Kentucky Probate Process — What is it?
Frequently Asked Questions —
The Kentucky probate process, also called estate administration, is the process of settling a person’s legal and property affairs after death.
John Meyers is a Probate Lawyer in Lexington, KY. To discuss the probate process, John can be reached at 859-552-5151. In summary, however, the probate process often involves:
- Presenting and proving the validity of a decedent’s Will to the probate court,
- Seeking the appointment of an Executor or Administrator to handle the probate process,
- Identifying the decedent’s property,
- Determining and paying the decedent’s debts and other obligations of the estate, and
- Distributing the remaining assets to the estate beneficiaries as directed by the decedent’s Will, or as directed by state law if there is no Will.
The probate process can be more or less complicated depending on the facts of the estate. Some of the factors that can affect the difficulty include:
- The amount and type of decedent’s property, including the form of ownership,
- The amount and type of decedent’s debt, including whether the total debt exceeds the ability of the estate to fully pay it, and
- Whether other claims or challenges will be asserted by parties with an interest in the estate.
The specifics of the probate process differ from state to state, although the overall purpose and the relevant issues are generally the same. The discussion below describes the Kentucky probate process.
Disclaimer
This discussion of the Kentucky probate process is not intended to be legal advice, and it should not be treated as such. Although this discussion is somewhat lengthy, it is not a complete review of the Kentucky probate process. Many additional issues and sub-issues may be encountered in the probate process that are beyond the scope of this discussion. Also, each estate presents its own unique set of issues and challenges. Mr. Meyers, a probate attorney in Lexington, KY, helps Executors and Administrators address the particular circumstances presented in each estate situation.
What to Do First?
The first step in the probate process is to gather information regarding (i) the Will (if there is one), (ii) the known property, (iii) the known debts, (iv) the estate beneficiaries, and (v) other known issues that may affect the estate.
Mr. Meyers regularly meets with families and prospective Executors and Administrators to review this information and discuss how the facts of the estate will affect the probate process.
Is a Formal Probate Process Required?
An analysis of the estate facts should determine whether a formal, court-based, probate process is required. Of particular importance is whether the estate includes any “probate property” or if all of the property is “non-probate property.” If the estate includes no probate property, a formal probate process likely will not be needed.
Non-Probate Property
Non-probate property includes items that pass from the decedent to another person by a mechanism other than the court-based probate process. These items include:
- Jointly-owned property with “right of survivorship.” Examples include, but are not limited to, certain bank accounts and real estate jointly owned by married couples. Upon the death of a joint owner, the decedent’s interest in the right-of-survivorship property automatically passes to the surviving joint owner outside of the probate process.
- Properties, such as retirement plans and life insurance policies, that have beneficiary designations as part of the property contract. These properties are distributed directly by the retirement plan or insurance company to the designated beneficiaries. Note that only the designated beneficiaries of these properties, and not the Executor or Administrator, have authority to get information about and apply for the distribution of these items.
- Some bank accounts and investment accounts offer “pay on death” or “transfer on death” features that allow the owner to designate beneficiaries to receive these assets after death. As with many retirement plans and life insurance policies, these properties are paid out directly to the designated persons outside the probate process.
- Properties that have been transferred to the name of a trust prior to the decedent’s death. After the decedent’s death, these properties are handled and transferred as directed by the trust document outside the probate process.
None of these properties are controlled by, or affected by, the court-based probate process. Some people only own non-probate property at death, in which case no court-based probate process is needed.
For example, the first to die of a married couple might own at death only jointly-owned assets with right of survivorship with the surviving spouse and assets like retirement plans and life insurance policies with designated beneficiaries named in the contracts. No court-based probate process may be needed for that spouse’s estate regardless of the value of these non-probate assets.
Probate Property
Probate property is just about all property not described above as non-probate property. This particularly includes individually owned items without beneficiary designations, such as individually owned bank accounts, investment accounts, vehicles, real estate, business interests, and many other types of assets.
