What it means
When someone dies, their assets cannot simply be taken by relatives. Someone needs legal authority to close bank accounts, sell property and deal with creditors, and the probate court grants that authority.
If there is a will, the court checks that it is valid and appoints the executor named in it. If there is no will, the court appoints an administrator and the estate is shared according to the rules of the place where the person lived.
The person managing the estate collects the assets, pays outstanding debts, taxes and the costs of the process, and then distributes what remains to the people entitled to it. Creditors are normally paid before beneficiaries receive anything.
Probate takes time and money, often months or years, and the costs can include court fees, legal fees and valuation costs. Estates that include a business, property in several places or family disputes usually take longer.
Families often use trusts, joint ownership or beneficiary designations to pass some assets outside probate. These steps can reduce delay and cost, but they must be done properly, and the rules vary widely between places, so professional advice is important.
For business owners, probate matters because shares in a company can be frozen until the court appoints a personal representative. Planning succession in advance, including a shareholder agreement and a will that is kept up to date, helps the business to continue.
In practice
Real-world examples.
Example
An owner of a small bakery dies leaving a will that names her son as executor. The probate court confirms the will and grants him authority to run the business while the estate is sorted out. He pays suppliers and employees from the estate's bank account. The court asks him to report regularly on the money received and spent.
Example
A man dies without a will, leaving a house and savings of $450,000. The court appoints his wife as administrator, and the estate is divided under the local rules. Because the rules are set in advance, there is little room for discretion. The process is usually slower because the court must first check who the rightful heirs are.
Example
A landlord owns apartments in two different regions. The estate must go through probate in each place where land is held. The family hires local lawyers to avoid delay. Each court may charge its own fees, so the total cost is higher than for a single estate.
Formula
Calculation
Net distributable estate = gross assets - debts - taxes - costs of administration
Suppose a woman dies with assets of $900,000, made up of a house, savings and shares. She owed $150,000 on a mortgage and other debts, and the costs of the legal process came to $30,000. There is no tax due.
Net distributable estate = 900,000 - 150,000 - 30,000 = $720,000.
If the will leaves everything equally to her two children, each receives 720,000 / 2 = $360,000.Case study
Seen in the real world.
Whitfield Family Hardware is an illustrative, fictional shop whose founder died suddenly. His will left the business to his daughter, but the shop's bank accounts were in his sole name and were frozen until the court confirmed her authority.
For eight weeks, the shop could not pay suppliers from the main account, and the daughter used her own savings of $25,000 to keep stock on the shelves. The probate court then appointed her executor and she regained access to the accounts.
In this illustrative story the family learned the importance of planning. The daughter later set up a company to own the shop and signed a succession plan so that, in future, ownership could pass without freezing the business.
Watch out
Common mistakes.
- Assuming that all assets must go through probate, when jointly held property, trust assets and accounts with named beneficiaries may pass outside it.
- Distributing money to beneficiaries before paying debts and taxes, which can leave the person managing the estate personally liable.
- Leaving a will out of date, which can cause disputes and delays when marriages, births, business sales or property purchases have changed the facts since it was written.
Questions
People also ask.
How long does probate take?
It varies widely by place and by the complexity of the estate, from a few months for simple cases to several years for estates with disputes or complex assets.
Do all estates have to go through probate?
Not always, since small estates may qualify for simplified procedures and some assets pass directly to a surviving owner or named beneficiary, although the rules and limits differ between places.
What happens to a business during probate?
The executor can usually continue to run it with court approval, but access to bank accounts and shares may be limited until authority is granted.
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