The Probate Process

The Probate Process

Probate is a Court Proceeding
The Probate Procedure Involves Three Basic Steps
The Selection and Duties of the Executor
A Few More Facts About Wills and Probate

Information provided by Michael T. Palermo, Attorney at Law, Certified Financial Planner™ Author of The AARP Crash Course in Estate Planning.

Probate is a Court Proceeding

It is here that final debts are settled, and legal title to property is formally passed from the decedent to his/her heirs. It is initiated in the county of the decedent’s legal residence at death. Usually, the first step is taken by the person named as Executor, or other interested person who has the original Will.

This person should file (with or without the help of a lawyer) a Petition for Probate of Will and Appointment of Executor, or something similar. Some states give out pre-printed forms for this, so people can do at least that much themselves. If there is no Will, somebody must come forward and ask the court to be appointed as Administrator, instead of an Executor. Most often, this is the surviving spouse or an adult child, although it might also be another interested party.

The “probate estate” simply refers to any property subject to the authority of the probate court. Assets disposed of outside the probate process are part of the “non-probate estate.”

“Probate Court” is a lower level court in the state system, but it might be referred to by another name, e.g., “surrogate court.” The clerk of your county court system can help you find the right office. If the estate is small, keep in mind that most states have streamlined procedures that can save the Executor time and legal fees. Details of the probate process vary greatly by locality, but the following explanation should be helpful.

After the document’s genuineness and validity are established, the court issues an order “admitting the Will to probate,” or some similar proclamation that the Will is “official.” It is then recorded by the County Clerk. Usually, this is a routine matter. State law might then require public notice of the probate proceeding by the publication of newspaper ads.

Occasionally, however, there might be an objection. For example, somebody might claim that the document being offered to the court is actually a forgery. Or, more commonly, the document being objected to has been revoked in a later Will. Whatever the objection or claim, it must be brought to the judge’s attention. The FBI does not investigate these cases; whoever has a gripe must go to court.

TIP: As a general rule of law – in all areas – if you snooze very long before asserting your claim or rights, they may be lost.

The judge’s order also formally appoints the Executor. This appointment confers on him full authority to handle the decedent’s accounts. The Executor is given a certified court document that will be recognized by financial institutions and others. This is often called the “Letters of Administration,” or “Letters Testamentary.”

Once probated, a Will is a public record, and so is the final settlement and inventory of estate property. As such, these papers may be viewed by anyone. This is a fact of great concern to some, but to others, none at all.

There is a common misconception that a Will can be drafted in a manner to completely avoid the probate process. This is not possible – but read on. As mentioned above, there are usually streamlined – and in some places highly expedited – procedures set up by the local court system to handle the settlement of small estates, or even larger ones, if uncomplicated. In a few states, the procedure for small estates is so “expedited” that a trip to probate court might not even be needed – but that is because of the small size of the estate, not because of anything about the way the Will was written. Although there are other ways to avoid probate (discussed later), all Wills in almost every state are subject to probate. But if the situation is not complicated, and people are not protesting and fighting with each other, the process is simply not as bad as many people fear.

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The Probate Procedure Involves Three Basic Steps

1. Collection, inventory and appraisal of all assets that are subject to probate;
2. Payment of taxes and creditors;
3. Formal transfer of estate property according to the Will, or by the state laws of intestate succession, if there is no Will.

The surviving spouse and/or children are generally allowed a set-aside under state law, as discussed earlier, whether or not there is a Will. Generally, that comes “off the top” first. After that, the order of payment of claims against the estate is usually:

1. Costs/expenses of Administration (i.e., the lawyer gets paid first)
2. Funeral expenses
3. Debts and taxes
4. All other claims

What remains of the estate after these payments are made is available for distribution to heirs and beneficiaries.

The Selection and Duties of the Executor

Your Executor (Executrix, if a woman) should be a trustworthy person (or bank, or other financial institution) with common sense, good judgment and the fairness of a referee. The latter role is one the Executor is often called upon to play, and your choice should not be intimidated by this possibity. Certainly, geographical proximity to the probate court and the decedent’s property (especially real estate) should be considered.

The Executor may hire lawyers, accountants and other professionals with estate funds for assistance, but fees and other costs can be saved if the Executor or family members are available and able to do some of the “legwork” themselves. The Executor should generally not act, however, until the Will is probated, because he has not been officially given authority till then. But he should, of course, pay for the funeral and take care of estate property before appointment, if necessary, e.g., maintain real estate or continue to operate a business.

