Clients often say, “I want to avoid probate,” or “I thought having a Will means I avoid probate?” What we generally do not hear is exactly why someone wants to avoid probate, or even a full understanding of what exactly probate is.  

As a lifelong fan of The Wizard of Oz, I often see correlations between that story and probate. In this newsletter, we will take a closer look at the difference between probate assets and gross estate assets and how they may impact your estate tax obligations.

We’re not in Kansas anymore 

Generally, probate property is individually owned (meaning not jointly owned and not owned by a revocable trust or entity) and has no designated beneficiary. Probate property is often a decedent’s real estate, checking/investment account, business interests, or a car (all individually owned). Retirement assets often have a named beneficiary, or the beneficiary is determined under the plan, and is therefore generally not probate property (because although it is individually owned, it has a designated beneficiary). Always double check you have the appropriate beneficiaries, as they can become outdated or may be missing – never assume! A joint checking account between spouses or a parent and child is also not probate property (because the asset is not individually owned), and immediately passes to the surviving account owner at death.  

“The Scarecrow said, “I cannot think why this wall is here nor what it is made of.” The Woodman replied, “…when we have climbed over it, we shall know what is on the other side.”

At death, your loved ones will need to determine what “probate” property you own, if any. This will be pretty apparent as jointly owned property will be accessible by the surviving owner, assets with beneficiary designations will be distributed directly to the named beneficiary, and trust assets will be accessible by the successor Trustee. With probate property, your loved ones will, in a sense, hit a wall and be refused access to the asset. Someone (a bank teller, financial advisor, the registry of deeds) will hold up a stop sign and say – “STOP! You cannot proceed without court appointment or approval.” Once your loved one hits this “wall,” they will immediately realize the need for court involvement (in other words – probate).

The need for court involvement or probate does not have anything to do with whether or not someone has a Will. I repeat, the need for court involvement when someone dies with probate assets has nothing to do with whether or not someone has a Will!  

We’re off to see the wizard, the wonderful Wizard of Oz!

I often think of probate as the yellow brick road. Who is traveling on the yellow brick road? Your loved ones – whoever would help administer your probate property at your death (maybe a spouse, child, close friend, or attorney). Where does the yellow brick road lead? Why to the Emerald City of course! And who is at the Emerald City? Oz…aka the probate judge. While traveling on the yellow brick road towards the Emerald City, which is the only route when dealing with probate assets, your loved one (Dorothy in this scenario) may encounter friends, allies, apple-throwing trees, maybe even a flying monkey or two. Who she encounters while traveling on the yellow brick road is dependent on many factors, such as whether or not you had a properly drafted Will, whether your family is contesting the Will, or whether you had no Will at all. So, as your loved ones travel on the road to Oz, how easy the path is will be entirely dependent on your Will and your family (not to say that Oz never blows some smoke and fire into the mix). 

Utilizing a revocable living trust and ensuring assets are either titled to the trust or the trust is the named beneficiary, can keep your loved ones safely in Kansas, away from Oz and the yellow brick road.  Although the movie makes it, at times, look exciting, there is nothing shiny and enjoyable about the probate process, and when confronted with the statement, “I want to avoid probate,” well, we would also agree. 

Another road through the forest

Alternatively and unrelated, a decedent’s “gross estate” for estate tax purposes includes all probate and non-probate property, including assets held in the name of the decedent, those held jointly, those with beneficiaries, and trusts where the decedent had control over the assets. It might be easiest to visual an individual’s gross estate as one large pie and the probate assets as one piece of that pie. The size of the piece of pie depends on the forethought of the decedent to structure the assets to avoid probate (i.e. naming beneficiaries, holding joint assets, or funding a trust).

Determining the gross estate is important to determine if the decedent’s estate will be subject to a federal or Massachusetts estate tax. Estate tax returns are due nine months from the date of death. Even if a six-month extension is applied for, payment of the estimated tax remains due on the nine-month due date to avoid interest and penalties. If payment is due but not made or is underestimated, then the estate could be subject to interest and penalties. 

In summary, it’s important to plan ahead to avoid unintended circumstances when it comes time to administer your estate. As Glinda the Good Witch said, “You’ve always had the power my dear, you just had to learn it for yourself.” And, remember, you don’t need to go it alone. We are here to guide you every step of those ruby red slippers.

-Kristin N.G. Dzialo