Probate property also includes the decedent’s interest in jointly-owned assets that are not with right of survivorship. Also, most payments received after death are probate assets, including compensation paid after death, refunds, and retirement plans and life insurance policies that are payable to the estate rather than to other designated beneficiaries.
The court-based probate process is required to transfer probate property as directed by the decedent’s Will, or as directed by state law if no Will exists.
Small Estate Administration
Kentucky probate law allows some probate estates valued at no more than $30,000 (and sometimes a little more depending on the facts) and having no real estate to be administered through a simplified process called Dispense with Administration. This process usually requires only a single court hearing and can be completed more quickly than the standard probate process.
Some Relevant Terminology
Testator. A person who executes a Will is sometimes referred to as a Testator. An estate in which a Will exists is called a “testate estate.” An estate in which no Will exists is called an “intestate estate.”
Probate. The term “Probate” can be used in several ways, including as a synonym for the estate administration process, as used in this discussion. Sometimes probate is used more narrowly to refer to the task of submitting the Will to the court (“to probate the Will”). And, as is explained above, “probate property” differs in important ways from “non-probate property.”
Executor; Administrator. The term “Executor” refers to a person named in a Will to administer an estate, and the term “Administrator” means a person administering an estate who was not appointed by a Will, such as when no Will exists. The roles and obligations of Executors and Administrators, once appointed by the probate court, are essentially the same.
Personal Representative; Fiduciary. Sometimes the term “Personal Representative” is used to refer to both Executors and Administrators. The term “Fiduciary” is also sometimes used, like Personal Representative, to refer to both Executors and Administrators. Fiduciary can also refer to Trustees. The discussion below will often use the term Fiduciary as shorthand for both Executors and Administrators.
Starting the Kentucky Probate Process
The standard, court-based, probate process in Kentucky begins with the preparation of a Petition for Probate that is filed with the District Court of the county in which the decedent lived when he or she died. The Petition provides the court basic information about the estate, such as the decedent’s identity and date of death, whether a Will exists, the decedent’s next of kin, the proposed Executor or Administrator, and an estimate of the estate property and value.
When the Petition for Probate and some related documents are filed with the probate court clerk, a hearing is scheduled for a judge to review the Will for validity (if a Will exists) and consider the appointment of the proposed Executor or Administrator. The exact process for filing the Petition and scheduling the hearing varies somewhat from county to county in Kentucky. A filing fee also must be paid, which amount varies from county to county.
Often this initial process of probating the Will and having the Fiduciary appointed is simple and uncontested. But not always. Some cases require additional advance preparation to prove the validity of the Will or to support the request to be appointed as Fiduciary, particularly when there is no Will. And, in some cases, claims and challenges to the estate may be confronted at this first hearing.
It is important to note that nobody has any legal authority to take action regarding the estate or the probate property until the court appoints an Executor or Administrator. A Will might include language “appointing” someone as Executor, but that person has no legal authority until the court appoints him or her. Generally, the probate judge will honor and follow the “appointment” of an Executor made in a Will unless there is a compelling reason not to.
What to Do After the Probate Hearing?
Usually the probate hearing concludes with the judge entering an Order probating the Will (accepting the Will as legally valid) and appointing an Executor or Administrator. Assuming such an Order has been entered, the appointed Executor or Administrator then has the legal authority to administer the decedent’s estate. This includes, among other things, having access to information that was previously confidential (such as bank account information), having authority to take legal positions and settle legal issues regarding the estate, and having the authority to take control over the decedent’s probate assets.
The responsibility of the Executor or Administrator (often referred to as Fiduciary going forward in this discussion) is to administer the probate estate in accordance with law. This means to respect and serve the various interests in the estate. These interests may include the rights of estate creditors, the rights of tax authorities, and the rights of estate beneficiaries. These various parties sometimes have competing interests in, and claims to, the estate property, and the Fiduciary has to sort out these competing interests. If the Fiduciary distributes estate property to the wrong parties, the Fiduciary can become personally liable for the resulting losses.
