- Rick Kozlowski
Demystifying the Probate Process
Many clients fear the costs and complications of the probate process – either as a result of a bad experience with a relative’s estate or from a general, pervasive mistrust of that process.
While no one would argue that probate is desirable or enjoyable, it is not the calamity that many people envision. Hopefully, this blog will help you understand the probate process and thereby allow you to better assess whether probate avoidance is worth the effort and expense.
What is Probate?
To address this question, some simple concepts need to be discussed.
First: probate only applies to certain property owned by a decedent. It does not apply to:
Property owned jointly with another person who has rights of survivorship. Such property passes directly to the survivor. Married persons often own most of their property in this form.
Property that, by contract, passes to a designated beneficiary. All IRA, 401(k), 403(b), annuities, life insurance and other similar types of property pass to the beneficiary designated by the decedent. If that beneficiary is any person or entity other than the decedent’s estate, the property passes directly to such person/entity and skip probate.
Property subject to a “pay on death” (POD) or “transfer on death” (TOD) arrangement, then such property passes to the person(s) name in that arrangement. Bank and brokerage accounts are often set up as POD/TOD accounts and are transferred directly to the designee(s) upon the decedent’s death.
Property held in trust. A common way to avoid probate is to establish a revocable (living) trust and then transfer property into the trust – all avoiding probate.
As you can see, many common types of property are not subject to the probate process, a fact that, to some degree, minimizes the impact that probate might otherwise have. In many estates a minority of the decedent’s property is subject to probate.
Second: Probate is not dependent on the existence, or absence, of a last will and testament. If a person dies owning property, and that property is not one of the excluded types described above, then the probate process is invoked. If the decedent left a will then that will determines who receives the decedent’s property. If the decedent did not leave a will then state law (in our case Vermont) determines the ultimate recipient of the decedent’s property. Either way, such property must be “probated.”
Okay, armed with these concepts, the question remains: what is probate? Probate is the formal process by which a decedent’s debts are paid and property distributed to the decedent’s rightful heirs. That process is governed by a probate court according to a fixed set of rules that ensure the orderly payment of those debts and distribution of such property.
A review of the steps involved in the probate process reveals that it is not overly-complicated and not something to be feared.
The Probate Process
There are nine basic steps that are normally taken in probating a simple Vermont estate (assuming the decedent left property subject to probate).
Step 1 – Determine whether the decedent left a will.
If a will exists, then the probate proceeding is called a “testate estate.” If no will exists then the proceeding is called an “intestate estate.” The remaining steps remain essentially the same regardless of which type of estate is probated. [All references to “executor” (the person named in a will who administers a testate estate) also include an “administrator” – the title given to someone who administers an intestate estate.]
Step 2 – Open the estate.
In order to open an estate, whether testate or intestate, someone involved with the estate (usually an heir or a person named as the executor) files a petition with the court (together with a death certificate and an original will if one exists). The petition provides the court with the name of the decedent, some basic information about assets (the size of the estate), names of heirs and other contact information. All “interested persons” are required to receive notice of the filing of the petition. “Interested persons” include anyone named in the will (if there is one) and anyone who would be an heir at law if there were no will. All interested persons are invited to consent to the opening of the estate, the appointment of the executor, and the allowance of the will (if one exists). If all such persons consent, then the estate will be opened without a hearing. If someone objects, it gets a bit messier – a hearing is then scheduled to allow any objections to be raised to the court.
Step 3 – Gather the estate assets.
After the estate is opened, the executor investigates the decedent’s finances and determines what assets are owned by the decedent that are subject to probate. The executor then prepares and files an inventory that provides a description and value for all assets subject to probate.
Once the estate is opened, interested persons include only those individuals and entities named in the will (individuals who are only heirs at law are no longer interested persons).
Step 4 – Identify and pay debts.
