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Apr 8, 20225 min

What Is Probate in Life Insurance?

Find out what is, why it's important, and how to set it up inside.

Probate is something many people go through after the death of a loved one. It involves validating the will of a deceased person and identifying their final assets, along with paying any debts owed and the distribution of their estate. In this guide, we're taking a deeper dive into probate, so you understand what it is and how it works.

What is probate, and how does it work?

Probate validates your will if you have one. It's a court-supervised proceeding that approves the named executor so they can distribute any assets, such as money, belongings, and property. If no executor is named, the probate court appoints an administrator to oversee proceedings.

Named executor or not, the process tends to involve lawyers and takes place in court, with the stipulations of the will read aloud and inheritances handed out. The length of time it takes to get through probate depends on the size of the deceased’s estate.

During probate, all assets are located and assessed. Next, owed taxes and debts are paid, with the estate's remaining value distributed to anyone named in the will. If, however, there is no will, the entire probate process can be more complicated because there won't be any available documentation stating the deceased's final wishes.

At this point, it’s up to the courts to handle proceedings and make a final decision on the assets of the deceased.

When is probate necessary?

Let’s say you’re the person who passes away (sorry to be a drag). In that case, probate would be necessary to implement the provisions of the will you leave (if you’ve left one). But as previously stated, probate can still happen if you pass away and don’t leave a will.

There could also be a scenario where you've named a beneficiary, but they've passed away before you. In this scenario, probate law requires your account to go through the court, and funds are passed to the person legally entitled to your assets under state law.

How probate works can vary from state to state, though the basics tend to be similar. In one aspect or another, all 50 states have put in place laws governing most factors related to estate planning and probate, including the legal validity of wills, creation of trusts, and the probate process.

How to file and validate a will

The majority of state laws ask the executor to file a will with the local probate court as soon as death or shortly after. The executor could also be asked to file the death certificate to open the probate process officially.

A probate court judge then decides if the will is legally valid through a hearing where all the listed beneficiaries have the right to review the documents. At this point, they can either accept or object to their role in the will.

The court will utilize self-proving affidavits to check the will's validity and help create and finalize it. Once all is ok'd, the will grantor and witnesses sign off on the affidavits, with the court beginning the probate proceedings.

Next, the executor receives and signs letters of authority of administration. In layman’s terms, this means that the executor legally enters the probate process and agrees to oversee matters involving the deceased’s estate.

That’s essentially how the will is validated. However, in some states, the executor may be required to post bond. Doing so acts as an insurance policy to protect beneficiaries if the executor accidentally (or on purpose) makes an error during probate.

Identifying assets for probate

All assets must be identified so they can be assessed for value. This process accounts for everything the deceased owned at the time of passing, including banking and investment account statements, tax documents, and more. More extensive estates could require a larger appraiser, someone who understands the process of collecting and inventorying real estate, personal, and household items.

Some states may require executors to show the court a document detailing the deceased's assets, their total value, and notation on how such a value was concluded. Once completed, you will have the "date of death values."

When it comes to items like fine art and vehicles, the executor may be required to take physical possession. They will also need to ensure that property taxes, insurance, and mortgage payments are covered throughout the process.

Once everything has been tallied up, the total combined value is used to estimate the worth of the estate.

Contacting creditors and paying off debts of the deceased

It’s safe to say that the executor has a large role on their hands, as they’re also required to track down the deceased’s creditors. Creditors tend to have a limited time to make claims against the decedent’s estate, but the exact timing will vary by state.

The executor also has the power to challenge claims, and they may decide to petition the court to make a final decision. Regardless of challenges, the estate must pay off official debts owed, such as medical bills. Suppose the deceased passed away while owning significant debts. In that case, the estate is liable to pay them, and the amount the beneficiary receives will reduce once those debts are taken into account.

Filing the decedent’s final taxes

As nice as it would be to have a clean slate, taxes are still owed even in death. Consequently, the executor should file and pay off the deceased's final taxes using the estate funds. The federal estate tax can reach as much as 40%, with states enforcing their own on top. However, the estate tax only applies to estates worth $11.58 million or more at the federal level.

Estate taxes are usually due within a year of the owner’s death, though it’s possible to reduce the size of the estate during the owner’s life so they can transfer the property tax-free to beneficiaries after they pass away.

Distributing property from an estate

Once the court confirms all debts and taxes are paid, it can distribute the rest of the estate. If the deceased doesn't have a will, the court will divide assets and the property among immediate family members. When someone passes away without a will, the surviving spouse (if any) takes the priority.

During this stage, the executor provides the probate court with documents detailing every transaction they engaged with during the probate process. These filings also contain details of the value of the remaining estate. Some states, however, allow the executor the right to waive the requirement.

How to avoid probate

Probate isn’t always necessary if you plan carefully. This may be beneficial to some, as it allows them to reduce legal fees and avoid estate tax–something that typically accounts for a significant amount of a wealthy estate. Avoiding probate also protects privacy because some of the records may not be available to the public.

One way of avoiding probate requires you to use a revocable living trust. This is when assets are placed in the trust but can be used by a trust creator during their lifetime. When they pass, the assets in the trust are given to their beneficiaries by operation of the trust document and don't require any probate.

Another option involves a life insurance policy, as they pass property outside of probate. The named beneficiary on your policy receives the death benefit directly with no probate process required.

Retirement accounts may also pass outside of probate, with the account owner naming a beneficiary to receive the balance of the account after the owner's death. A payable on death accounts don't require probate.

You can also convert banking accounts to a “pay-on-death” account. This usually only requires a signature on a form provided by your financial institution and for you to designate a beneficiary.

Tips on estate planning

Probate can see your assets held for as long as a year, which is far from ideal. With good estate planning, however, you can avoid unnecessary delays.

One way of doing this involves avoiding probate altogether by taking out a life insurance policy. Plus, if you opt for a permanent policy, you can build wealth while you're still alive tax-free and skip probate when the beneficiary receives the death benefit after you pass away.

If you do go through the probate process, a good financial advisor can help plan your state and manage wealth. Having someone who knows the process involved will help you navigate probate faster and provide more clarity over how everything works.

In conclusion: to probate or not to probate

Regardless of if you go through probate or not, you should understand the process for obtaining the deceased's assets, whether you're the one leaving your belongings and worth behind or are the person receiving the asset from someone who has passed away. Doing so means the process will be much clearer in what is already a tricky scenario to navigate.