BEWARE ! If you own a business that depends heavily on YOU, do not allow it to be dropped in the Executor’s lap. The value of the enterprise could be ruined literally overnight if no plan exists to replace you or carry on day to day operations.

All family members should regard the Executor’s job realistically. Yes, it is an honor to be considered worthy of this trust. But there is time and work involved. Even though entitled to compensation, most Executors would agree the position is more of a “pain in the neck” than anything else, especially if there are any difficulties or disputes. This might be an important point to discuss in advance. Some parents worry that naming one child as Executor would cause hurt feelings among the children not chosen. Realistically, they should be grateful.

TIP: If this is a potential problem in your situation, the solution is usually not the naming of multiple children as co-executors. To do so is to complicate matters at best, and invite costly disagreement or even bitter personal disputes, at worst. Instead, consider using a trusted family friend or attorney. Better yet, choose the qualified person you want, then sit down with everyone and discuss it.

If the Executor is also a beneficiary, he cannot give himself preferential treatment. Try to think ahead and not put him/her in a difficult situation. It is essential to keeping the family peace that the Executor’s fairness is acknowledged by all the beneficiaries. Most Wills give the Executor very wide discretion in handling property and the affairs of the estate, and the law permits this. But the intention of the Testator in writing the Will, and the desires of the beneficiaries should always be considered.

One of the Executor’s first and most important duties after appointment is to take an inventory of Estate assets. The detail required in the inventory of tangible, household personal property varies, depending largely on its value, and on the distributional scheme. In a large house, full of valuable antiques to be distributed among suspicious siblings, an item by item, professional appraisal is called for, at estate expense. But why bother, for example, if the contents of a modest home all go to the surviving spouse? In that case, the Executor’s honest, best reasonable estimate would probably be acceptable.

Family members and prior tax returns can be a big help in identifying assets and account numbers, but it is essential to look through the decedent’s personal papers carefully. Insurance policy and retirement account information, for example, might be difficult to gather from the tax returns. Private debts to the decedent and accounts receivable are also assets that may be hard to find. Remember the obvious, too: Is there a final paycheck and/or death benefit(s) due from the decedent’s employer?

The Executor must also act immediately to preserve and protect the assets, according to the “Prudent Person Rule.” Obeying this rule is part of a fiduciary duty imposed by law on Executors (and Trustees) to act cautiously, as though dealing with their own affairs. If this duty is violated and a loss of assets results, the Executor might be ordered to pay compensation personally (or as an institution) to the beneficiaries. For example, if estate funds were available, but the Executor neglected to pay a theft insurance bill covering property owned by the estate, and a theft loss resulted, he might well be held liable to the beneficiaries. (But suppose the Executor lacks sufficient personal funds to pay for the loss his negligence created? That is a consideration favoring the use of a bank as Executor.)

Although the job entails effort and serious responsibilities, the personal difficulties and liabilities of the Executor should not be overblown, either. Note that – absent his own negligence or wrongdoing – the individual wearing the hat of Executor is never personally liable on claims or lawsuits against the decedent or the estate itself.

He is not liable, either, for a poor return on estate investments – as long as those, if any, chosen by the Executor are appropriate. For example, if a general economic downturn decreases the value of a “blue chip” estate portfolio of stocks and bonds, the law would not hold the Executor responsible. That could happen to anyone. On the other hand, if the Executor invested in small, speculative, companies with no good track record, that would be unnecessarily risky and inappropriate. True, fortunes can be made with such investments, and they are perfectly appropriate for some individuals. These are not investments a fiduciary should make, however, because the risk of losing everything is also significant

TIP: Many simple Wills have a “standard” clause directing the Executor to pay “all debts and taxes.” In some situations, this can produce an unintended and very unfair result. We will see later that some of the decedent’s money and property might be OUTSIDE the probate process, and, therefore, not under the control of his Will (or the Executor). For example, a bank Certificate of Deposit might be “Payable On Death” and go directly to a particular child, designated on a bank form when the decedent bought the CD. Meanwhile, the decedent’s other kids might be getting their share of his wealth by inheriting assets that DO go through probate. The result could be that the Executor would have to pay all the decedent’s final debts without taking anything out of the “CD child’s” hide. After all, the Will told the Executor to, “Pay ALL debts and taxes.” So the children getting money from the probate pot might have to give up more than their fair share of their inheritance paying debts, while the “CD child” gives up nothing.

