What probate is and how it works

Probate is the legal process for settling the affairs of someone who has died. A court confirms who is in charge of the estate, and that person gathers the assets, pays the debts and hands what is left to the people entitled to it. The word carries a reputation for delay and expense. The reality depends a great deal on the state and on what the person owned, and many assets never go through probate at all.

What probate is for

The IRS summarizes the job of the person in charge, whom it calls the estate administrator, in three parts:

• collect all the assets of the deceased,
• pay creditors, and
• distribute the remaining assets to heirs or other beneficiaries.

Probate is handled by state courts under state law. The rules, names of documents, timelines and fees differ from one state to another.

The usual steps

Details vary, but the process generally runs in this order:

1. Opening the case. Someone, often a family member or the executor named in the will, files with the court. If there is a will, it is submitted so the court can accept it as valid.
2. Appointment. The court appoints the person who will act for the estate. The IRS notes this may be a surviving spouse, another family member, the executor named in the will or an attorney.
3. Authority. The court issues a document, commonly called letters testamentary or something similar, authorizing that person to act on behalf of the deceased. Financial institutions typically ask to see it.
4. Inventory. The administrator gives the court an accounting of the assets and debts. The IRS mentions having assets appraised and verifying all debts as part of this step.
5. Paying debts and taxes. Valid creditor claims, final bills and taxes are paid from estate assets.
6. Distribution and closing. What remains goes to the people named in the will, or to heirs under state law if there is no will, and the court closes the estate.

Many states offer simplified procedures for smaller or simpler estates. The thresholds and methods are set by each state.

Who is in charge

Terminology can be confusing. IRS Publication 559 uses personal representative as the umbrella term. An executor is generally named in the will. An administrator is usually appointed by the court if there is no will, if no executor was named, or if the named executor cannot or will not serve. The IRS notes that the two generally perform the same duties.

The role is a working one. The representative keeps estate money separate, keeps records, and answers to the court and the beneficiaries.

What goes through probate and what does not

Probate covers property the person owned in their own name with no built-in instruction for who gets it next. Several common kinds of property generally pass outside probate:

• Accounts with a named beneficiary. Retirement plans, IRAs, life insurance and many annuities are paid to whoever is on the beneficiary designation.
• Survivorship property. The Consumer Financial Protection Bureau notes that most joint bank accounts are held with rights of survivorship, so the money passes to the surviving owner. An account titled as "tenants in common" works differently: the deceased owner's share passes to their heirs.
• Trust property. Assets that were transferred into a living trust are distributed by the trustee under the trust's terms. The CFPB lists avoiding probate as one reason people set up such trusts. See wills vs. trusts.

One caution applies here. If a retirement account has no living beneficiary on file, it may be paid to the estate and become a probate asset after all.

Passing outside probate does not mean passing outside tax. An inherited retirement account goes straight to the beneficiary, and the beneficiary still owes income tax on taxable withdrawals.

Common misunderstandings

"A will avoids probate." It does not. A will is the document probate carries out. Without one, the estate still goes through probate, and state law rather than the person's wishes decides who inherits.

"Probate is a tax." Probate is a court process with its own filing fees and professional costs. The federal estate tax is a separate matter that generally applies only to large estates.

"Avoiding probate is always the goal." Court supervision has costs, and it also provides a formal process for cutting off creditor claims and resolving disagreements. Whether avoiding it is worth the effort varies by state and by family.

The tax filings that run alongside

Probate and taxes are separate tracks, and the personal representative usually handles both. The IRS explains that the tax return for the deceased and their estate are separate:

• A final individual income tax return covers the person's income up to the date of death.
• If the estate itself earns income while it is open, such as interest, dividends or rent, it may need to file an estate income tax return on Form 1041. Before filing, the estate needs its own tax identification number, called an employer identification number or EIN.
• A federal estate tax return is required only when the estate is above the filing threshold.

For families going through it

The first weeks after a death also involve tasks outside court, such as obtaining certified copies of the death certificate. USA.gov keeps a checklist of agencies to notify and benefits to look into. The posts on steps after the death of a spouse and receiving an inheritance cover the financial side.

Because probate is governed by state law and differs widely in procedure and cost, an attorney licensed in the relevant state can advise on what a particular estate requires.