Probate and estate planning organize and direct how loved ones receive your estate’s assets following your passing. Essentially, with estate planning, the estate’s owner decides who will receive what when they die or become medically incapacitated.
In this context, an estate means all assets that the estate owner possesses, including debts. This may include houses, land, vehicles, personal belongings, pensions and life insurance, among other items. Every estate is organized differently, which is why the probate and estate planning process can be confusing. Even among young, healthy people, starting the estate planning process is a smart idea. This is especially true if you are a parent to minor children, are already in possession of significant assets or expect to be line for an inheritance.
Estate planning may also concern how the estate owner’s medical affairs should be handled if they can no longer make these decisions.
Probate is what happens after the estate owner passes. It is a court-supervised process, during which the state distributes assets that are not protected from probate. During probate, the court produces a representative (if one is not named in a will) who steers everything.
What estate planning looks like
Estate planning looks different for everyone, but there are several aspects that are common in most cases. If you have considerable assets to your name, are of advanced age or have minor children, these are essential parts of the estate planning process:
- Create a will – A will is a fundamental document for naming beneficiaries and directing people in a manner recognized by the courts. Attorneys highly recommend most people make a will, even young people, people with no children or those that have few assets to their name. A simple will likely cover everything. But a will is critical for people with considerable assets or people who need to make decisions regarding their children. A will allows the estate owner to name beneficiaries and the property they are to receive, and it can be used to pass on legal guardianship to others regarding children.
Keep in mind that a will does not prevent assets from going through probate.
- Put together a living trust – A living trust is the primary method that estate owners use to avoid probate, though a trust will not avoid debts, including taxes. A living trust is a popular means of assigning property to chosen beneficiaries, because a trust allows the estate owner to quickly pass property to a beneficiary, and only according to terms the estate owner sets.
When a trust is formed, a successor trustee is assigned to handling the property or assets protected by the trust. The estate owner doesn’t technically own the assets in the living trust, but can manage them as if they did have ownership. Ownership is given over to the trustee, and because only the estate owner’s property passes through probate, anything in the trust is omitted from the process, except in cases where the trust assets are needed to resolve debts or taxes.
Once certain conditions are met (this can be the estate owner’s death or something else, like the beneficiary graduating from college), the property’s ownership is transferred. This is a simple process that normally only takes a few weeks, which is much faster than probate.
- Assign a financial power of attorney and ensure your children’s property is protected – A power of attorney should only be given after careful consideration, especially when giving someone financial power of attorney. This person is called an attorney-in-fact or agent, but they don’t have to be a legal professional. A financial power of attorney will manage the estate owner’s property should the estate owner become medically incapable of managing their own finances.
An adult should also be named to manage any property given to minor children. This will ensure the children’s property is protected from mismanagement.
- Put together beneficiary documents – Some assets, like retirement and bank accounts, can be protected from probate by assigning them to a beneficiary. This ensures they are payable on death. In most states, this can also be done for brokerage accounts. This is another simple approach to getting assets directly to the people you want.
- Get your final arrangements in order – Life insurance is something to consider, especially if you have young children or significant debt. Although less than one percent of estates are taxed, it is still something to factor into your planning process. Make sure there are clear directives set out in paying this, or some assets may be sold off that would have otherwise been kept protected. If you own a business, make sure there is a plan of succession in place, or a buyout agreement if you are a part owner. Finally, detail what you would prefer regarding funeral arrangements and set aside funds to cover them, if possible.
And, of course, any documents produced during estate planning, such as a will or trust, should be stored and organized so that any named trustees or executors can find them and sort through them easily.
What probate looks like
Probate is the court-supervised process of distributing property to surviving family members and other personal connections. If possible, estate owners usually prefer to avoid probate as much as they can. There’s two reasons for this:
- Probate takes time – Proper estate planning will usually shorten the probate process, but your beneficiaries will still have to dedicate months to it, at least. In some cases, probate can last up to two years. During that time, your beneficiaries only have limited access to the property going through probate.
- Probate can be expensive – Probate is not free, and the incurred cost will be paid using the gross estate, or the total value of the estate’s assets. Fees will vary from one jurisdiction to another, but it can be as high as 10 percent in some cases. That’s a lot of property that’s not making it to your beneficiaries.
The easiest way to shield property from probate is to place it in a living trust.
If an estate owner has only provided a will (of if they haven’t planned at all) probate commences rapidly following their passing. The probate court will first name the estate’s administrator, as specified in the document. Next, the court will determine whether the will is valid or not, using the state’s requirements for witnesses, signatures and the like. As such, it’s essential that these requirements are followed to the letter when creating a will, or it may not be recognized by the court.
Once the will is proven to be valid, the estate owner’s property is identified and tallied up. It is appraised to determine its value and if there are any outstanding debts or estate taxes, they are paid off first. At this point, remaining property is doled out according to what is set forth in the will.
If an estate owner dies without a will, the state will follow its own procedures instead in distributing property. This differs from state to state, and in Texas, community property laws complicate it a bit. In general, a surviving spouse will receive most of the property, with surviving children (including adopted children) receiving a large share as well. Parents and siblings will then get their part of the estate. As all of this property being passed around can lead to familial conflict, it’s critical that a will be left behind that specifies everything. This will speed the probate process along. Probate can be a source of stress and can also be expensive (eating up around five percent of the estate) if it is drawn out.
Regardless of how complex of an estate, it is always best to hire a lawyer who understands estate planning and the subsequent probate process. It is important to consider your affairs now and ensure that your estate is handled the way you want it to be managed once you are gone.