When a person passes away, their estate passes through probate, upon which their property and assets become probate property for the time being. This property must pass through the probate process before it can be distributed to loved ones. Find out what exactly probate property is, and how it plays a role in the execution of your Estate Plan. Trust & Will provides helpful examples and tips, as well as information on the popular topic of buying and selling a probate property.
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What is probate?
Probate is a court process through which a decedent’s estate is executed. First the court will verify the decedent’s Will. Then, they will appoint the nominated Executor (if available) to distribute property and assets to beneficiaries per the wishes outlined in the Will.
If an individual passes away without a Will, they are said to have died intestate. This means that the court will instead appoint an Administrator to oversee the execution of this individual’s estate. State intestacy and probate laws are used to determine who should inherit the estate.
Learn more about the probate process in our What is Probate guide.
What is probate property?
Probate property is any asset or property left by a person who passed away. Further, it’s any property left by this individual that has to pass through the probate court process. This can include assets that will eventually be distributed by a Will, and it can include assets that were left by a person who died without a Will (died intestate.)
Any asset that falls under the tenants-in-common category is also subject to probate. Tenants-in-common is a legal term used to describe when two or more individuals jointly own an asset. More specifically, each owner owns a specific portion of that asset. Real estate is the perfect example. If you own property as a part of a tenants-in-common agreement (rather than just jointly owning property), then you only own your specific share of the property interest. You then have the right to bequeath your share to a beneficiary in your Will. This portion of the property interest goes through the probate process and thus becomes probate property.
It should be noted that not all of a decedent’s property must pass through probate.
For instance, any assets with a beneficiary designation will pass directly to the beneficiary outside of the probate process. Examples of these include life insurance policies and retirement accounts. Essentially, it is any type of asset that allows you to name a beneficiary for that specific asset.
Another example of a property that doesn’t pass through probate is any property placed into a Trust. Many individuals utilize Trusts for this very reason. Assets placed into a Trust are owned by the Trust thereafter, and not by the individual. Thus, Trust property does not go through the probate process.
What are some probate property examples?
Assets are subject to probate if they are titled in the decedent’s name, are not jointly owned by others, are not payable-on-death, and do not have any beneficiary designations. Further, any assets that are left out of a Trust are also always subject to probate.
Examples of probate property include:
Stocks and bonds
Bank and other financial accounts
Vehicles (such as cars, boats and airplanes)
Business assets and interests
If you’re wondering if household items go through probate, the answer is yes. Visit this guide here, which dives deeper to determine what type of items become probate property.
Buying & selling probate property
An Executor’s key responsibility is to preserve an estate’s value so that it can be distributed to the decedent’s loved ones. However, probate property sometimes must be sold. This typically occurs when creditors must be paid off, although there are other circumstances when a probate sale will become necessary as well.
To pay off the debts of the estate, liquid assets are used first. However, if there is not enough cash to cover these debts, then other assets must be sold and liquidated.
For example, let’s say an individual passes away and leaves behind a bank account with a balance of $5,000, a house worth $300,000, and not other assets. If they had credit card debt of $4,000, then the estate would simply use the liquid bank account to pay off this debt. The remaining $1,000 and home can be distributed to heirs. In contrast, let’s say that the decedent had credit card debt amounting up to $40,000. Here, the Executor would be forced to sell the house and use the proceeds of the sale to pay off the debt. The remaining $265,000 can be distributed to heirs in the form of cash since the house was sold.
Probate property is also sold when a person dies intestate and has no immediate heirs. The probate court may order that the property is sold such that the proceeds can be distributed amongst the closest relatives.
Here are the roles authorized to sell probate property:
An Executor of the estate; typically the person who is nominated in the Will to distribute and close the estate.
The Administrator of the estate who was appointed by the court. An Administrator is appointed when an estate has heirs, but the decedent passed away without a Will.
The Probate Court, when no heirs are seeking administration and there is no Will.
Any property that is sold by heirs after they inherited it is not considered probate property. Property is only considered probate property when it is undergoing the probate process.
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The term probate property describes the set of property and assets that was left by a deceased individual, and which must go through the probate process to be administered and distributed. There are times at which probate property must be sold in order to pay off any debts left behind by the decedent. Because the goal is to preserve the estate as much as possible, liquid assets are used to pay off debt first. However, when there isn’t enough cash to cover the debt owed by the estate, then property and assets must be liquidated and sold. The remainder is then distributed amongst the heirs.
Reading this guide may have enlightened you to the idea that probate offers very limited protection. Not only is the court process costly in itself, but it also offers little protection against creditors. This can be heartbreaking, for both you and your heirs, if the precious property gets liquidated and sold to cover the debt.
Luckily there are ways to better protect your property. As aforementioned, any property placed into a Trust is removed from your estate, and thus does not become probate property. A Trust is a wonderful estate planning tool that can protect you from certain taxes and creditors, and thus preserves important property for your loved ones. To find out how you can create or update your Estate Plan to better protect your assets, get started here.