Avoiding Probate Is a Smart Strategy, But Here's What It Can't Change

The goals of most who enter into estate planning is to avoid probate. The probate process is the legal mechanism by which the state takes control of a person’s assets and distributes it as it seems fit. This usually takes place in a district court or even a distinct probate court. It is costly and often the last challenge a grieving family wants to face after the death of a loved one.

To that end, many come to legal professionals to see to it that their assets are distributed as they would like. That’s the first step to avoiding probate. However, for your planning purposes, it’s best to be aware of when probate cannot be avoided. Having a strong command of this information can help to protect your estate as well as the financial stability of your family.

Here Comes the IRS

No matter how you place the assets of your estate, there may be no way to avoid taxes. Estate taxes have been undergoing many changes lately due to political changes; gift taxes fall under this category as well. While taxes plus the legal and court costs of probate are certainly less than taxes alone, be sure to warn your beneficiaries of the burdens they will bear when they inherit.

Remind them to check with their financial advisors and accountants about what they might owe on next year’s taxes, as well as how they might best invest and protect a lump sum. They may need to plan ahead and set aside part of their bequest to meet a future tax burden. Also, state taxes may come into play, as well as federal. While the burden will be smaller, it’s still one which will likely need to be met.

Obligations to Creditors During the Probate Process

Meeting obligations to creditors is one of the primary duties of a trustee or executor. Sometimes these can be addressed out of the cash holdings of the estate; in other cases, personal possessions such as cars or real estate must be sold in order to satisfy them.

Addressing these issues while working on your estate planning is the best way to avoid nasty surprises in the event of an unexpected death. Some unfortunate student loan holders or promissory note signers have found that the entire debt becomes due upon the death of a co-signer; this can be addressed with specifically noted life insurance policies or coming to a payment agreement with the creditor.

When an estate enters probate, creditors have a time limit to file a claim to the court in order to carve out their part. In most states, this period is anywhere from three to six months after the account holder’s death. Usually, courts notify all creditors when the case reaches it. The creditor must then take action to receive payment of the debt; the court will not automatically distribute money.

If a person is largely debt-free, final accounts are usually settled quickly. They may include undertaker and cemetery expenses, plus small credit card statements or utility bills which come due after the account holder passes away. In other cases, executors must settle with insurance companies, hospitals, and doctors to cover looming health care costs.

Some may have to oversee the sale of property if a mortgage is not paid off and the new owner does not wish to take over the deed. In the event an estate is not subject to the probate process, beneficiaries should take care to check on the financial heath of the total estate: In some states, a creditor could sue him or her for uncollected debts. However, in most states, outside of probate, there is no legal requirement to alert creditors that an account holder has passed away.

The Rights of Your Surviving Spouse

The laws of each state are different, but in most cases, family members have a legal right to claim part of your estate, even if you have taken steps to avoid probate. While most people are relieved and reassured to know this, others might wish to make other arrangements. This can include those who are involved with blended families, who wish to disinherit specific family members, who have decided to leave their estate to friends or a business partner, or even people intent upon donating the bulk of their estate to charities.

In states which are known as “community property states,” spouses co-own the money, property, and other holdings they acquire for the legal duration of the marriage. California is included in this list. Spouses are permitted to distribute their “half” in whatever matter they choose. However, the majority of the remaining states are not “community property.” In these, a surviving husband or wife, by law, is entitled to anywhere between one third to one half of the estate. It doesn’t matter if the property is distributed through a trust, last will and testament, or other means: He or she has standing to demand at least this amount in court, no matter what a valid end of life document stipulates.

The Rights of Other Family Members

The law does not stipulate that grantors must leave any part of their estate to children, although most people do anyway, if even in the form of a trust to minors. Some children do inherit if they are born after a will has been finalized under the assumption that the parent would have liked to include him or her as a beneficiary, especially if siblings are named.

Some do not wish to leave any of their estate to their children, either due to family disputes or because their sons and daughters are already financially stable. Others have already made provisions to their children while they are still alive. If this applies to you, it’s important to communicate, perhaps in writing, what your intentions are. This might save your loved ones some future strife and court battles.

Like children, grandchildren do not automatically stand to inherit. However, if their parent has died, they may be entitled to his or her share.