This is perhaps the trickiest part of the process. After filing the inventory, the executor can then begin satisfying the decedent’s debts. In some estates the decedent’s affairs are well-known and creditors are easily identified – in others creditors might not be easy to ascertain. The executor can publish notice in the local paper which gives unknown creditors four months to come forward and file a written claim with the executor and court. Failure to file a claim bars the creditor from seeking payment. The executor can waive this notice if unknown creditors are not a concern (which accelerates the probate process since the four month period is not a factor).
The executor should begin satisfying debts only if the executor is certain that the probate assets are sufficient to satisfy all claims and administration expenses in full. If debts and expenses exceed the value of the probate assets then the estate is insolvent. The executor would then need to determine whether any non-probate assets are available to satisfy debts – assets held in revocable trusts, or in TOD/POD type accounts, are (by law) subject to creditor claims if the estate is insolvent. If there are no such assets, or if such assets are insufficient to satisfy all debts/expenses, then the executor needs to carefully apply the assets. Certain expenses of administration have a priority for payment. After those expenses are satisfied, other creditors are paid pro-rata based on the size of the claim and the assets remaining.
Step 5 – File tax returns.
There are three potential types of tax returns. The first are the decedent’s personal federal and state returns for the year of death. The second are returns for any income earned by the estate after the date of death (fiduciary income tax returns). The third are estate tax returns (which affect only a handful of estates due to the large federal and state exemption levels currently in place). In Vermont, an estate cannot be closed until an application is filed with the Vermont Department of Taxes and the Department certifies that all taxes have been paid. This certification is often a bottleneck that can slow the completion of an estate’s administration.
Step 6 – Prepare an account.
Once all assets are gathered, debts paid and tax returns filed, the executor can then prepare a final account. A final account is simply a report that shows the beginning assets of the estate as reflected on the inventory (see Step 3 above), the income (if any) received by the estate, and the debts and expenses paid. The account should “balance,” meaning that assets plus income less debts/expenses should equal the remaining assets in the estate. Money in, money out.
Step 7 – Prepare a proposed final decree.
Once an accurate account is prepared, the executor can then prepare a proposed decree based on that account (which sets forth the assets remaining to be distributed). The proposed decree is a document that the court will issue if, after the court’s review, the account is accepted. The decree is the roadmap for the executor in distributing the estate’s assets.
Step 8 – File account, proposed decree and consents.
The executor must send the account and decree to all interested persons. If they agree with the administration of the estate as reflected in these documents they can consent to their acceptance by the court. If they do not, a hearing is held to allow any interested person to voice an objection.
Step 9 – Distribute remaining assets and close the estate.
The issuance of the final decree by the court is the go-ahead to distribute the remaining estate assets. Those assets should be distributed with a receipt to be returned by the recipient. The executor then files all receipts with the court (together with a simple closing report) and the estate will then be officially closed.
Many practitioners preach probate avoidance as part of their approach to estate planning. While probate avoidance sounds like a worthy goal, it comes with a price – both administrative and monetary.
The administrative cost results from the fact that, to avoid probate, the decedent cannot own any assets individually when he/she dies. This means that for the remainder of the decedent’s life, all assets must be held in joint name, in a trust, or pass by beneficiary designation. This includes investment accounts, checking and savings accounts, personal property, etc. Especially in the case of younger clients, this lifetime administrative hassle can outweigh the downside of leaving a probate estate.
The monetary cost can result from the need to establish a trust and fund the trust with various assets. Creating a trust normally involves an attorney (like me) and therefore time and legal fees. In addition, in order to transfer assets into the trust other documents (such as a deed) might be required. In some cases the cost of creating a “probate avoidance plan” can approach the cost of probate itself.
On balance, I do not preach probate avoidance as a panacea. In some cases, it makes perfect sense – such as for a single, elderly client or a client who has real property in other states and needs to avoid probate in multiple jurisdictions. In others, it makes little sense – such as for a young married couple who own assets jointly (both would need to die before probate became an issue). The cost and hassle of taking steps to avoid probate should be weighed against the benefit. Often, it is best just to wait.