Probate is the process of settling a person’s estate after they have died. During probate, a court oversees the distribution of assets left by a deceased person. Some joint ownership structures require probate, while others do not. In this article, we’ll look at each in detail.
When Does Probate Become A Factor?
Probate is a court-led process of distributing property ownership in the case there is no named beneficiary. In rare cases, probate may be used even if there is a will or trust to direct ownership distribution. Probate can take several months to complete. Having a will or living trust can avoid most probate situations. However, even with a named beneficiary, probate may be required, but the process will go more smoothly than if no beneficiary was named.
Tenancy in Common—Probate Required
Tenancy in common is joint ownership of a property by two or more people. It is one of the simplest forms of joint ownership and also one of the most common, historically. Owners can own equal or unequal shares of the property. They can also sell their shares without affecting the other owners.
Tenants-in-common (TIC) must go through probate court upon the death of an owner. What happens from there depends if the owner has a will or not. In either case, the executor/representative distributes ownership of the property. The representative is named by the deceased in their will or revocable living trust. If there is no will, the court will appoint a representative.
In the case of two owners and one passes away without a will, probate is required. This scenario puts the surviving owner at a disadvantage since he will need to communicate with the executor of the deceased for anything he wants to do with the property, including mortgaging or improving it.
The above scenario also outlines an important point about joint ownership. Before the owner passed, he and the other owner likely had an understanding about the property. That understanding may change once probate completes, and the deceased heirs come into the picture. With a will or trust, all other owners will know what to expect in the event one of them passes. Knowing beforehand what happens if one owner passes is critical information in joint ownership arrangements and can help to avoid unfavorable outcomes.
Joint Tenancy—Probate Not Required
In a joint tenancy arrangement, also called joint tenants with right of survivorship, owners own equal amounts of a property. Upon the death of an owner, interest is split among the remaining owners, avoiding the need for probate. Ownership cannot pass to heirs under joint tenancy without terminating the joint tenancy agreement.
Joint tenancy is a great way to avoid probate as remaining interest will always pass on to the existing owners, which may be family members or relatives. But there are some situations where probate may be necessary. Upon the death of the last owner under joint tenancy, the property will pass to a named beneficiary via a will or living trust. If there is no named beneficiary, then distribution must go through probate.
Tenancy by the Entirety—Probate Not Required
Tenancy by the entirety is used between married couples or domestic partners (assuming the state has such a law). Under this arrangement, the property is owned wholly by the spouses rather than being split among shares. When one spouse passes, the other spouse assumes full ownership of the property. For that reason, probate is not required.
Divorce or end of a domestic partnership (per state laws) will terminate tenancy by the entirety. At that point, the ownership structure will be dictated by the terms of the divorce. A transition to tenancy in common is most common, which does require probate. Tenancy by the entirety can also be terminated through mutual agreement of the spouses.
Whether probate is required or not, property owners should have a will or living trust in place that can carry out their wishes. This eases the transition for the other owners and heirs alike. It also greatly reduces the chance of conflict and unforeseen difficulties.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not offer legal or tax advice. As such, this information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult with a qualified professional.
