Is the State Going to Take Everything? What is Probate?
While there are many legal areas and processes that are misunderstood, perhaps none are more so than probate. Unfortunately, it is an undeniable fact that at some point, each of us will pass away. When that happens, someone will need to settle your affairs and, very likely, they will use one of the available probate processes to do so. Read on as we explore what probate is, what it is not, how it can be avoided, and how we can help through the process.
WHAT IS PROBATE?
At a basic level, probate is the process of settling a decedent’s probate-able estate after they pass away. This means determining what assets are considered probate versus those that are non-probate. Non-probate assets would be anything that can be transferred to a new owner without outside involvement. These include joint accounts, any financial accounts that have beneficiaries or pay-on-death designations, and real estate that is held jointly, or has a valid Transfer on Death Deed.
In contrast, probate eligible assets are those which are owned solely by the decedent and have no beneficiary or pay-on-death designations. Think of it as any asset that does not have an automatic mechanism to transfer to the new owner. Most often, transferring these requires judicial involvement through an appointed Personal Representative, who is the agent in charge of the decedent’s estate.
After a Personal Representative is appointed to the estate, either via nomination in the decedent’s Will, or petitioning the court, they have the authority to handle the Estate’s affairs. This includes gathering all the decedent’s probate assets, paying any valid debts, distributing any specific gifts made in a Will, and distributing the remaining assets, called the residue, to the appropriate beneficiaries. Because this can be a labor-intensive process, the Personal Representative has the option to be paid for their time out of estate assets. We can help the Personal Representative as much, or as little, as they prefer.
WHAT ARE SOME OF THE MISCONCEPTIONS OF PROBATE?
One of the most common misconceptions that we hear about the probate process is that if an estate ends up going through probate, the State is going to take as much of the proceeds of the estate that they can. While the State making a claim against an estate is possible, it is not as common as people think. The three most common claims that the State can assert on estate assets are Medical Assistance liens, unpaid State or Federal taxes, and Estate Taxes. While Medical Assistance liens and unpaid taxes are straightforward, it is the idea of Estate Taxes that have given the probate process the bad reputation that it has. Historically, in some jurisdictions, the State could make a claim to a portion of the decedent’s estate. However, currently the Minnesota Estate Tax is only applicable to those individuals whose assets are above $3 Million dollars (or $6 Million for a couple). Federally, that number jumps to $11.7 Million! These figures are subject to change via legislative action, so they are worth keeping in mind when crafting your estate plan. If your asset level warrants considering Estate Tax mitigation, there are options that can help reduce or eliminate the tax burden on your estate.
Another common misconception is that if a decedent had a Will, that it will help to avoid probate. Unfortunately, the simple act of executing a Will does not automatically mean that your estate will avoid probate after your passing. A Will is a document that gives you the opportunity to describe how you would like your estate to be administered after you pass.
There are four main functions of a basic Will. The first is the nomination of a Personal Representative, and often a backup or two. The second is a description of the authority that your Personal Representative has. The third is a description of any specific gifts of money or personal property that you would like to leave to beneficiaries. The fourth is a description of how you would like the residue of your estate to be distributed. Beyond these four functions, a Will can also name preferred Guardians and Conservators for minor children, how you would like any taxes paid, and if there are specific people you would like included, or excluded, from your estate. Unfortunately, none of these functions are effective in avoiding probate, but they do direct how you would like the probate process to be handled. Without that input, your estate will be administered according to the State’s probate statutes. That isn’t necessarily a bad thing, but it does leave a bit more work for the survivors that need to settle your estate.