An attorney representing an Executor or Administrator serves that person in his or her fiduciary role and advises the Fiduciary regarding the performance of his or her legal responsibilities.
The administration of an estate by the appointed Fiduciary often involves the following tasks and issues:
Federal Tax ID Number and Bank Account
Most estates need a bank account to which to deposit the estate’s cash assets, including transfers from the decedent’s lifetime bank accounts and other receipts of money during the estate administration. Payments for the estate debts and the costs of administration also are usually made from the estate bank account. A federal tax ID number is required to open an estate bank account. Obtaining a federal tax ID number from the IRS and then opening a bank account for the estate often are some of the first steps for a Fiduciary after being appointed by the court.
Inventory Filing
The Kentucky probate process requires the Fiduciary file an Inventory of the estate probate assets within 60 days after being appointed by the court. The idea is that 60 days should provide the Fiduciary time to complete an investigation of the assets to report in the Inventory. Sometimes assets are not fully discovered during this 60-day period and the Inventory is filed with the best available information. The Inventory can be amended later with more complete information, if needed.
Identifying and Protecting Probate Assets
The primary purpose of the probate process is to transfer the probate property to the correct parties. Therefore, it is important for the Fiduciary to identify the probate property and take reasonable steps to protect those assets until they can be properly transferred.
As discussed above, cash in the decedent’s bank accounts is usually transferred to a new estate bank account controlled by the Fiduciary. Vehicles are often parked and insured until sale or distribution. Probate real estate should be insured until sale or distribution. And additional decisions need to be made regarding the control and care of other property, such as furniture and furnishings, clothing, jewelry, etc.
Debts of the Decedent
The Fiduciary is responsible for paying the valid debts of the decedent before distributing the probate property to the estate beneficiaries. In some estates, satisfying the debts is no challenge for the estate. At the other extreme, in some estates the decedent’s debts fully consume, and even exceed the value of, the probate assets. At an early point in the estate administration, the size of the debts relative the value of the probate assets needs to be carefully considered.
If the estate is solvent, the estate will fully pay the debts and costs of administration and then distribute the remainder of the assets to the estate beneficiaries. If the estate is insolvent (meaning the probate assets are insufficient to pay all of the debts and costs of administration), great care must be given to determining the hierarchy of the competing claims to the estate assets, and how the limited estate property will be applied to these claims. Insolvent estates are inherently more difficult to administer.
The Creditors’ Claim Period
After the court appoints a Fiduciary, the court clerk will arrange for a legal notice of the estate to be published in a local newspaper. This legal notice is intended to put the decedent’s creditors on notice that they need to present their claims to the Fiduciary. The decedent’s creditors have six months from the date of the Fiduciary’s appointment to present their claims either to the court or to the Fiduciary (or the Fiduciary’s lawyer). This means all probate estates must be open for at least this six-month notice period.
The estate is also generally obligated for all debts that the Fiduciary becomes aware of during the six-month claims period, whether or not a formal claim is submitted. But, claims first presented and learned of after the six-month claims period are generally barred and do not constitute obligations of the estate.
Disallowance of a Claim
If a claim is received within the claims period that the Fiduciary determines is invalid, the Kentucky probate process allow the Fiduciary to formally “disallow” the claim within a designated time period. After the Fiduciary has disallowed a claim, the claimant has a limited time to institute a lawsuit in Circuit Court to attempt to prove the claim’s validity. Such a lawsuit brought by a claimant regarding a disallowed claim is handled in parallel with the estate administration case in District Court.
Will Contests
Will contests are also lawsuits brought in the Circuit Court and handled in parallel with the estate administration case in District Court. Will contests seek to have the probated Will determined invalid for reasons such as the testator’s incapacity to execute the Will or undue influence on the testator. The particulars of will contest lawsuits are beyond the scope of this discussion except to note that a Fiduciary needs careful legal guidance about such lawsuits and how they affect the estate administration process.
