In every estate planning consultation, the conversation inevitably turns to the topic of "Probate." Many clients begin with the assumption that Probate must be avoided at all costs, but whether it is appropriate to avoid Probate depends on several factors that are personal and unique to each client.
First, it is imperative to understand that not all assets require probate. In the world of estate planning there are two types of assets, Probate Assets and Non-Probate assets. A Probate Asset is an asset that remains in a Decedent's name at the time of the Decedent's death. For example, if I die owning a parcel of real estate solely in my own name, that parcel of real estate becomes an asset of my probate estate. Consequently, the "Personal Representative" (or "Executor") nominated in my will must commence a probate proceeding to transfer the asset out of my estate to my desired beneficiaries.
Generally, "Probate" is a court-supervised procedure of transferring property at a Decedent's death pursuant to the terms of the Decedent's will or, if the Decedent elected not to execute a will, pursuant to the "intestacy statutes." (Link Do I Need a Will Article) To clarify, assuming that there are in fact probate assets, if a Decedent has executed a will, the will must be probated to ensure that the Personal Representative named in the will is appointed and that the assets are distributed pursuant to the terms of the will. If, however, a Decedent has elected not to execute a will, the intestacy statutes dictate who is appointed personal representative, and to whom and in what share the Decedent's assets are distributed. From a technical standpoint, if there are probate assets in a Decedent's estate, the Personal Representative, whether nominated by the will or by statute, must petition the court for appointment. After the Court approves the Petition to Appoint the Personal Representative, the Personal Representative gathers the Decedent's probate assets, pays the applicable taxes (Decedent's income, estate income, and estate tax), other debts of the estate, and the expenses of the estate's administration. Further, the Personal Representative, if necessary, must coordinate the Decedent's final 1040 (Decedent's income tax return), the 706 (estate tax return(link How to Avoid Estate Tax)), and the 1041 (Estate's income tax return).
To help illustrate the process more colloquially, I often use the analogy of a child's playroom. Imagine a child's playroom with toys strewn carelessly about on the floor and a wooden toy chest in the corner with a treasure map taped to the top. If there are probate assets, the Personal Representative nominated in the Decedent's will must first locate the original map atop the toy chest. The Personal Representative must submit the original map and several other documents needed to satisfy the statutory requirement to the Court necessary to appoint a Personal Representative. Once the appointment is approved the by Court, the Personal Representative is then charged with searching the playroom for toys and placing any found toys into the toy chest. While the toys are in the chest, and the Personal Representative is waiting for the statutory four month creditor period to expire, the Personal Representative must pay all taxes and debts of the estate as well as any expenses of the estate's administration. Lastly, after all the bills are paid, the Personal Representative consults the treasure map and distributes the remaining assets to the appropriate individuals.
In recent years, mainly because probate is time consuming, public, expensive and often unnecessary, many people request estate plans designed to avoid the heavy burden. There are many effective tools available to avoid probate, most tools are able to keep assets and property out of probate because, upon the Decedent's death, they are transferred pursuant to a contractual or trust obligation (Link Trust Article) that specifies the persons whom the proceeds should be paid. This avoids probate because if title of the asset is transferred outside of the probate, a proceeding is thereby not needed to transfer title to the assets or property. In the case of a trust a probate is unnecessary because the assets (toys) have already been carefully placed in the toy chest with a distribution list attached. Similarly, in the case of an asset that is jointly owned or is controlled by a beneficiary designation, probate is unnecessary because the asset has distribution instructions taped to it.
