 Personal Finance PowerPoint Presentation. Probate. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. Probate what it is and how it works with and without a will, which you can find online. Take a look at the references, resources, continue your research from there. This is by Julia Kagan, updated March 14, 2022. In prior presentations, we've been looking at estate planning in general, then focusing in on particular components and tools of estate planning. This time we're focusing in on probate, asking the question, what is probate? So the term probate refers to a legal process in which the validity and authenticity of a will are determined. So you have the will at the time before death, then our goal when we're setting up our estate planning process will be in part to try to make sure that our assets are assigned in accordance with what we would like them to be assigned to at the point of death and try to make it as easy as possible for our loved ones to manage the process at that point in time. So the probate may be applied then in the process depending on the circumstances. So probate also refers to the general administration of a deceased person's will or the estate of a deceased person without a will. So note that the will is not like a separate legal entity kind of thing like a trust. So the will is going to be going into place at the point in time of death. That's when it's going to take effect and typically you're going to have to go through the probate in order to determine the authenticity of the will and get the legal authorization to go forward with what has been stated within it generally. If there's no will then you're going to have to go through that legal process of probate as well without the benefit of the will helping you out and then you go to the default of whatever the law is where you are at. So after an asset holder dies the court appoints an executor named in the will or an administrator if there is no will to administer the process of probate. So if there is a will and then you go through the probate the court kind of process and they say hey this will is legitimate we're giving authority to this last will here and we're going to say that the person that was named as the executor within it now has the authority necessary to administer the will. But if there is no will we still need someone as an administrator assigned by the court to go through the process needed to go through. So this involves collecting the deceased's assets to pay any liabilities that remain on their estate and to distribute the assets to beneficiaries. So it's similar to a corporation in this case because we're talking about the financial component of a person's holdings after they have died. So now the idea would be well they got basically a balance sheet at that point in time. They might have some income still as well but they got basically a balance sheet assets liabilities. You would think that you're going to take what's there and you're going to have to pay off the liabilities. Hopefully there's more assets than liabilities if not then you'll have to manage that situation. You pay off the liabilities and then you're going to have to allocate what's left over of the assets to the beneficiaries. Easy sounds straightforward not always so however because we could have a situation for example where you have more assets than liabilities but one of the assets is a home and so you can't really liquidate the home that easily so what are you going to do in order to pay off the liabilities and so on and so forth. Hopefully those kind of things are helped out through a will. They can help you to kind of list that stuff out. Otherwise different people might have different opinions about what's going to happen here. How probate works? Probate is the analysis and transfer administration of a state assets previously owned by a deceased person. When a property owner dies their assets are commonly reviewed by a probate court. The court provides the final ruling on the division and distribution of assets to beneficiaries. A probate proceeding will typically begin by analyzing whether or not the deceased person has provided a legalized will. So clearly if you're going into probate first question or one of the first things on the table would be hey do they have a will can we legitimize the will that could help us out in this process. In many cases the deceased person has established documentation which contains instructions on how their assets should be distributed after death. That could be helpful however in some cases the deceased does not leave a will. There are special circumstances that occur with both situations that we've listed below. Probate with a will. So a deceased person with a will is known as a testator. So we got some complicated terminology once you get used to it. It's not so bad like any terminology but it can be a little bit confusing at first. When a testator dies the executor is responsible for initiating the probate process. The executor is typically a family member. The will can also provide details on a specified executor. The executor is responsible for filing the will with the probate court. States can have different rules for timeframe in which a will must be filed after death. So different states might have different timeframes and due dates filing the will initiates the probate process. So once the will is filed if the will is if you have a will that's going to initiate the process. The probate process is a court supervised proceeding in which the authenticity of the will left behind is proven to be valid and accepted as the true last testament of the deceased. So if someone dies and things are prepared for and there's a will then you can go through the probate with the will that's going to start the process in place. And hopefully then get