Funeral, Burial, and Estate Administration Costs
Funeral and burial costs and all proper costs of the estate administration process are to be paid by the Fiduciary from the probate estate property. These costs come before most debts of the decedent, which is very important in insolvent estates. However, secured debts, such as mortgage loans and secured car loans, to the extent of the pledged property, come before everything, including the funeral and burial costs and costs of administration.
Executor or Administrator Commission
Executors and Administrators have the right to be paid a commission (fee) for their services, but commissions are not required to be paid. The commission is generally capped at 5% of the value of the personal property probate assets. The value of any real estate included in the probate estate is not considered in determining the amount of the commission. The Fiduciary’s commission is part of the costs of estate administration.
The commission received by a Fiduciary is taxable income. If the Fiduciary is the only beneficiary, or a substantial beneficiary, of the estate, taking a commission may effectively convert part of a non-taxable inheritance into taxable commission income. This can be a reason for a Fiduciary to decline a commission.
Income Taxes
If the decedent has taxable income that was not reported on tax returns during life, such as compensation received during the decedent’s last year of life, the Fiduciary is responsible for filing appropriate tax returns for the decedent reporting that income. These tax returns could show an income tax owed by the estate or a refund due to the estate.
In addition, the estate is a separate taxable entity that could receive its own income during the period of administration. Many estates have no taxable income, or an insignificantly low level of income, and never have to file income tax returns. However, some estates earn significant enough income during the period of administration that income tax returns have to be filed by the estate. Income sources for the estate can include, but are not limited to, compensation received after death, investment income, or a taxable retirement account that is payable to the estate rather than to another designated beneficiary.
Estate and Inheritance Taxes
Federal estate taxes are payable only by very large estates, valued at more than $11 million for decedents dying in 2018. Clearly, the federal estate does not apply to most estates.
Many states, including Kentucky, have an inheritance tax that is separate from the federal estate tax. Kentucky’s inheritance tax is determined by reference to the amounts passing to each of the estate beneficiaries.
The amounts passing to certain beneficiaries closely related to the decedent (such as a spouse, children, and grandchildren) are fully exempt from the Kentucky inheritance tax. Amounts passing to beneficiaries less-closely related to the decedent, or not at all related to the decedent, are subject to the inheritance tax at varying rates. Amounts passing to certain charities are not subject to the inheritance tax.
An estate cannot be closed unless the probate court has first been presented with evidence that the KY inheritance obligation has been satisfied by the estate. If the estate has no inheritance tax obligation, the proper evidence for the court is an affidavit (a sworn statement) signed by the Fiduciary stating that no inheritance tax is owed. If the estate has an inheritance tax obligation, the appropriate evidence for the court is a notice letter from the KY Department of Revenue that the estate’s tax liability has been fully paid.
Some Other Tax Issues
Most inherited property is not taxable income to the recipient. Exceptions include the receipt of retirement assets that were not previously subject to income tax. This includes most 401k accounts and non-Roth IRA accounts. The receiving beneficiaries of taxable retirement accounts are responsible for reporting the amount received as taxable income, which will be subject to tax at the receiving beneficiary’s tax rates.
Property owned by a decedent at death receives a new tax basis equal to the property’s fair market value as of the decedent’s date of death. This is relevant to the determination of taxable gain or loss on a subsequent sale of the property by the estate beneficiary.
For example, if a decedent purchased a property years before death for $100,000, and the property was worth $200,000 on the decedent’s date of death, the tax basis of the property passing to the estate beneficiary is $200,000, not the original purchase-price tax basis of $100,000. If the estate beneficiary later sells the property for $225,000, the beneficiary must report a taxable gain on the sale of only $25,000, being the appreciation over the new tax basis of $200,000. Keep in mind that this is a simplistic example and other factors can also affect tax basis, gain or loss, and recognition of income.