Such a blanket instruction to “pay all debts and taxes” might also oblige the Executor to pay off real estate mortgage loans. Unfortunately, it is often to the survivor’s advantage to use estate cash for other purposes, and to continue making house payments, especially since mortgage interest payments are tax deductible. So it is wise to give the Executor discretion to pay or not pay off real estate debts.

TIP: If protecting the family home is a concern, adequate traditional life insurance (either term or whole life) should be purchased to allow the mortgage pay off, while leaving enough funds for other needs. Some people buy a specific life insurance policy to pay-off a mortgage loan in case of premature death. Sometimes, coverage is limited to accidental death. Such policies offer what is called “credit life protection,” but they are usually bad values, giving little “bang” for the buck, compared to traditional life insurance. These policies are often offered by lenders in a manner suggesting that one has little choice but to accept. Decline the coverage, if possible, unless you feel it necessary because traditional life insurance is not practical.

The Executor may sell real estate – only after the legally mandated waiting period – and only if the Will so provides, or gives him discretionary power to sell it (most Wills give this discretion). The Executor usually may sell personal property any time after his appointment, but may not begin final distribution of property or sale proceeds until after a waiting period specified by state law (e.g., six months). He should not sell any property specifically bequeathed or devised, unless that sale is necessary to pay estate debts.

F.Y.I. “Personal property” (or, “personalty”) is a specific legal term referring to anything that is not real estate (e.g., a chair; a boat; a brokerage account; cash). In a Will, personal property is disposed of by a “bequest;” real estate, by a “devise.”

If you have an interest in a decedent’s estate, consider filing with the court and the Executor a “demand for prior notice” of any action regarding the estate, such as property sales. That way, nothing important should be able to happen “behind your back.” The Executor would have a duty to inform demanding parties that a sale was planned, for example. This would give them a chance to object or take other action before it was a “done deal.”

The waiting period before distribution of property, even if not required by law, is a very practical idea. Creditors of the decedent then have a chance to present their claims. If claims are not made in writing to the Executor within this period they may be barred forever by law. In fairness, the law requires that for such a bar to be effective, the world must have been put on notice of the death. That is why the Executor should publish in the newspaper legal notice that the estate is in probate.

The Executor reviews the claims and supporting proof, pays those he deems valid, and rejects the rest. The Executor may hire an attorney with estate funds for advice, or to defend or settle any claims. Examples of such claims might include a request by the decedent’s associate for repayment of a loan he had made to the decedent. In other cases, someone might demand payment for injuries received in a car accident caused by the decedent a few months before his death.

A rejected claimant then has a limited time to file a lawsuit against the estate. If that time limit expires, the claim is dead. The certainty of that “cut off” is an often overlooked argument in favor of going through probate.

There is, however, an additional option to creditors in some states that could be important: It might be permissible for a creditor of the decedent to wait until after probate proceedings, then try to collect his money by suing those to whom the estate has been distributed. This is an unsettling prospect. But if they have been given notice, most creditors will not wait till later, even if it is allowed. Common sense dictates to the creditor that the chances of payment are better (and easier) if he “gets his name in the hat” at once, during probate. If a creditor does so, however, he/she is then stuck with probate court rules and time limits for filing a suit if no agreement is reached on the claim. In other words, the creditor usually cannot take one “shot” using the probate process, then, if not satisfied, come back much later with the same claim in a separate lawsuit outside the probate process.

When all claims, debts and expenses have been paid, the remainder of the property is distributed by the Executor, as the Will directs. (At this point, if there is no Will, the Administrator distributes property according to the state law of intestacy, discussed earlier.) The Executor generally has the discretion to distribute the beneficiaries’ shares in cash or in kind, but the Will can specify otherwise. Finally, the Executor or Administrator submits a report or final accounting for approval by the court.

At this time, if not before, beneficiaries or other interested parties (e.g., creditors) can file objections to the final report, and ask that the judge not approve it. A hearing might be necessary to settle the objections. This might happen, for example, if a beneficiary felt he did not, in fact, receive all to which he was entitled under the Will.

The Executor is entitled to reasonable compensation, often limited to a certain percentage (e.g., 5%) of the property in the probate estate. (Extra compensation, related to handling some special matter, may be allowed by the court.) That does not mean the Executor automatically gets that much. The fee taken is usually listed on the final report, and is, therefore, subject to approval by the court. As with anything else, an objection can be raised if the fee appears excessive, considering the time and effort actually expended by the Executor. Professional fees (lawyers, accountants, appraisers) will also be allowed. These fees, too, must be reasonable, but are not subject to a set limit.

