How Probate Works. A Guide for Executors, Heirs, and Families.
Unlike real estate, most people (including heirs and executors) have never owned a business, let alone sold one. So, when it comes up in an estate probate, understandably, folks are lost. We have a recent estate example, which included a retail business.
Sometimes the estate doesn’t have cash on hand and only has illiquid assets like the home, a business, or artwork. But settling the estate has many ongoing bills and expenses, from court fees to movers to accountants. We’ll discuss 3 ways to deal with cash-poor, illiquid estates.
Here are three recent, real world, case studies of common probate real estate mistakes. Hopefully, you’ll learn how seemingly small errors can quickly snowball into huge, expensive problems, which you definitely want to avoid!
Earl Simmons (known as rapper “DMX”) recently passed with 11 possible non-marital children. This certainly has the potential to become a complex and interesting probate case. Are any of them heirs? How do they prove they were his kids? Can they prove it without DNA? Let’s break it down:
When someone passes away and you are in charge, one of the top priorities is securing the house. In order to do this, you need to start with the following five steps.
It is helpful to know what happens to your probate vs. non-probate assets when thinking about your estate plan or your future inheritance. Do you really know how assets transfer upon your death? You may think there is a shortcut to use in your estate planning but read below to see what really happens.
First, there are in-court and out-of-court assets. In-court means that there is a type of asset that has to go through the probate court. Probate court is an extremely specific court that every county in the country has. Their job is to make sure that assets transfer properly. They make sure that the Will is correct and real, and that the proper heirs are notified. If someone dies with a Will, it’s called the probate process. If there is no Will, it is called the intestate process. By default, anything in your name or your name alone will go through probate.
In general, the pros are related to a legal finality.
The cons are generally related to dealing with a government entity.
Probate means you have to go through court. The other option is having non-probate assets. These assets are anything with a named beneficiary or a named/joint owner. One example is life insurance. A life insurance company, for example, might require the beneficiary to turn in a claim form and death certificate in order to receive the money. This is a good thing to set up so there is some cash available while doing the rest of the probate.
Other examples of non-probate accounts are IRAs, retirement accounts, 401(k)s. There are tax benefits for naming your spouse or children as beneficiaries on IRAs and 401(k)s (talk to your tax advisor!).
If you are joint owners of real estate, the survivor automatically owns the whole thing. For example, a husband and wife own a condo in Manhattan. Husband dies, and the wife immediately owns 100% of the condo.
Even bank accounts can be set up as non-probatable assets. You can add a joint owner or use another method such as ITF (in trust for, TOD (transfer on death), POD (paid on death), Totten trust, and many other options.
Trusts are also non-probate assets. These can be revocable, living trusts, or grantor trusts. They act as a wrapper that you put around your assets so that they are no longer owned by you. Rather, they are owned by a trust with its own instructions with what happens when you pass away. These are used to avoid probate court.
Let’s’ say that I bought a house before I got married, and it is my name alone. Then I can update the deed to add my wife after we married. I can add my wife easily to a bank account, etc.
This is extremely important to understand. Let’s say my wife and I have our first child and I go through all of our accounts and name the baby as the secondary beneficiary. Then we have more kids and I forget about the beneficiary designations. Now that I have a big family, I decide to have a Will drafted to leave everything to my wife. If she dies, then I leave everything to my kids. However, the Will only controls anything that comes through probate. So, those beneficiary designations naming my first child will not go through my estate. Then my other kids get nothing from those accounts, even though I named them in the Will. This happens all the time – people forget!
You might think that making everything non-probate will save time and money. Don’t do that. Here’s why: people forget! Your monthly bank statements do not list your beneficiaries; there are no reminders for updating! Unless you are one of the few conscientious people who remember to update all account beneficiaries, there will be something that doesn’t match your intentions when you die.
For example, Kurt was in love with Jasmine. They weren’t married, but Kurt added Jasmine as beneficiary to his savings account. Unfortunately, Kurt and Jasmine separated. Decades later, Kurt got married and had a daughter. He had a very long, fulfilling life and all the while he maintained that bank account. When he passed, his daughter was going through the estate assets and had to find out why someone named Jasmine was getting all that money!
Hopefully, my examples have been helpful to you in your estate planning or in administering a loved one’s estate. Please check out my book, “How Probate Works,” which covers this and a lot of other topics.
What happens if the executor dies during probate? It depends on how far along you are in the probate process.
A recent example of headaches and costs if you delay probate: Lou’s mom died owning a co-op apartment in New York. Since there was no mortgage, Lou and his sisters didn’t think there was any rush to deal with it.
After we published When Does the Executor Tell the Beneficiaries, many listeners and clients have asked: how does the court know who to notify? Great question; the answer depends on who the heirs are.
Going through probate is a grueling 1-to-2-year process. Would you want to go through all that if you don’t even get anything out of it?
If you think the estate may be insolvent, consider hiring a professional executor.
An insolvent estate is when the decedent’s debts are greater than the assets. For example, the mortgage, credit card debt, and medical bills are greater than the value of the house and bank accounts.
There are also situations where the estate is close to being insolvent and you don’t realize it. Examples of this are Medicare clawback and unseen taxes. If you received medical care paid for by the government, the government will want the money back when you die. This could leave your estate with a large bill. Additionally, the IRS will look over your taxes carefully to be sure they didn’t miss anything.
Many family members and heirs ask: am I required to be executor? The answer is no! You can decline or not act at all. Although, some may feel like they are dishonoring their deceased loved one by leaving the estate as a mess.
If you think the decedent is close to having an insolvent estate, you have options.
One not-so-great option is to let the state take over. There’s a state office (sort of like the public defender, but called a public administrator) that can step in. But, the interest in the estate and the incentives might not be the same as a person who you hire to help.
A better option is hiring a professional executor. You won’t have to do the stressful work yourself and you don’t have to feel bad about abandoning your loved one’s estate to the public administrator.
Even if the estate is NOT insolvent, you now have a relationship with the hired executor. This helps to make sure you get your inheritance. If the estate IS insolvent, then you can relax knowing that a professional is there to wrap up the estate.
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