Selling Probate Property
In appropriate circumstances, a Fiduciary may sell probate properties, such as to make needed cash available to pay debts and the costs of administration. However, the Fiduciary has legal authority to sell probate real estate only if (i) the Will provides that clear authority or (ii) the probate court grants that authority. If no Will exists or the Will fails to provide authority to sell the probate real estate, the Fiduciary must first obtain authority from the probate court before selling any probate real estate.
Distributions of Probate Property
As discussed above, the Fiduciary is responsible for paying funeral and burial costs, estate administration costs, and debts of the decedent as part of the Kentucky probate process before making distributions to the estate beneficiaries. Because the estate creditors have six months to present their claims to the estate, the estate’s total debt obligation cannot be known with certainty until the six-month notice period has expired. Therefore, distributions to estate beneficiaries should not occur until after that six-month notice period has expired and the Fiduciary has confidently determined the net estate assets available for distribution to the beneficiaries.
Periodic Settlement Due at the Two-Year Anniversary
If an estate remains open with the probate court for more than two years, the Fiduciary is required to file with the probate court at the second anniversary a Periodic Settlement, which includes an accounting report of (i) the transactions of the estate for the first two years of administration and (ii) the property then remaining in the Fiduciary’s hands. A similar Periodic Settlement is required to be filed by the Fiduciary on each anniversary thereafter that the estate is open. Most estates are completed before the second anniversary and no Periodic Settlements are required to be prepared and filed for those estates.
Closing the Kentucky Probate Process
After all the administration tasks have been completed for an estate, the estate needs to be closed with the probate court, at which time the Fiduciary will be discharged and relieved from further responsibility in the estate matter. In Kentucky, estates can be closed by either an Informal Final Settlement process or a Formal Final Settlement process.
Informal Final Settlement
The Informal Final Settlement involves the filing of (i) a simple form signed by the Fiduciary informing the court that the estate administration is complete and (ii) documents signed by each of the residuary estate beneficiaries indicating their satisfaction with the estate administration.
The idea with this informal process is that, if all of the parties with an interest in the estate tell the court they are satisfied with the estate administration, the court is similarly satisfied and then requires no review of the estate details. Based on the filing of these documents, the probate judge will usually issue an Order closing the estate and discharging the Fiduciary.
The Informal Final Settlement does not require providing the court detailed information regarding the estate transactions, making it fairly simple to prepare and file. If the estate is closed by an Informal Final Settlement before a Periodic Settlement is required to be filed on the second anniversary, very little financial detail regarding the estate administration will become a part the court’s public file.
The Informal Final Settlement is available only for solvent estates (where all debts and expenses have been fully paid) and is practical only when all of the residuary estate beneficiaries are satisfied, including with what they received from the estate.
Formal Final Settlement
The Formal Final Settlement is a more complicated process and involves providing the probate court and other parties having an interest in the estate complete information about the administration, including an accounting of the estate’s financial transactions.
Parties with an interest in the estate then have an opportunity to present any objections they may have to the final settlement presented by the Fiduciary. If objections to the Formal Final Settlement are presented, the court holds a hearing to resolve the objections.
The Formal Final Settlement is used in various instances where an Informal Final Settlement is not possible or practical. This includes insolvent estates and other estates where it may be difficult or impossible to obtain documents signed by all residuary estate beneficiaries indicating their satisfaction with the estate administration. The use of the Formal Final Settlement process does not necessarily mean there will be objections to the settlement.
Help With the Kentucky Probate Process
John Meyers • Probate Attorney • Lexington, KY
Mr. Meyers, a probate attorney in Lexington, KY, helps clients handle and complete the probate process, resolve the challenges and complications that may be encountered, and make the entire process smoother and easier. Click here for more about Probate Lawyer services.
He can be reached at (859) 552-5151 or by using the contact form, below.