give their inheritance to their kids, why wait until after you are gone for them to benefit? If you are charitably minded, go ahead and donate as much as you desire now. On top of the benefit to your heirs, there can be tax benefits to simply donating now rather than waiting. Currently, there is an annual exclusion for gifts up to $19,000 from one individual to another. So, married couples can give $38,000 to anyone they choose each year. After reaching a point in life where distributing assets becomes important, gifting now instead of later could become an enormous benefit.
Room For Growth
Estate planning is one of those topics that everyone knows is important, but almost everyone finds it hard to do well. Probate is a big part of the death process for your loved ones, especially if there is no clearly organized estate plan. If asking your heirs to go to court on your behalf is not preferable, start working on steps to avoid probate. Retitling assets, adding beneficiaries, and creating trusts can all help avoid probate. Work with a great attorney and other members of your financial team to update this part of your financial life.
TC Falkner 