What are Probate Assets?
You may be a family member dealing with the affairs of a deceased loved one. Perhaps you have been named as the executor of the estate. One of your challenges will be to list all the probate assets of the decedent. These assets will be part of the dispersal of the estate to the named heirs.
What is the Probate Process?
Probate is a legal process where a probate court oversees the handling of the estate. The court validates the will and appoints someone to act as executor or administrator of the estate at the probate court proceeding. That person must secure all assets and notify the beneficiaries and creditors.
The executor pays the outstanding debts of the decedent, including filing and paying the final tax return for the estate. They may even need to sell off some of the assets to pay the debts or to provide funds to the heirs as part of the remaining assets. Some assets may go directly to the heirs, which will require the executor to transfer the title and ownership.
What Assets are Included in Probate?
The list of probate assets that the executor prepares for the court can be vast. It may include real estate, businesses the decedent owned, vehicles, collectibles of value, such as artwork or jewelry, as well as personal belongings.
The executor may need to locate the probate assets, especially if the deceased person had property elsewhere. They will need to find these assets and ensure they are safely maintained until the estate is distributed. If the decedent owned a vacation home in another state, it will be included as part of the estate.
What Defines an Asset as Probate Assets?
Any property owned by the decedent may be a probated asset. If it is co-owned, the portion owned by the decedent would also be part of probate. A prime example is in a business where the decedent was a co-owner with someone else. Their part of the company would be included in probate and the beneficiary may inherit that part of the business.
What Assets are Excluded from Probate?
Not all assets of an estate are part of probate. In fact, you can avoid probate just by how you handle those assets. There are two main ways to have a non-probate asset.
POD or TOD
One way to keep an asset from being part of the probate process is by naming a beneficiary. This allows the asset to either be Payable on Death (POD) or Transfer on Death (TOD). Some examples include bank accounts, life insurance policies, retirement accounts, medical savings accounts, and even vehicles. When the decedent opened the account or purchased the item, they may have named someone as the designated beneficiary. In this case, the asset goes directly to the person instead of passing through probate.
Some states allow real estate to pass in the same way instead of limiting it to a probate asset. If the decedent had issued a quit claim deed with a beneficiary named, the property would pass to them directly without going through probate. Not every state allows this automatic transfer though.
Another option with real estate is to have joint tenancy with rights of survivorship. Joint tenants give each person an equal right with the surviving owner taking complete ownership at the other owner’s death.
Revocable Living Trust
Another way to prevent assets from being subject to probate is by creating a revocable living trust and placing those assets in the trust. When the decedent dies, who is the trustee, the contents of the trust automatically transfer to the named beneficiary of the trust as non-probate property.
You can place any asset in a trust, such as bank accounts, real property, vehicles, and personal property. These assets don’t have to be listed as probate assets because they will pass to the heir directly.
It’s possible to have probate assets even with a living trust. If you opened a trust with the assets you owned at the time and purchased others later that weren’t added to the trust, those assets would need to be probated. Purchasing assets doesn’t automatically include them in the trust. They must be added individually.
What Happens with Probate Assets?
Probate assets cannot be sold or dispersed without the permission of probate court. Many times, the executor will sell the assets to pay debts of the deceased or to distribute the funds from the sale to the beneficiaries.
In some cases, the decedent will want the probate assets to go directly to an heir. For instance, they may select one of their children to take over their business. They may give the family home to an adult child who was living with them. In these cases, the title of the asset is transferred to the beneficiary.
Assets that are co-owned, such as with a business or real property, with rights of survivorship automatically transfer to the other co-owner. They won’t go through the probate court or be listed as probate assets./p>
Challenges of Probate Assets
One of the biggest concerns for the beneficiaries with probate assets is whether they will get them. All probate assets may be used to pay the deceased person’s debts before they can go to any beneficiary. Even if the decedent designated a specific asset to their heir, it may have to be sold to pay outstanding bills. Non probate assets aren’t used for this purpose because they are no longer part of the estate.
Life insurance proceeds is one example. A bank account with a POD person named is another example. When the person dies, the asset automatically belongs to the designated beneficiary.
Benefits of Non-Probate Assets
Having non-probate assets can eliminate estate taxes. Estate taxes are only figured on assets that can be included in probate. By having a beneficiary designation on some of these assets, it lowers the value of the taxable estate below the threshold to pay estate taxes in the states that include this tax.
If there is no will when someone dies, the probate assets go to the surviving spouse and children or other family members as designated by state law. Property with joint ownership will pass to the surviving joint owner if designated by right of survivorship. Property not included in probate assets can be transferred immediately.
You can avoid dealing with probate assets and the challenges that come with it if you create an estate plan with a trust and designated beneficiaries.