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Estate Planning Made Easy

How to Settle an Estate: A Manual for Executors and Trustees

Your Living Trust and Estate Plan: How to Maximize Your Family's Assets and Protect Your Loved Ones

Plan Your Estate: Everything You Need to Know to Protect Your Loved Ones, Property and Finances (Law for All Series)

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Planning Directives

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Estate Planning and Trusts

Probate

The assets covered in your will and planning directives do not pass directly to your heirs. First, your heirs must prove that:

The will is valid.
You do in fact own the assets listed in the will.
There are no claims or debts against your estate.

The process by which your heirs provide this proof is called probate. During probate, the executor of your will must:

Assemble the will, directives, and other documents
Send a notice of death to your creditors
File an estate tax return
File a final tax return

In most states, the executor also must set up court appearances to officially “clear” your assets. Some states allow informal probate, which requires no court appearances.

Even when everything goes smoothly, “probating” an estate regularly takes 9–18 months and can cost thousands of dollars in court and legal fees. If your estate includes real estate, the costs may be tens of thousands of dollars. Special circumstances, such as ancillary probate—in which the deceased owned property in two states—can make probate even more time-consuming and expensive.

Assets Subject to Probate

Any asset covered by your will must go through probate:

Stocks, bonds, mutual funds, and other personally owned investments
Checking, savings, CDs, and other cash accounts
Assets to which you personally hold title (homes, land, cars, or other personal property)
Your share of property held as joint tenants in common
Your share of ownership in a business
Insurance benefits paid to your estate

The only way to keep any of these assets out of probate is to put them in a trust (see Estate Planning and Trusts). In fact, avoiding the costs of probate is one reason why people put their assets into trusts.

Assets Not Subject to Probate

Assets with named beneficiaries or joint ownership do not go through probate, including:

Annuities
Jointly owned property
Assets that are Payable on Death (POD)
Life insurance with a named beneficiary other than your estate
Assets in retirement plans (401(k), IRA, SEP-IRA, etc.)

As you plan your estate, it’s very important to keep in mind which assets must go through probate and which do not. If you don’t, it can lead to serious, unintended inequities in the way you allocate your assets. For example, if a person with two children leaves the $100,000 in a retirement fund to his first child and $100,000 in stock to his second child, the second child’s entire inheritance must go through probate while the first child will avoid the costs of probate entirely.

Taxes and Assets Not Subject to Probate

If your estate is larger than the allowable exemption amount (see How Estate Taxes Work), assets that avoid probate are still subject to estate and inheritance taxes. Depending on whether the assets are considered ordinary income or capital gains, they will also be subject to capital gains or income taxes.

The main exception is life insurance benefits, which can be received tax free if they go to a named beneficiary or are paid inside an irrevocable life insurance trust (see Types of Trusts). If the benefits are paid into your estate, they won’t be free from taxes or probate. Consult a tax professional to help assess your specific situation.

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