PROBATE PROCESS
The probate process can apply to both those who pass away with a Will, or testate, and those who pass away without a Will, or intestate. In either case, one of the first actions is to determine who the appropriate Personal representative should be. For those who die testate, the Personal Representative should be nominated in the decedent’s Will. If the decedent died intestate, then an appropriate Personal Representative must petition the court to be appointed after showing that they are a sufficiently interested party. An interested party is often a close family member, but with the proper interest, virtually anyone can open the probate proceeding. This includes creditors! This is quite rare, but it can happen if the creditor determines that their interest is worth the time and effort of administering the decedent’s estate. Much more likely is the creditor submitting a claim against the decedent’s estate. Before moving on, any other interested parties must be identified. That generally includes any individuals or organizations that have the potential to receive a specific gift, or a portion of the estate’s residue.
After the potential Personal Representative and interested parties have been identified, the next step is to determine whether the probate should be conducted formally or informally. In Minnesota, the general processes are the same between both options. Both are commenced by submitting an application or petition to the probate registrar or judge in the county in which the decedent was domiciled at the time of their passing. The biggest difference between the two different processes is the judicial oversight required. Often, informal probate proceedings will be “unsupervised,” meaning that there is no continual oversight of the Personal Representative’s actions. By contrast, a formal probate can either be similarly “unsupervised,” or it can have additional oversight required in a “supervised” administration. Whether the probate is formal or informal, supervised or unsupervised, there will be a hearing on the application or the petition that will appoint the Personal Representative. The judge or registrar will issue Letters Testamentary if there is a Will, or Letters of General Administration if the decedent died intestate. These are colloquially referred to as the Letters, and they are the proof that the Personal Representative has the authority to act on behalf of the Estate.
After the Personal Representative has the Letters, they are able to open up an estate bank account that will act as a repository for all of the decedent’s assets before they are distributed. This includes any assets that do not have a specific beneficiary. Bank accounts, insurance payouts, refund payments, petty cash, proceeds from the sale of the decedent’s personal items, or real property sales all get deposited into the account. Once all the decedent’s assets are gathered into one place, the Personal Representative must compile an Inventory of all the assets that the decedent had at the time of their passing. After the Inventory is created, the Personal Representative must determine what valid debts and bills need to be paid. Most jurisdictions, including Minnesota, have a hierarchy of payments to help the Personal Representative determine the order in which debts and bills should be paid. Look for an upcoming blog post about the priority of payments and creditor’s claims.
After the bills and debts have been paid, the Personal Representative’s next step is to distribute any specific monetary or personal property gifts that the decedent has left in their Will. Anything left over after the bills, debts, and specific gifts have been distributed is considered the residue of the estate. If the decedent left a Will, it generally directs the Personal Representative how to distribute the residue. If the decedent died intestate, the Personal Representative distributes the residue equally to the closest living relatives. This determination is made by consulting the jurisdiction’s Table of Heirship. Minnesota’s Table of Heirship can be found at the end of this post. If the probate is formal and supervised, the Personal Representative will need to have the supervising judge approve any distributions before they are made. In an informal proceeding, this approval is not necessary.
Once the Personal Representative has finished all the steps to this point, they must create a Final Accounting. This Final Accounting is one of the last steps to take before filing the documents to close the estate and have the Personal Representative discharged and relieved of their duties.
AVOIDING PROBATE
For tips on how to avoid probate via estate planning, check out this blog post by Schuyler Tilson-Doheny. If it is too late to mitigate the risk of probate through estate planning, there are a few things that can be done.
HOW CAN WE HELP?
If this overview of the probate process seems a bit complex, that’s because it is! We help everyone from those who have never interacted with the legal system to other lawyers, and everyone in between. We have dealt with everything from the most straightforward estate to multi-year and multi-generational probate cases. Our philosophy is to help Personal Representatives and interested parties in whatever capacity and at whatever level they need help. We can handle virtually every step of the way for the Personal Representative, or we can be more hands-off to keep the cost of administration down.
Do you have more specific questions about your estate planning to help avoid probate? Call us today to set up a free, no obligation, consultation!
Please remember, this post provides educational information only and in no way constitutes legal advice.
Source: https://www.ag.state.mn.us/consumer/handbooks/probate/TableofHeirship.pdf