Did you know that Trusts didn’t used to be so widely used? In fact, the widespread use of Trusts for planning the transfer of assets from parents to children is a fairly new development. It wasn’t that long ago that everyone passed their asset on to the next generation using the centuries-old method of Last Wills and Testaments. Last Wills were taken by priests. The dying elder would transmit their “testament” verbally to the priest and receive their last rights before slipping off to the next world.
Over time, Wills were required to be written to be valid and then witnessed as well. In California, for example a valid Will must be in writing, signed, and have two witnesses to be valid. And here’s an important note: No notary is required. In fact, notaries are not supposed to notarize Wills at all, although sometimes they do. No harm though, the notary stamp is simply irrelevant to a California Will.
Wills were easy to use in the sense that they control all assets held in an individual’s name. In other words, it works by default. If you own property, and you have a Will, then that Will is going to govern the transfer of all the property you own without you having to do anything more about it. Just own asset in your own name and Voila—the Will controls.
But Wills were seen as having a heavy downside: Probate. That dreaded word has caused State legislatures, financial companies, and ordinary people to go far, far out of their way to avoid Probate. What is Probate and why is it so scary that it would cause all of society to take extreme measures to avoid it?
The Scariest of Words: Probate, What Does It Mean?
The word Probate comes from Latin and means “to prove.” It’s actually a simple concept. You bring a Will to court after someone dies and you ask the judge to issue an order saying the Will is valid. A Will is only truly a Will—meaning it only has any legal effect—once a Judge issues an order that says the Will is valid. And there you have it, the Will is now said to have been “admitted to probate.” But what does that mean? And how does probate work after the Will is admitted to it?
Any assets subject to the terms of the Will must be included in the court-supervised process of Probate. That’s a fancy way of saying that the appointed Executor of the estate must take control of all assets owned by the decedent, and then must follow the rules for managing those assets until they can be distributed to the beneficiaries of the probate estate.
For example, let’s say you create a Will that leaves your property to your two children, Karen and Cody. And you name your friend, Bob, to be the Executor. You own a home, a bank account with $50,000 in it, and a stock portfolio worth $150,000. All of these assets are held in your name alone, so they are subject to your Will after your death.
Timeline of a Probate Process Example
Submitting a Petition for Probate
The first step would be a Petition for Probate asking the Probate Court to issue an order validating your Will. The petition can be brought by Bob, Karen, or Cody—any interested party has the right to start the process. The petition will also ask that Bob be named as the Executor to manage your estate. The Executor is the estate manager, the person whose job it is to take all the necessary steps to complete the court process for your estate.
Receiving Letters of Testamentary
Once the Probate Court issues its order, then Bob will be appointed as Executor and the court issues Letters Testamentary. It is the Letters Testamentary that allows Bob to drive down to the bank and take control of your bank account. The Letters will also be used to take control of the stock portfolio and the house. The Letters are a powerful document because it essentially gives Bob the right to step into your shoes and manage your assets.
But Bob cannot receive Letters Testamentary from the Court until the Court first issues an order saying the Will is valid and appointing Bob as the Executor. So the process goes: (1) Petition for Probate is filed, (2) Order is issued, and (3) Letters Testamentary are issued. Of course, there’s more to it than that because certain procedures and rules must be followed before the Court will issue an order, but that at least gives you an idea of the broad steps it takes before Bob can start acting as an Executor.
By the way, if someone is appointed to act over an Estate, but they are not named in the Will to be Executor, or there is no Will, then that person is called an Administrator and they will received Letters of Administration rather than Letters Testamentary. What’s the difference? Nothing at all. The Executor and Administrator have the same powers, do the same job, and have the same responsibilities. In fact, they are both referred to as the “Personal Representative” of the decedent. The only difference is one denotes a Will and the appointment under a Will, whereas the other denotes either no Will, or someone acting who was not named to act in the Will.
What Happens After the Probate Process?
Now that Bob is Executor, he can gather together the Estate assets and put them all into new accounts titled in the name of the Estate. But what Bob cannot do is give the money to the children. Not yet. First, the estate must be administered. What does that mean? It means that the assets must be inventoried and appraised, the house must be sold (unless the Will says otherwise or the beneficiaries work out an arrangement to keep the house), and most importantly the creditors must be paid.
What’s The Importance of the Probate Process?
That’s right, one of the biggest reasons for Probate is to protect creditors. We want those creditors to be paid. In fact, the Executor has the right to pay creditor’s without court approval (unless the creditor is also the Executor). And yet, none of the estate assets can be given to the children without a court order. So who is more important, creditors or beneficiaries? They’re both important, of course, but creditors come first in every probate. Beneficiaries usually get their share last.
Overall, Probate is not that scary. It takes time to maneuver through the court process, but so what? In our next article in our Trust Uses and Abuses series, we will talk about some of the downsides of Probate that has caused people to look for other estate planning solutions; making the modern-day Will almost irrelevant.