What is Probate?
Probate is a legal process involving the courts during which the will of someone who has passed away (the “decedent”) is administered. During the administration of the will, the court will review the will to determine that it was properly prepared and executed (this is called admitting the will to probate). After the will has been admitted to probate, the court will appoint someone to be the personal representative of the estate (usually this person is named in the will). The personal representative will be given letters of administration (sometimes called “letters testamentary”). The letters of administration give the personal representative the legal authority to take control of the decedent’s assets. Once the personal representative has control over the decedent’s assets, debts and taxes are paid and the decedent’s property is then transferred to those named in the will (the “beneficiaries”).
What is a properly prepared and executed will?
A properly prepared will is a valid legal document which accurately directs the decedent’s wishes. Among other things, a properly prepared will should designate what happens to all of the decedent’s property when he or she passes away. Additionally it will name a personal representative (sometimes called an executor), possibly name a guardian for the decedent’s children, and state how taxes and expenses of the decedent’s estate are going to be paid.
During execution of a Will, the document is signed. There are many specific requirements that must be met for a Will to be properly executed. An estate planning attorney will make sure that the Will execution is valid.
What if the decedent did not have a will?
Someone who dies without a will is said to have died “intestate.” If an individual dies intestate, the laws of intestacy govern how the probate property of the decedent is divided. Probate property is all property a person holds in his or her own name which cannot be disposed of in some other manner, such as through a trust, joint tenancy, a beneficiary designation or an account with a payable on death (POD) designation.
Does a probate estate always need to be opened to transfer probate property?
If the net value of the probate assets (their value after subtracting liens and encumbrances) does not exceed $60,000, then a probate estate may not need to be opened with the court. In these cases, an affidavit may be used to distribute the estate to the persons entitled to it. If there is real estate that needs to be sold, instead of transferred to heirs, then a probate estate will need to be opened with the court.
What legal steps need to be taken after someone dies?
If there is property which needs to be transferred through probate, there are a range of types of estate administration which are available. On the simple end of the range, the property may be able to be transferred through an affidavit with no formal administration. On the other end of the spectrum, a supervised estate administration with probate court involvement may be required. If a decedent had a trust, no probate may be necessary, however, other steps such as retitling property or filing tax returns may be required. Consulting with an attorney can save time and money by helping to ensure the most appropriate manner of handling the settlement of the decedent’s affairs is chosen.
How long will it take to administer my loved one’s estate?
If an estate has to be opened with the court, the probate process will last at least six months. During this time, creditors and other interested parties have an opportunity to file claims against the decedent’s estate. A supervised estate may take longer to administer than an unsupervised estate. Additionally, if there is real estate to sell, waiting for someone to purchase the real estate may prolong the probate process.
What is the difference between supervised and unsupervised administration?
During the unsupervised administration of an estate, the court typically is involved only in the appointment of the personal representative. The personal representative then proceeds with the inventorying of the estate, payments of creditors and taxes, and distribution of property without involvement with the court. At the end of the process, the personal representative must provide all beneficiaries with a written accounting of his or her actions during the course of the administration. If someone believes that the personal representative acted improperly they may file with the court an objection to the personal representative’s accounting.
What are some of the tax considerations related to my estate?
The Federal Estate Tax taxes the value of the property owned by the decedent at the time of his or her death. In 2013, after a taxable estate reaches $5.25 million, the excess is taxed with the maximum tax rate set at 40%. However, property passing to a surviving spouse or to a church or other charitable organization generally is deductible in determining the amount of the taxable estate. If an estate is likely to owe federal estate tax, there are several things that can be done, particularly for married couples to reduce and frequently eliminate the federal estate tax.
You should also know that for estate tax purposes, the taxable estate includes more than the probate property. It also includes property held in trust, property owned jointly with the right of survivorship, annuities, and retirement plans. Thus, a decedent could have little or no probate estate, but his or her beneficiaries could still owe estate tax.
The property an heir receives is generally not considered taxable for the heir. Exceptions to this are IRAs, 401(k) benefits, some government bonds, and other items on which the decedent had not yet paid income taxes. If the estate receives income (after the date of death of the decedent) such as interest on savings accounts, the estate can distribute this income to the heirs and thereby avoid paying income tax. But, the heir must then claim that income and pay applicable income tax.
The personal representative should obtain a Federal tax Identification Number (FEIN) for the estate. One is actually necessary if the estate expects to have taxable income and files a required income tax return, or if it will file a federal estate tax return.
While it may seem expedient to avoid filing an income tax return for the estate (Form 1041), in most cases it is actually better for the heirs if the estate does claim income and file a tax return. In fact, the estate may be able to deduct certain expenses that would not otherwise be deductible by the heirs.
Capital gains tax can be minimized by inheriting appreciated property rather than by receiving the property as a gift from the decedent before death. An heir receives, as his or her basis in assets, the fair market value of the property on the date of death of the decedent. So, if the heir sells the property for the same fair market value, then the heir has no gain and would not have to pay income tax on that property. But, an heir who receives appreciated property as a gift during life, is also given the donor’s basis in the property. If the heir then later sells the gifted property, he/she is obliged to recognize any gain and pay applicable capital gains tax. Usually, an owner’s basis is the amount the owner paid to purchase the asset.