What is it—and why does it have such a bad reputation?
We’ve all heard of probate, and it seems we all know it’s “bad” and to be avoided. But what is it really? And, given your circumstances, should you make arrangements to avoid it? If so, how can you do that?
First, an overview of what it is.
What is probate?
Probate is a legal process for distributing property that has been left through a will or that belongs to someone who died without a will. During probate, the decedent’s will, property and debts are handled as follows:
1. The will, if any, is filed with the local court—the probate, surrogate or chancery court, depending on the state—and is proved valid.
2. Property is identified and appraised.
3. Debts are paid, including estate and inheritance taxes, if any.
4. Property is distributed according to the terms of the will or, absent a will, according to any living trust, joint tenancy on property or by state law.
Why is probate considered bad?
It’s costly. Probate law varies by state and so the costs vary as well. In some states, the court approves “reasonable” fees, while in others the fees are a set percentage of estate value. On average, court, attorney, executor and other fees run 5 percent of an estate’s gross value—that is, fair market value, not reduced by mortgage or debt. That means that an estate with a gross value of $500,000 will incur probate expenses of about $25,000.
If probate is required, families can rarely avoid the costs. In two states, California and Wisconsin, the executor of the will can reasonably handle probate without attorney assistance (relying instead on self-help and court-provided aids) and save some money. In most states, however, the process is complex—and the courts discourage amateurs. And in a few states, the executor is legally barred from handling probate without an attorney.
It’s lengthy. On average, probate proceedings last 12 to 14 months. Until probate concludes, the property in the estate is tied up and cannot be distributed to heirs.
It’s public. The will, associated assets and debts, beneficiaries and the status of proceedings are on file in the county where the deceased lived. The records are public, available for review by anyone who wants.
What’s good about probate?
On the other hand, there are estates for which probate can be beneficial:
• If the legal arrangements for estate distribution are likely to be challenged in court, probate can be an efficient means to address and resolve disputes.
• Or, if the estate has significant debt, probate allows creditors only a limited window within which to file claims. A claim received beyond the window (typically four to six months) does not have to be paid.
Payment of debts generally follows this priority: probate fees, funeral expenses, any federal tax, medical expenses, any state tax, then other claims and creditors. The available assets are applied until the bills are paid in full or the assets are depleted. In either case, the debts are then considered satisfied.
This probate process for handling significant debt is good for loved ones—because the debts are thereby resolved. However, this situation also means that there will be little to no inheritance remaining.
How can my loved ones avoid probate?
Let’s assume you’d prefer your loved ones avoid the cost, time, and public process. Here’s how you can take steps today to help them do so.
Small Estate Exemption. Each state provides simplified probate procedures for smaller estates, but the definition of “small” varies from $5,000 to $200,000—and, depending on the state, may exclude personal vehicles, real estate or back pay.
If the value of your estate will be less than the small-estate threshold, your loved ones will be able to take advantage of simplified procedures—essentially avoiding probate.
The Larger Estate. If you die owning more than the small-estate threshold, your loved ones will not avoid probate—unless you take steps now to help them do so.
The key to probate avoidance is arranging exemptions for your large assets. If you do so, and the total value of nonexempt assets then falls below the small-estate threshold, your loved ones will be able to follow simplified procedures (similar to Small Estate procedures above).
Probate Avoidance. Some of your assets are exempt from probate based on the way the property is titled or beneficiaries are designated:
• Property owned jointly with right of survivorship
• Life insurance proceeds that flow directly to beneficiaries
• Retirement account balances and any pension benefits that transfer directly to named beneficiaries
• Gifts that have been previously given to recipients
For the balance, you have some options.
• You can create a revocable living trust and re-title your large assets (such as your home and brokerage accounts) to the trust. With a trust attachment (Schedule A), you can also include valuable personal property that does not have a title, such as heirlooms, equipment and household furnishings.
• Or you can make probate-avoidance arrangements asset by asset:
~ For bank accounts, establish pay-on-death (POD) beneficiaries.
~ For vehicles, brokerage accounts and government securities, establish transfer-on-death (TOD) beneficiaries.
~ For real estate, establish a transfer-on-death (TOD) beneficiary (available in
only some states) or a deed with right of survivorship.
With a POD or TOD designation, assets will be transferred directly to your named beneficiaries and will not be subject to probate proceedings.
For a straightforward summary of probate-avoidance options, see Avoiding Probate in Your State on www.nolo.com. In addition, see the book 8 Ways to Avoid Probate by Mary Randolph (Nolo).
If you desire more detail about probate law, search your state's Web site for probate code, decedents’ estates, fiduciaries or estate administration. Or contact a local estate planning attorney for a no-cost overview of probate law for your state.
Melanie Cullen is the author of Get It Together: Organize Your Records So Your Family Won’t Have To (Nolo), a workbook/CD-ROM for preparing and organizing your important records—for yourself and for your loved ones. She is a management consultant with TerraSys Consulting, Inc. and serves on the Projects@Work editorial board. She holds an MBA from the Graduate School of Business at Stanford University.
Image: Flickr Creative Commons / Bilal Kamoon