What is Probate Property and What Isn’t?

 In Probate, Wills

Photo by Melinda Gimpel on Unsplash

Everyone talks about probate and avoiding probate, but what is “probate?” And what is “probate property?”

Probate is the judicial process through which property you own passes to your heirs when you die. If you have a will, it will say who gets the property. If you don’t have a will, then your state’s laws of “intestacy” will say — essentially to your closest living relatives.

However, the catch is that your will and the probate process only apply to property in your name alone. Here are some of the types of property ownership that don’t fall under probate:

  • Jointly-owned property passes to the other joint owner or owners when one owner dies.
  • Property in trust passes as stated in the trust document.
  • Retirement accounts (IRAs and 401(k)s) pass to the named beneficiaries.
  • Life insurance is paid out to the named beneficiaries.
  • Many banks and investment houses now permit you to name beneficiaries to receive accounts upon your death.
  • Life estate or “lady bird” deeds give recipients a property interest and full possession at the death of the so-called “life tenant.” The people to receive the property upon the life tenant’s death are called “remaindermen.”

The fact that there are all of these ways to hold property that avoid probate means that very often little or no property goes through the probate process when someone dies. This has both good and bad consequences. It makes the process easier, but it can also lead to unintended results. It’s not unusual for someone to name a beneficiary to a retirement plan or life insurance policy decades before he dies with the person receiving the property not the person the decedent would have wanted upon his death. Or he may have different joint accounts with different children each receiving a different share of his estate.

I have always found it ironic (if that’s the right word) that we have a large body of laws and history of court cases around wills, yet they govern the distribution of less and less property every year. Further, the execution of a will is a formal process requiring two witnesses and a notary public while the naming of beneficiaries on your accounts, life insurance policies and retirement plans may involve a simple signature that may or may not be misplaced over the years. All of these should receive the same attention and coordination with other planning steps as executing your will.

Finally, be aware that there’s another area of potential confusion: the distinction between your probate estate and your taxable estate. Your taxable estate includes your probate estate plus all of the non-probate property listed above. On the federal level, this is irrelevant to most people since the federal estate tax now (in 2018) excludes the first $11.2 million of your estate. However, many states have lower thresholds.

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