F.Y.I. Common Question: “I’ve recently been appointed as Executor, and also a beneficiary under Aunt Sadie’s Will. Am I better off, tax-wise, taking my fee or not?” The answer will vary, but the factors to consider are as follows:

From the beneficiary’s standpoint, inheritance money is free from federal income tax. (The federal levy – if any – is an estate tax, taken “off the top” before the beneficiary gets his/her share.) The fee to an Executor, however, is ordinary, taxable income to him. These facts weigh in favor of the beneficiary/Executor not taking his fee, and obtaining a slightly larger (income tax free) inheritance. So if the only beneficiaries are you and your spouse, for example, then it makes sense to skip the fee, for this reason.

On the other hand, if there are other beneficiaries, then not taking your Executor’s fee means this money is left in the estate to be shared with the others. Depending on how many other beneficiaries there are, and on the distributions provided by the Will, you might end up with more money after all, by taking an appropriate Executor’s fee and paying income tax.

There are two other factors that sometimes must be considered in the decision to take or not take the fee. First, the Executor’s fee is a deductible expense in calculating federal estate tax. That tax only applies to estates over $1 million ($1.5 million in 2004), but the rates are so high that the Executor might be duty-bound (to the other beneficiaries, if any) to reduce federal estate tax by taking his fee, in larger estates where the tax is applicable. Secondly, some states have an estate or inheritance tax of their own, but they are not considered here. These tax rates are much lower than either the federal income or estate tax rates. For this reason, planners focus their attention almost entirely on federal taxes.

The practical response to questions regarding the Executor’s compensation and overall handling of things is often, “Is anybody involved going to complain?” Judges review probate inventories and final distributions routinely, but do not have time to scrutinize every transaction. They rely on other interested parties to point out true inequities and improper dealing.

A Few More Facts About Wills And Probate

1. In many states, if a witness to a Will is also a beneficiary, and the Will cannot be proved without this witness, the Will can be void as to that beneficiary/witness. Avoid this situation.

2. The birth of a child, unborn when one’s Will is made, serves to revoke that Will, in many states. In others, an after-born child receives a share equal to what he/she would have received if the Testator had died without a Will (i.e., intestate) unless: It appears that the omission was intentional, OR the Testator already did have one or more children and left substantially all to the surviving parent of the omitted child, OR the Testator provided for the omitted child by gifts outside the Will. The share-splitting arithmetic in such situations can get complicated. This formula does not necessarily result in equal treatment of the omitted child, so it is wise to have your Will revised after the birth of a child.

3. In some states, a “no contest” clause can be used in a Will to automatically exclude anyone who challenges the Will in court. This can be a very useful tool if your state allows it. It is unlikely, however, that any state would enforce the exclusion of a beneficiary presenting a legitimate claim of outright fraud or other significant impropriety against the Executor.

4. Marriage generally revokes a person’s Will automatically, unless the Will expressly states that it is not to be revoked. A divorce and final property settlement bar all claims of the divorced survivor to the estate of the ex-spouse. The same may be true if a spouse abandons the household, even if there is no formal divorce.

5. Regarding access to safe deposit boxes and joint accounts after death: Unfortunately, not much general advice can be offered on this important concern. State laws vary, and experience shows that procedures differ among banks. (All banks have a person in charge of deceased customers’ accounts, and he/she should have the details you need.) The following observations may be helpful.

Many banks check death records daily, and you might have a legal duty to inform the bank of the death of a customer before attempting to access funds. If the bank is aware of the death, accounts and lock boxes will often be frozen, at least briefly. Under one sensible approach, a deceased customer’s safe deposit box can be opened, only so the Will can be retrieved, after the state taxing authority’s agent is notified to be there. The contents are not available till after probate.

The “joint” bank accounts most people speak of are owned “jointly with right of survivorship.” Therefore, they do not have to wait for distribution through probate court. Unfortunately, the account might still be frozen by the state to secure payment of state death (or other) taxes, if any. If the surviving joint tenant of an account is the spouse, the funds should be much easier to get, partly because few states impose death taxes on transfers to spouses. If the surviving tenant is not the spouse, a tax release might be necessary.

6. In some states it is possible for a surviving spouse to obtain emergency money from a bank account that has been temporarily frozen because of the decedent’s death. To avoid hardship, he/she might be able to get an immediate court order permitting the withdrawal of a small sum for living expenses (e.g., $1,000) until the local tax authorities release the account.

Excerpt from the website of Michael T. Palermo, Attorney at Law, Certified Financial Planner www.mtpalermo.com