Probate is a legal process that involves the distribution of a deceased person's property to their heirs, beneficiaries, and devisees. If you plan on leaving an estate for your family, friends, or even charitable organizations after your death, you may need to think about what will happen if you pass away without a will.

Why Probate?

While probate can be a daunting legal process, the death of your spouse can bring life-changing tax consequences for you and your surviving family members. The IRS generally does not allow people to avoid probate by creating a living trust for their assets to pass directly to them. The IRS generally imposes potentially long-term estate tax penalties on people who create living trusts to avoid probate after death. Further, the IRS can penalize your estate if a trustee of the living trust fails to file probate to distribute property under the legal formalities in your state.

3 Ways That an Estate Goes Into Probate

1. If a person dies without a will or trust, and they have only assets that are subject to probates, such as real estate or bank accounts, then an executor is appointed by these assets' title holder (for example, a bank or an attorney who holds the title of your home). The executor will then file a notice of probate with the proper governmental body.

2. If a person dies without a will or trust and they have assets that are not subject to probate, such as personal items or family heirlooms, then any assets that the decedent owned in their right pass directly to their heirs. However, the estate will owe inheritance tax on these assets.

3. If a person dies without a will or trust and their estate has assets that are not subject to probate, then the executor will have to start probating the estate. The executor may have to sell assets from the estate, distribute property through heirlooms and other family members, and sell property from the deceased's estate (such as jewelry) or their living trust. The executor may also have to pay penalties from the estate's assets to the IRS if:

•   The executor does not file probate (i.e., if the probate is not started within nine months of death)

•   The executor does not file timely tax returns on behalf of the decedent (including income tax returns, gift tax returns, and estate tax returns)

How It Works

After the estate goes into probate, a bank can release any money in the decedent's bank accounts to the account's beneficiary, even if the beneficiary has not been identified.

The estate may also receive property under the joint tenancy with the right of survivorship so that the surviving party gets control of the property. However, this will create a new tax by transferring property between two parties who are still living. Therefore, the IRS generally requires that joint tenancy assets be reported on both parties' income tax returns as they are distributed between them.

After your death, the executor can sign either petition the court to have your spouse appointed as executor or maintain the power to have your spouse act as executor.

Probating an estate can be costly and time-consuming, so it is important to understand what will happen with your estate if you do not have a will or trust. It is also more likely that a probate court will order that your estate goes into probate if you own property alone and no one knows of legal ways in which they can receive the property.

Generally, a will is the best way to avoid probate. However, a will can only accomplish its purpose if the person who has died has clearly designated their beneficiaries and any limitations on those beneficiaries in the will. If there are issues with the designating of beneficiaries or limitations on what that beneficiary can do with the property, then a trust may be necessary for that property.

Some states have laws that allow you to avoid probate by creating a living trust and having your assets pass directly to the trust, known as a testamentary trust. Under those laws, the person who has died can also be the trustee of the living trust rather than a third party. The estate will owe no estate tax if they have no taxable property and only assets exempt from probate. This is in contrast to probate, where any property subject to probate is also taxable for all beneficiaries.

The Bottom Line

The probate process can be lengthy and confusing, so it is important to seek advice from an experienced estate planning attorney if you have any questions about this process. To learn more about how an estate goes into probate or what you should do to avoid probate, contact our experienced estate planning attorneys or visit us to discuss your options.