There can be a lot of confusion about probate and how it relates to someone’s estate plan. It’s typically talked about as if it were something to be avoided at all costs, lest you bankrupt your family. Talking to someone about the probate process often generates a lot of questions about the basics: What is probate? Is it expensive? It’s bad, right? How do you skip it?
Probate is the process by which the court system supervises the division of an estate. “Estate” is the term given to the assets and debts held by someone at the time of passing. A will, revocable trust, and other planning documents are created to govern what happens to the estate during the probate process (and in some cases to skip it altogether).
THREE TYPES OF PROPERTY
Not all estates will go through probate, but before I explain why, it’s important to understand three basic types of property that affect the probate estate: joint property, non-probate property, and probate property. The amount of these three types of property you have will determine not only whether your estate will go through probate, but whether the probate proceedings will be formal or informal. Spoiler: formal probate can be expensive and time-consuming. Informal probate — at least in Minnesota — isn’t so bad. Joint property, specifically property that is owned in joint tenancy with rights of survivorship (JTWROS) is a property that is owned equally and in undivided shares with at least one other person.
A common example of joint property is the home where someone lives with his or her spouse or significant other. If the house is deeded in the names of both owners in joint tenancy with rights of survivorship, then the property transfers automatically at the death of the first owner to the surviving owner. The county office responsible for keeping property records will need to be notified of the passing of one of the joint owners, but aside from this, the transfer is automatic and happens outside of probate by operation of law. No probate proceeding is needed for a property that is owned jointly.
TENANTS IN COMMON
Not all real estate titled in the names of multiple owners is JTWROS; property titled in the name of multiple people as tenants in common will not pass automatically to the other owners. In the case of tenants in common, the portion owned by the deceased owner is controlled by that person’s will (or if they don’t have a will, then the state’s intestacy statute). This is a property that may have to be supervised in the probate process (property owned as tenants in common is probate property). Non-probate property is very similar to JTWROS property because it is the property that passes automatically at death without any probate supervision.
If you have a life insurance policy, a retirement account, or an investment account that allows you to designate beneficiaries, this is typically the non-probate property. The account will pass to that individual without the help of the probate court; the beneficiary will need to mail in a death certificate proving that a death has occurred, and the property becomes theirs. There can be various tax consequences with these types of transfers, so be very careful who you name as a beneficiary (a transfer of a 401K to a non-family member can cause a large amount of income tax liability which may not have occurred if the account was given to a spouse, for example).
Be careful here . . . if you name your estate as the beneficiary of these accounts, then this non-probate property will suddenly become probate property and will be controlled by your will. This can be particularly problematic for tax-deferred accounts like 401Ks and IRAs, which can cause huge unintended tax consequences. You probably shouldn’t do this.
There are other types of non-probate property, such as real estate that is titled with a transfer-on-death-deed (TODD). Any property titled in the name of a properly drafted revocable or irrevocable trust, subject to transfer rules, is also non-probate property. This property is removed from the probate estate and will be transferred to beneficiaries according to the terms of the trust document by operation of law.
Lastly, we have probate property, which is, loosely, “everything else.” All of your “stuff” that is titled in your name at death: your tangible personal property that has not been added to a trust, your bank accounts without beneficiary designations, your cars, your jewelry, etc. All of this property is controlled by your will and is subject to probate.
PROBATE IN MINNESOTA
A Minnesota estate that is less than $50,000 in value will typically be allowed to skip the probate process and instead transfer via an Affidavit of Collection, though there are exceptions. Probate proceedings in some states can be an all-out lawyer brawl and can get very expensive. Fortunately, most estates that go through the probate process in Minnesota will go through informally (it pays to be Minnesota Nice!). An affidavit is filed with the court and notice is given to the estate’s interested parties. The probate attorney is then able to distribute the probate assets subject to transfer rules and claims from creditors (due to notice requirements, this can be a slow process).
If the estate is exceptionally large, if it is insolvent (the person dies with more debts than assets), if there is a dispute among family members, or if the assets are complicated, then there may be formal probate which is typically more expensive and has a higher level of attorney and judicial involvement. Probate laws and estate tax laws are unique to each state. Make sure you consider your state’s laws carefully before making any estate planning decisions (this is where I mention that you should hire an attorney who specialized in estate planning). Probate doesn’t have to be the nightmare that everyone thinks it is, but that assumes your estate is not only planned properly but is also executed according to your plan. If you have questions, I can help.
Philip J. Ruce creates wills and trusts for families who want to feel secure that their loved ones are cared for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.