some you know authorization of the authenticity of the will to apply you know hopefully go forward with the wishes that are outlined within it. So the court officially appoints the executor named in the will so if everything goes well they approve the will they give it authenticity. Then you would think they would go with the executor in the will which gives the executor the legal power to act on behalf of the deceased. So now of course the deceased can no longer allocate their assets and so on. It's been given to the executor to do this the executor the will typically designates a legal representative or executor approved by the court. This person is responsible for locating and overseeing all the assets of the deceased. The executor has the estimate the value of the estate by using either the date of death value or the alternative valuation date as specified by the internal revenue code the IRS. Now this could be important if of course the estate and is subject to a state taxes. So if there's subject to the estate taxes in particular then you're going to have to determine how big is the estate because remember we're usually used to an income tax meaning you get taxed when you earn the income. If you're subject to the estate taxes at the point of death they're basically taxing on the balance sheet and you have to determine how much the assets are worth at that point in time. Which can be difficult because things like stocks and so on you can look at the market at that point in time to help you to determine. But things like a home which are unique in nature can be more difficult to do that you have to pick a point in time that you're going to make the valuation as of. Most assets that are subject to a probate administration come under the supervision of a probate court and the place where the decedent lived at death. The exception is real estate probate for real estate may need to be extended to any counties in which the real estate is located. Clearly real estate is going to be subject to a particular location in some ways. The executor also has to pay off any taxes and debt owed by the deceased from the estate. So clearly if they owe taxes or liabilities you would think the general process is they're going to have to pay those things off. So creditors usually have a limited amount of time approximately one year from the date of death to make any claims against the estate for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say on whether or not the claim is justified. The executor is also responsible for filing the final personal income tax returns on behalf of the deceased. So when the deceased died they probably died mid-year they got to file the final tax return for them. Any estate taxes that are pending can also come due within one year from the date of death after the inventory of the estate has been taken. The value of assets calculated and debts paid off the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries. Notice that in an ideal world that's kind of done last because what you want to do is you want to get the estate and you want to take care of the liabilities. If you have to liquidate some of the assets or something like that then you may have to do that to basically pay off the liabilities and then distribute to the owners in a similar way as you would do in a liquidation for a corporation. If you do it otherwise or differently if for example you pay the beneficiaries before you pay off the liabilities then it's going to be difficult to pay off the liabilities, right? Because now they're not going to want to give you the money back to pay the liabilities. So you want to pay the liabilities first before you give the money to the beneficiaries so that you don't run into that problem would be the general way you'd like things to flow. Probate without a will. When a person dies without a will he is said to have died in test-states. So that's another technical term and in test-state estate is also one where the will presented to the court has been deemed to be invalid. So if they gave a will to the court and the court says no this does not look like a valid will then you're in the same kind of situation without a will in test-state. The probate process for an in test-state estate includes distributing the decedent assets according to state law. So then the question would be well how am I going to move forward if there's no will helping us with the distribution process? Well then you fall back on the state law as the default. So if a deceased person has no assets probate may not be necessary. So if they don't have anything of value to administer out then obviously then you have less of an issue less of a problem of doing that administration process. So in general a probate court proceeding usually begins with the appointment of an administer to oversee the estate of the deceased. The administer function as an executor receiving all legal claims against the estate and paying off the outstanding debts. So you've got the same kind of situation you've got someone that you would hope you would need to then process the management of the assets and liabilities that are owed or and have of the deceased individual. So the administration is tasked with locating any legal heirs of the deceased including surviving spouses, children and parents. The probate court will assess what assets need to be distributed among the legal heirs and how to distribute them. The probate law in most states divide property among their surviving spouse and children of the deceased. And then you can divide things up the assets in accordance with whatever the state law says. So asset transferred to the government is known as as cheat meant as cheat meant another technical term. States do typically have a time frame for the claiming of any assets by an heir or may step