The word “probate” may sound unfamiliar to most of you. It is a very important concept in estate planning. In my opinion, everyone should at least understand it and most of the people should avoid it. I will tell you why and how in this post.
What is Probate?
Merriam-Webster defines “Probate” as the action or process of proving before a competent judicial authority that a document offered for official recognition and registration as the last will and testament of a deceased person is genuine.
In estate planning, Probate usually refers to the whole legal process of administrating and settling a decedent’s estate, including the official approval of a will if there is one, with court supervision.
Here is my simple version of the normal probate process. It may vary from state to state and case by case. And I also find another good article here explain it in more details.
- File a petition for probate. The court will decide who is going to administer the decedent’s estate. If there is a will, the court will name the “executor” in the will as the person unless he/she refuses or cannot perform the duty. Otherwise, the court will appoint an “administrator” if the decedent dies without leaving a will.
- Notify heirs and beneficiaries and also publish a notice in local newspapers.
Prove the validity of the will.
- File an inventory of the estate assets and liabilities. Appraise certain assets if necessary.
- Notify creditors and file federal and state estate tax return.
- Pay debts and taxes.
- Get the permission from the court and distribute properties to the correct party.
Why avoid probate?
In general, I usually recommend people to avoid probate or at least reduce the value of the assets in your estate that will be subject to probate for three reasons.
It varies by states and cases. It usually takes 6 months to 2 years for a normal probate in California. Why does it matter? It matters to the heirs because any assets being subjected to probate cannot be distributed to them until the last step of the whole process.
The costs of probate usually include but not limited to court fees, executor/administrator fees, attorney fees, accounting fees and appraisal fees. Some of the fees are dictated by the state law and can be very expensive in a state like California.
Based on California Probate Code section 10810, the statutory fees that attorneys can charge for a probate are 4% on the first $100,000 of the estate, 3% on the next $100,000, 2% on the next $800,000, 1% on the next $9,000,000, 0.5% on the next $15,000,000 and a reasonable amount to be determined by the court for all amounts above $25,000,000. California Probate Code section 10811 also allows additional compensation if approved by the court. Two things are worth mentioning here. Firstly, liabilities are not considered in calculating attorney fees. For example, if a house worth $1,000,000 with a $400,000 mortgage, the fees will be calculated based on the value of the house which is $1,000,000 rather than the equity the decedent left which is $600,000. Secondly, even though the executor/ administrator usually will decide to waive their fees, they are entitled to the same fee amount mentioned above.
Besides the public notice requirement mentioned in the probate process above, all the probate files will also become part of the public records once the probate is done. Anyone could look it up and find out needed information in the files, such as who passed away, what was in the estate and even who inherited what. It could be useful for tabloids who follow celebrities without proper estate planning, but it may not be good for the decedent and his/her heirs.
How to avoid probate?
Again, different states may offer different ways to avoid probate. I will give you some general options, and you could also find more details about your specific state here.
Assets owned by a trust are not necessary for probate. The trustee or successor trustee will be able to transfer the decedent’s assets to the beneficiaries named in the trust document without probate. There are so many different types of trusts for different purposes. The trust created only for avoiding probate is called the living trust.
Even though you might be able to create a living trust by yourself through some websites with a little fee or even for free, I would still recommend you consulting an estate attorney to make sure the document can achieve what you would like to do. Also, remember to transfer your assets into the trust after you create it.
- Joint ownership with “the right of survivorship”
Owning an asset with someone else and “the right of survivorship” is another way of avoiding probate. It may also be easier and cheaper. “The right of survivorship” means that the decedent’s shares of the property will be passed to the surviving owner/owners upon death automatically. Some paperwork will be needed, but no probate is required to transfer the property. Some general forms of joint ownership with “the right of survivorship” are Joint tenancy/ Joint tenancy with right of survivorship, tenancy by the entirety and community property with right of survivorship.
Not all states have all three forms of ownership mentioned above. Each one has its own advantages and disadvantages. I will compare all the ownership types including these three in another post and link it back here. To keep it simple here, I generally recommend using the community property with right of survivorship if you are living in one of the nine community property states like California. There are other benefits from the estate planning perspective, and they are beyond the scope of this post.
- Contracts with beneficiary designations
Most of the assets with beneficiary designations in the form of a contract do not need to go through probate unless the beneficiary itself is the estate. The most common ones are life insurance policies, annuity contracts, retirement accounts, 529 plans and health savings accounts (HSA). One side note, your spouse is automatically the beneficiary of your retirement accounts under the law and please get his/her consent in writing if you would like to name the beneficiary of your retirement accounts other than your spouse.
You may also designate beneficiaries to inherit your bank accounts, brokerage accounts, securities, vehicles and real estate through a type of agreement called Transfer-on-Death (POD) or Payable-on-Death (TOD). The assets with this type of agreement will avoid probate. You just need to fill out a simple form to add the TOD/POD agreement, and it will be reflected in the title of your assets. Not all states currently allow TOD registration for vehicles and/or TOD deeds for real estate. Check your state here.
It is pretty straightforward. The assets that you no longer own certainly do not have to go through probate. It may make sense for some people to give away some properties to your kids, charities or others while you are alive. However, I would highly recommend you to consult a tax expert, an estate attorney or a financial planner to make sure your gifting strategy will not cause any unintended consequences from tax and estate planning perspectives.
- Probate “Shortcuts”
Almost every state offers some simplified probate procedures or even probate exemptions for certain groups. You could check whether you are qualified for any “Shortcuts” in your state here.
Estate planning is a very important subject in financial planning. It is more than just estate tax planning. I hope this post not only could help you get a better understanding of probate but also could help you realize the importance of the estate planning.