If you expect to leave a significant amount of assets to your loved ones, you probably assume that the simple procedures for "small estates" won't be of any help to your inheritors. Not so fast. Even if the value of your estate is much bigger than your state's limit, your inheritors may still be able to take advantage of the simpler procedures, which let families avoid probate court altogether or go through a much abbreviated probate process.
The reason is that in adding up the value of your estate to see if it is under the dollar limit, many states exclude huge chunks of assets. In some states, a $500,000 estate could qualify for "small estate" procedures.
If you plan ahead and learn about your state's rules (keeping in mind, of course, that they may change before your death), chances are good that you can adjust your affairs so that you will leave a small estate as your state defines it.
Learn about your state's shortcuts for small estates:
What Kinds of Property Count
Many states simply don't consider the value of certain kinds of valuable property—for example, motor vehicles, real estate, or real estate located in another state. And possibly more important, many states don't count the value of property that won't go through probate. That means your probate-avoidance work pays double dividends after your death. Making sure your bank accounts and real estate won't go through probate, for example, not only saves on those probate costs but might also enable other property to escape probate, too.
EXAMPLE 1: Robert, a California resident, dies owning a car worth $18,000 and a half-interest in these assets, worth almost $400,000:
- an IRA worth $150,000
- a payable-on-death bank account with $10,000 in it
- $20,000 worth of stocks, and
- a house worth $400,000, which he owns as community property with right of survivorship with his wife.
The limit for "small estates" in California is $150,000, but vehicles, payable-on-death accounts, and property that goes to a surviving spouse aren't counted toward that limit. So only the stocks count toward the $150,000 limit, allowing Robert's estate to qualify for small estate procedures.
EXAMPLE 2: Tina lives in Indiana, which restricts use of its affidavit procedure to estates worth no more than $50,000. That won't help me, thinks Tina. But she's wrong. When it comes to this limit, Indiana, like many other states, counts onlyassets that would otherwise go through probate.
Here's how Tina's estate breaks down:
- her house, worth $100,000, which she has transferred to a living trust to avoid probate
- securities worth $40,000, which she has registered in beneficiary (TOD) form
- checking and savings accounts containing $30,000
- a $40,000 retirement account for which she's named a beneficiary, and
- miscellaneous items worth about $10,000
The total value is more than $200,000. But because only the bank accounts and miscellaneous items are subject to probate, Tina has a "small estate" under Indiana law. Her inheritors will be able to use the state's affidavit procedure to claim the money, and no probate will be necessary.
Subtracting What You Owe on Property
When you're trying to figure out whether or not your estate will be small enough to escape probate, some states require you to use the market value of your property; others instruct you to subtract any amounts owed on it. It can make a huge difference, of course.
EXAMPLE: Millie, a childless widow, dies owning personal property—a car, some stocks, bank accounts, and household furnishings—with a total market value of $45,000. Missouri law says that her inheritors can claim the property without probate if the total value, less "liens and encumbrances," is no greater than $40,000. Because Millie still owed $7,000 on her car when she died, that amount (a lien on the car) can be subtracted. That brings the total value of her estate to $38,000—low enough to qualify for the small estate procedure.
If There's No Dollar Limit
When it comes to determining who can use simplified probate, a fair number of states don't specify a dollar amount as an upper limit. Instead, they grant small estate status to estates that will be used up by paying certain high-priority debts: the family allowance mandated by law, reasonable funeral and burial expenses, and medical costs of the last illness. The reasoning is that if there's nothing left for other creditors, there's no need for a probate court proceeding. Obviously, estates of very different size will qualify, depending on the debts of the deceased person.
Using These Rules to Plan
Your state's definition of a small estate is the final piece in the entire probate-avoidance puzzle. Once you understand it, you'll know how much effort you need to devote to other probate-avoidance methods.
For example, say you discover that your state allows up to $70,000 to be transferred by affidavit, and only property that is subject to probate counts toward that limit. You'll know that as long as your most valuable items avoid probate, your executor will be able to use the small estate procedures for a big pile of miscellaneous assets that you have left through your will.
Educate your executor. Even if your estate qualifies for a simplified probate procedure, it won't do you any good unless your executor knows that the option is available. Too many confused or intimidated executors simply turn everything over to a lawyer, and pay the price.