Probate is the legal process of administering an estate. The nolo.com website explains it well, saying:
"Probate is a legal process that takes place after someone dies. It includes:
- Proving in court that a deceased person's will is valid (usually a routine matter)
- Identifying and inventorying the deceased person's property
- Having the property appraised
- Paying debts and taxes, and
- Distributing the remaining property as the will directs."
Part of the process also includes transferring title and ownership of various assets to the inheritors.
If this all sounds like a complicated hassle, it is. It can be a costly one, too, involving lots of paperwork and fees to people such as lawyers, accountants, appraisers, and executors, as well as court costs. All these costs would otherwise have gone to beneficiaries. Probate costs can amount to roughly 5% to 10% of the value of the estate. So with an estate worth $500,000, probate could eat up $25,000 to $50,000 -- a sizable chunk. In addition, property remains in a kind of limbo while in probate -- and that can last months or even years.
Probate has some good points, though. For example, it tends to be a methodical and unbiased system, since a judge oversees it.
For most people, the downside of probate overshadows the upside, so it's best avoided. And, it can be avoided, if you take the time to learn more about it and take some actions. When it comes to this topic, you'll probably be best served by consulting a professional. In brief, though, one way to avoid probate is through a living trust or a life estate trust. With a trust, you're actually formally transferring the title of various properties to your heirs before you die. You retain control over it while you're alive, but it technically belongs to the trust. Once you die, a trustee passes it on to your specified heirs. This tends to be a fairly quick and simple process.
Also, many states permit a certain amount of property to be inherited without going through probate. In some states the limit is $100,000, for example.
Other possibilities include "payable on death" designations on bank accounts (where the contents of the account pass immediately to the designated beneficiary on your death) and retirement accounts such as IRAs and 401(k)s (where you also specify beneficiaries). Thanks to the Uniform Transfer-on-Death Securities Registration Act, most states now permit securities held by the likes of brokerages to pass to beneficiaries without going through probate.
Learn more about estate planning at the thorough-but-not-entirely objective estateplanninglinks.com and on our Estate Planning discussion board.
These articles may also be of interest:
- What a Will Can Do
- Write a Different Kind of Will
- It's Inevitable...
- Why You Need a Living Will
- "Pre-Need" Funeral Plans
For lots of tips on how to get your life in order, financially and otherwise, including how to lop off several hundred dollars from your monthly or yearly expenses, try our newsletter, GreenLight. It's full of personal finance guidance and practical advice, and we suspect it will more than pay for itself in short order.