What is probate and why should you try to avoid it? Whether an inheritance will go through probate or bypass the process will depend on the type of asset - not whether the decedent had a will. Having a will does not mean assets will avoid probate; a will is essentially a legal record of the decedent's wishes that will be used during the probate process.
The probate process
Probate is a legal process where certain assets in the decedent's estate that were owned as an individual are distributed by the court. How does the court decide who gets what? If there was a will, then assets are typically distributed accordingly. If the decedent did not have a will, then the court decides.
Why avoid probate?
Even if you do have a will, it is still advantageous to structure your affairs to avoid as much of the probate process as possible. These are 4 main reasons to avoid going through probate:
- Probate can take a long time. Depending on how complex the estate is, it can take anywhere from a matter of months to years to complete the process. This is an emotional burden for the family and also a financial one, as there is often no liquidity from the estate during the process, yet regular expenses will continue, such as maintenance on the decedent’s home.
- The probate process can be very expensive. Some states have rules limiting the percent of the gross estate a probate attorney can collect in fees, which vary with the size of the estate. Again, the exact breakdown of fees will depend on whether there is a will in place, if it is contested by a friend or relative, whether a valuation is needed for interests held in a privately held business, and so on. In general, settling an estate though the probate process is costly, and if there's no real value being added, why not try to avoid it?
- Avoid family feuds. If the executor of the estate is a friend or relative (instead of a third party) it can create discord among the surviving family and friends for a variety of reasons. There may be disagreements about the way the estate is being managed or infighting about the way assets have been allocated to the beneficiaries by the decedent. This kind of disharmony can occur regardless of who is appointed as executor of the estate, however, when that individual has a personal relationship with the affected parties and is perhaps also a family member, it can have a devastating impact on those relationships. Using an impartial third party can take family dynamics out of the equation.
- Probate is a public affair. When assets pass through probate, it becomes public information. Details about who received what and how much becomes part of the public record. This can also create problems among family members and even predatory behavior from unrelated parties as anyone can find out how much money was inherited and how liquid it may be.
Does an inheritance go through probate?
Certain types of assets will not enter the probate process regardless of whether there was a will in place.
- Beneficiary designations: Assuming the decedent has made proper beneficiary designations, accounts like IRAs, 401(k)s, brokerage accounts, and life insurance policies will bypass probate.
- Trusts: Trusts will also bypass probate, which is one of the key reasons they are used in the estate planning process. Whether the decedent established a revocable or living trust during their lifetime, or the estate plan details that certain assets will pass to newly created trusts upon death, these assets may not be subject to probate. A wide range of assets can be placed in a trust - common examples include real estate, art, cash, investment accounts, and so on.
- Titling: Assets that are owned jointly, often by marriage, may pass to the spouse and avoid probate. States have different rules about ownership in this regard so it will ultimately depend on the state you live in and the physical location of the assets, if any.
If an inheritance does not fit these criteria, then it will likely pass through probate. Remember, having a will does not mean assets will avoid probate; a will is essentially a legal record of the decedent's wishes that will be used during the probate process.
The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting or tax advice.