What is Probate?

Probate is a court-supervised process for distributing the assets of a deceased person to the people or organizations that are entitled to the assets.  The local court oversees the process to be sure that the right people receive the assets.  Creditor claims are usually resolved as part of the probate proceeding.

Probate is often required to access bank accounts and other financial assets that were in the name of the deceased person alone (without a joint owner or payable-on-death beneficiary).  In fact, due to privacy concerns, many financial institutions will not even discuss the account until the estate is opened with the court.

The purpose of probate is to give clear or marketable title to the deceased person’s assets.  After the probate process is complete, the individuals or organizations that end up with the assets can sell them, take out loans against them, and otherwise freely deal with the assets.

Probate is for the benefit of third parties, such as buyers and banks. When a person dies, these third parties need to know who now owns the deceased person’s assets and whether they have clear title.

For example, assume that Marilyn died with a Last Will and Testament that left her mansion to Joe. Joe decides to sell Marilyn’s mansion. He finds a buyer who is willing to purchase it, but the buyer’s attorney informs him that the mansion is still in Marilyn’s name.  This leaves the buyer with two problems:

  • How does the buyer know that Marilyn’s Last Will and Testament is genuine and that Joe is the rightful owner of the mansion?
  • How does the buyer know that Marilyn doesn’t have any creditors that could claim a superior right to the mansion?

Because of these questions, Joe does not have clear title (title that a buyer or lender would accept) to Marilyn’s mansion. For Joe to be able to deal with inherited assets, he needs a process to resolve these issues. Only then can third parties be assured that Joe has the legal right to transfer clear title to the assets.

The probate process is designed to clear title to a deceased person’s assets. While the amount of court involvement can differ from state to state, the judge usually has to primary responsibilities:

  1. To make sure that the right people end up with the assets; and
  2. To be sure that any potential creditor claims are resolved in the process.

Once the probate process is complete, third parties can be assured that the deceased person’s heirs have the legal right to deal with the deceased person’s property and that all creditor claims have been resolved. This allows the heirs to transfer, borrow against, and otherwise deal with the assets.

Does Having a Will Avoid Probate?

Some people mistakenly believe that having a valid Last Will and Testament avoids probate. Unfortunately, that is not the case. Probate does not depend on whether or not you had a Will, but on what assets you own and how they are titled.  There are ways to structure an estate plan to avoid probate (such as using revocable living trusts), but just having a Will won’t do the job.

The Problem of Heir Property

Failure to deal with probate can result in a loss of value in real estate, giving rise to what is called heir propertyHeir property is land that is jointly owned by descendants of a deceased person whose estate was never handled in probate.  These descendants (heirs) have the right to use the property, but they do not have clear or marketable title to the property since the estate issues have not been resolved.

Over time, as each generation passes, the ownership of the heir property becomes more and more fragmented as it is divided among a larger group of people.  At the same time, the number of unprobated estates in the title increases, bringing with it an added cost.  Before long, it isn’t worthwhile for any one heir to pay the property taxes and the group of heirs cannot agree to keep up with the property.  At that point, the property is usually sold for outstanding taxes.  The new owner then acquires the property for a deeply discounted value.  The heirs simply lose the economic value of the property.  The best way to prevent the heir property scenario is to promptly deal with the estates of deceased property owners.