Probate
What is probate?
Probate is the legal process by which one person’s property transfers to another after she passes away. If the deceased person has a Will, probate involves proving its validity and distributing the estate according to its terms. Probate for one who dies without a Will, on the other hand, primarily involves distributing the estate according to state law.
Property can be transferred outside of probate, but this requires planning. Many times people are better off simply leaving their property to pass through the probate process. Probate is not an inherently bad process, and since Arizona’s adoption of the Uniform Probate Code, it is not as expensive as many people believe. Nevertheless, avoiding probate can have its benefits, such as tax advantages and expediting the transfer of assets to beneficiaries. Tools for avoiding probate include living trusts, bank accounts held in joint tenancy, and payable on death accounts.
Must every asset pass through probate before going to beneficiaries?
Some assets do not pass through probate. Whether property goes through probate depends on its value and how its legal title is held. In Arizona, simple estates pass to beneficiaries by special affidavit without going through probate. To qualify for the simple estate exception, personal property cannot exceed fifty thousand dollars and real property cannot exceed seventy five thousand dollars. Community property, property held in joint tenancy with survivor rights, life insurance policies with named beneficiaries, and property held in trust also pass to beneficiaries outside of probate.
What does probate entail?
Nearly everybody leaves behind assets and possessions when they pass away, which leaves family members and friends to properly distribute them. This is not always as simple as it seems. Those responsible for administering estates must carefully follow all of probate’s rules and procedures.
Generally speaking, people must take the following steps when administering an estate:
- Initiate probate and prove the Will. Most people appoint somebody to handle their estate in their Will. This person is called the Personal Representative, and he initiates probate by filing a petition with the court. Before admitting a Will into probate, however, the court first ascertains its validity. This is generally not an obstacle to beginning probate, but Will challenges are not unheard of, and Personal Representatives cannot proceed until the Will is proved.
- Letters of Administration. After the court determines a Will is valid, it provides the Personal Representative with letters of administration. These letters allow the Personal Representative to act on the estate’s behalf. They demonstrate to financial institutions and such that the Personal Representative has authority to handle the estate’s affairs.
- Posting Bond. A Personal Representative must be bonded unless the heirs and devisees, or the Will itself, specifically waive this requirement. Having the bond waived expedites probate, so Personal Representatives benefit from seeking waiver. Courts have discretion to waive or modify the bond amount, but they are not required to do so.If the bond amount is not specified in a Will, it is determined based on the size of the estate. Where a Will is silent on the bond issue, Personal Representatives typically become bonded for an amount totaling the estate’s value, plus any income the estate is expected to generate during the next year.
- Providing Notice. Personal Representatives must notify decedents’ creditors of their appointment by publishing notice in a local newspaper or mailing a notice directly to each creditor. They must also notify anybody who will inherit a portion of the estate about their appointment within 30 days of being appointed.
- Taking Possession of Estate Assets. Personal Representatives can take possession of any estate property unless the Will states otherwise. But this does not mean that they must take possession. At times it makes sense for Personal Representatives to leave certain properties in the hands of those entitled to receive it. This does not preclude them from taking possession of the property at a later time if doing so will help them administer the estate.
- Creating an Inventory. The real work for Personal Representatives begins once probate is officially opened. They begin by locating all of the estate property, and then having it appraised and inventoried. One of their obligations to the estate is to provide detailed and accurate information in the inventory. This means describing the nature of all estate properties as community or separate; determining the fair market value of all properties; and finding every lien or encumbrance that exists on any of the properties. Personal Representatives must make the completed inventory available to every interested party by either filing a copy of it with the court or providing a copy to all of those who will inherit a portion of the estate. Time is of the essence when creating an inventory because Personal Representatives only have 90 days from their appointment to complete it.
- Paying Taxes. Personal Representatives must pay taxes for the estate. While Arizona does not have an estate tax, estates valued at over $3,500,000 are susceptible to the federal estate tax in 2010. Personal Representatives are also required to pay property and other applicable taxes for the estate. With proper insight and tax planning, Personal Representatives can sometimes minimize tax obligations and preserve the estate.
- Managing and Preserving the Estate. Personal Representatives who do not manage and preserve an estate properly can be liable for damages or losses to interested parties. Managing the estate includes not spending estate funds frivolously, as well as using funds for legitimate purposes. For instance, Personal Representatives can use estate funds to pay for funeral expenses, for court costs and attorney fees, and for a reasonable fee for their time and services. Estate funds should also be used to pay off valid claims made by creditors and lenders.Personal Representatives may find it useful to open a checking account for the estate. Doing so involves depositing all of the estate funds into one account, and then drawing from the account as needed to make payments from the estate. In addition to making a Personal Representative’s job more convenient, using such an account automatically records all funds coming into or going out of the estate.
- Setting Aside Community Property. Arizona is a community property state, so any property that spouses acquire during marriage belongs to the married couple in equal shares. This means that Personal Representatives handling a married person’s estate must set aside all community property before making transfers from the estate. Once the Personal Representative sets the spouse’s property aside, he can distribute the remaining property according to the Will or under state law. This is a complicated accounting process, and Personal Representatives should seek legal counsel when making this division.
- Distributing Estate Property. The final step for Personal Representatives is to distribute the estate property. Before doing so, however, they should repay creditors and handle tax issues. What is left of the estate is then divided and distributed among the beneficiaries. Where there is a Will, the Personal Representative must abide by its terms. Without a valid Will, Arizona’s intestate succession laws control the distribution. Personal Representatives must execute certain documents with every transfer of estate property they make.
How much does probate cost?
Probate costs range from case to case, but at a minimum, courts charge a $251 filing fee to open probate. In addition to a filing fee, probate expenses include costs of publishing notice in a newspaper, any bond that may be required, compensating the executor or administrator, and attorney fees. The Personal Representative pays all of these expenses from the estate, and is never personally responsible for them.
Many people mistakenly believe that probate is always costly, and thus attempt to avoid it, but gain nothing from their preparations. Even including attorney fees, probate is sometimes both affordable and suitable for the estate. It is against the law in Arizona for attorneys to charge fees based on a percentage of the estate. Rather, fees are typically determined before opening probate, and are based on an hourly rate to help estates receive a fair deal.