Probate Tidbits

A major concern of clients is “avoiding” Probate. So what is Probate? And what does it cost? Probate is a process, supervised by a Probate Court, whereby assets are transferred from a deceased person, to heirs, or if there is a will, to the beneficiaries named in the will. The single most important thing to realize, however, is that property that is owned jointly with right of survivorship, or such as an IRA that has a beneficiary, does not pass through Probate. It goes directly to the survivor, or to the named beneficiary.

For that reason, Probate is not necessary for most husbands and wives because all of their assets are owned jointly with right of survivorship. This is good news for most people. But it is very important to understand that it is still necessary to file an Inheritance Tax Return, called a “Succession” tax in Connecticut, on a form CT706 NT. The NT stands for “no tax” as there is no estate tax when property passes to a spouse, and currently, in 2010, there is no tax on the first $3.5 million passing to your heirs, so almost no one in Connecticut pays inheritance tax. So why do you have to file the return? Because when you go to sell the house, the buyer will be looking for both spouses signatures, unless the deceased spouse is no longer an owner of record, and the filing of the tax return results in a “Certificate of No Tax”, issued by the Probate Court, and recorded on the land records, which is proof that one of the spouses has died, and the other is now the sole owner.

The filing of the tax return causes a Probate “fee”, based on the Connecticut statutes. The fee is based on the size of the estate, and this is what people are concerned about when they say “avoid probate”. Their jointly owned property is not technically passing through Probate, but there is still a “probate fee”. In Connecticut, this is quite small. For example, a typical husband and wife, with a $200,000 house and $200,000 of other assets would owe $1,515.00.

As of January 1, 2011, there is another reason to make sure the “Succession” Tax Return is filed, in addition to clearing title, because after that date there will be interest charged and building up through the years if the tax return is not filed. The rate of interest is 0.5% per month. Imagine the shock, if 15 years after your spouse dies, you go to sell your house, and find out that because you did not file the tax return, there is now due not only the probate fee, plus 15 years of interest. The interest could very well be much larger that the probate fee. So after January 1, 2011, it will be very important to follow the procedures set up in the Probate law.

There is a tax benefit. The benefit is that property such as real estate, or stocks, will get a “step up in basis”, subject to limits, which means IRS will treat the property as having been bought at its value when you die, instead of the price when you originally bought it, so your heirs will not have to pay Capital Gains Tax if they sell it at that price.

This is a very cursory discussion of Probate, and future articles may explain other aspects. But after January 1, 2011, if there is a death in the family, seek good advice, even if the situation is very simple, to avoid the potential for “interest” on a “Probate fee” you may not have known existed.