forward who may step forward. So in other words again you have the situation where you've got these assets that are sitting here. There's a statute of limitations generally for the heirs to come up and claim those assets otherwise they might go to the state. Spouses as joint property owners. Community property laws can recognize both spouses as joint property owners in an in-state proceeding. So now we've got some differences in terms of how people see property in terms of joint property say for married couples for example. So that comes the term or how marriage is seen. In other words as a taxpayer as a citizen are you seen as one legal entity which has your kind of your assets kind of combined together. Or are you seen kind of more as two entities that are married from say a tax perspective and a legal perspective. So there could be some differences from state to state. So once again community property laws can recognize both spouses as joint property owners in an in-state proceeding. In effect the distribution hierarchy typically starts with their surviving spouse which kind of makes sense of course because if you think of two individuals coming together in marriage as one legal entity you would think that that legal entity in essence owns the assets and liabilities and hasn't ended hasn't died until the second one dies right. So if unmarried or widowed at the time of death assets are usually divided among any surviving children. So clearly obviously after you die if they're surviving children you would think that would be the next place to go or maybe that's just obvious to me because that's where I live or what not. But in any case that makes sense to me after a spouse and children have considered other relatives may also be deemed appropriate for distribution. So then you're going to expand the net out after that point if there are no children. So close friends of the deceased will not normally be added to the list of the beneficiaries under the state's probate laws for interstate estates. So usually if you're just depending on state law it's going to go through the family line not typically well this is my best friend so I have a claim from best friend stuff. So that might you could you could give something to your best friend but you typically would think you would need a will or something like that to do so. However if the deceased had a joint account with right of survivorship or owned property jointly with another the joint asset would automatically be owned by the surviving partner. So you could have other ways other than a will possibly for something to go from one person to another not through the probate process generally by holding it in joint. So if you had a joint account or something like that. So is a probate always required. So it is important to know whether a probate is required following the death of an individual. The probate process can take a long time to finalize the more complex or contested the estate is the more time it will take to settle and distribute the assets the longer the duration the higher the cost. Probating an estate without a will is typically costlier than probating one with a valid will. So clearly if you had a will you would think even though you're still possibly going through probate in that case it would be easier because you could follow the will. Hopefully it's a will thought out will but any will you would think would be better than nothing. However the time and cost required of each are still high also since the proceedings of a probate court are publicly recorded avoiding probate would ensure that all settlements are done privately. So different states have different laws concerning probate and whether probate is required after the death of a test day tour. Some as some states have a specified estate value which requires probate for example probate laws in Texas hold that if the value of the estate is less than $75,000 then probate may be skipped. So if an estate is small enough to bypass the probate process then the estate's assets may be claimed using alternative legal actions such as an affidavit. Typically if a deceased person's debts exceed their assets probate is not necessarily initiated and alternative actions may be taken. Some assets can bypass probate because beneficiaries have been initiated through contractual terms, pension plans, life insurance proceeds, 401k plans, medical savings accounts and individual retirement plans or IRAs that have designated beneficiaries will not need to be probated. In other words when you set these kind of things up you typically have a beneficiary listed already and so it's all pretty much set up already for those particular types of assets. Likewise assets jointly owned with a right of survivorship can bypass the probate process. Another popular way to bypass probate is through the use of a trust. So we've talked about trust a bit in prior presentations you can think of them kind of like a separate legal entity right and you might have various reasons that you're going to set up a trust. But it's kind of you can think of it kind of like a corporation that has its own its own rights in some ways like to own property for example and it can live in essence past or beyond an individual life until the terms of whatever its existence was brought into being. To be are fulfilled so you might use a trust to make the probate process easier or you might use a trust for other estate planning purposes that we've talked about in prior presentation. Overall minimizing costs associated with the probate process can be prudent. Accumulated expenses can include court fees professional service hours and administration costs having an easily authenticated will is one of the most common ways to quickly move through a probate process and efficiently distribute assets appropriately.