Many people believe that a will avoids probate. They are sadly mistaken.
If someone dies without a living trust, their estate must pass
through probate, even if the decedent had a will.
what is probate?
Probate is a process by which the probate court supervises the passing of property from the decedent's estate to the decedent's heirs. In general, probate is required where the decedent's assets (cash, real property, securities, etc.) are valued at more than $150,000. The basic steps of the process are:
- Petitioning the court to appoint an executor or administrator.
- Marshaling the assets of the estate.
- Waiting 4 months for creditors to come forward with claims against the estate and deciding if the creditors' claims should be paid.
- Selling or otherwise disposing of the decedent's assets. (NOTE: If the decedent had a house, in many cases that house must be sold at public auction.)
- Petitioning the court for an order for final distribution and distributing the remaining estate assets according to the court's order.
A lot happens in the interim of the steps above. For example, the executor must see to it that the decedent's final tax returns are filed and any taxes owed are paid. The executor must follow strict rules, like keeping cash in interest bearing accounts, treating all heirs fairly, and refraining from using online banking. It is not unusual for complications to occur even in the most basic of cases. That is why an attorney is often needed to represent the executor.
how much does it cost?
The cost of probate is often enough to send one running to create a living trust. If an attorney is needed, the attorney's fees are based on the gross value of the estate. The calculation is as follows:
4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000
So if your gross estate is worth $1,000,000, the base attorney's fees would be $23,000. Because this calculation is based on the gross value of the estate, debt has no effect on attorney's fees. Whether there is zero debt or $900,000 in debt, the attorney's base fees in a $1,000,000 probate are $23,000. On top of that, the court fees and other court-related costs can add up to another $2,000 or more.
How long does it take?
A particularly fast probate can be completed in 8 or 9 months. Typically it takes a year or more to complete the probate process.
if there is no living trust, are there other alternatives to probate?
Small Estate Affidavit
In some cases where the assets are worth less than $150,000, and the estate includes no real property, the assets may be passed to the heirs or other proper person by a Small Estate Affidavit. Compared to probate, this process is fast, inexpensive, and efficient.
Joint Tenancy Property
When property (typically a residence) is owned by two people as "joint tenants," the property passes to the survivor of the two people with little more than an affidavit of death filed with the county recorder's office. Thus, joint tenancy avoids probate, but it also has drawbacks -- especially for married couples. For married couples, owning property as joint tenants could cause an unnecessarily hefty capital gains tax liability. However, married couples can also take title as community property with right of survival. This would likely solve the capital gains tax issue. But what many people don't consider with joint tenancy is that there are two people involved. If the second person dies without a living trust, the property must still go through probate. And it is certainly possible for the two people to die together, which would also result in probate.
Pay on Death Accounts
Most financial institutions will allow you to designate a death beneficiary for your account. This is similar to having a trust in that you are leaving the property to a particular person and it passes to them upon your death without having to go through the public probate process.
Retirement accounts, such as IRAs, are essentially a form of trust. They pass to the death beneficiaries without the need for probate. By law, a trust cannot own a most retirement accounts. They must be owned by individuals. But if a living trust is drafted properly, one can designate a trust as a beneficiary of a retirement account while preserving maximum income tax efficiency for the survivor's benefit.