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How to Avoid Costly Probate
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It is hard to get very excited about the subject of your death. But if you want to maximize the after-tax estate you leave to your loved ones, now is the time to plan for this inevitable event.
How the Costly Probate System Works
When a person dies, his assets become his "estate." Hopefully, the deceased has laid out plans to determine who is to inherit his property. But if no plans have been established, the person is said to have died "intestate." Then the state's law of intestate succession determines who receives the individual’s assets, regardless of the wishes of the deceased. The results of dying without a will are often not what the deceased would have wanted. Even if a person wants only to have his spouse receive his entire estate, a will is essential.
When a person dies, with or without a will, most of his assets become subject to probate. The services of a probate attorney are usually required. In most states, the attorney can charge the estate a statutory fee of 6 to 22 percent, depending on the size of the estate. In addition, there are various court and transfer fees.
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Why Probate Should Be Avoided
When a person dies, his assets must be distributed in probate—according to that person’s will or by the state law of intestate succession. To proceed with probate:
- 1. The attorney for the deceased's estate files a court petition for probate.
- 2. Once the petition is filed, the attorney is entitled to statutory fees set by state law (unless the attorney agrees to a lower fee).
- 3. The court appoints the executor named in the will or selects an administrator if no one was named (executors and administrators are entitled to statutory fees).
- 4. A monetary bond must be posted by the executor or administrator unless waived in the will or by the will's beneficiary.
- 5. Notice is given to creditors, usually by publication in a newspaper.
- 6. Prior to final distribution of the estate, a widow's family allowance is generally given within six to 12 months, but sometimes can take longer.
- 7. All assets must be inventoried and appraised.
- 8. Creditors’ claims are paid.
- 9. Assets may be sold to pay the debts of the deceased, any federal and state taxes, and the statutory fees of the attorney and executor or administrator.
- 10. Any assets left are distributed to the heirs.
- 11. Final state and federal tax returns, plus estate and inheritance returns, are filed.
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How to Avoid Probate Costs
But there are several ways to avoid the unnecessary probate expenses and delays.
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1. Hold Title in Joint Tenancy with Right of Survivorship
Most married couples own their homes and other real estate in joint tenancy with right of survivorship. In a few states, a tenancy by the entireties between spouses accomplishes the same result. When one joint tenant dies, the surviving joint tenant automatically receives title. Usually only a death certificate and affidavit of survivorship need be recorded to transfer title.
Beware, though. You should hold homes and other real estate in joint tenancy only with your spouse. Why? Because you are liable for the judgments and debts of the one with whom you hold the title in joint tenancy. Suppose you owned a home in joint tenancy with your son. You think this is a great thing to do because you will avoid a hassle—when you die, the home will automatically be held in your son's name. But suppose your son is involved in a serious car accident that is his fault, and suppose there is a large judgement against him resulting from a lawsuit. Your house can be taken to satisfy that judgement!
2. Make your Life Insurance Policies Payable to the Beneficiary.
This avoids the payment delays if the policy is payable to the deceased's estate.
3. Place all your assets in a Living Trust.
Most lawyers hate living trusts because the trusts keep them from collecting probate fees. A living trust is a legal entity which holds title to the owner's assets such as home, investment property, automobile, and other major real and personal property.
The creator of the living trust (called the trustor or grantor) is the initial beneficiary and the initial trustee who manages the trust assets. Husband and wife can be co-trustees. Nothing changes (except the property title) while the trustor is alive and capable of managing the trust assets. If the initial trustee becomes unable to manage the trust assets, the alternate or successor trustee takes over. But when the initial beneficiary (trustor) dies, the assets go to the beneficiary named in the living trust document. However, until the trustor dies, he or she can revoke or change the living trust terms.
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Advantages of a Living Trust
In addition to avoiding the delays and costs of probate, living trusts have many other benefits, including:
- Privacy — Since the contents of a living trust are not recorded, the public cannot learn who the second beneficiary is. (Probably the best known living trust advocate was the late Bing Crosby. His entire massive estate avoided probate costs and publicity.)
- Avoiding possible conservatorship — If you become unable to care for yourself, living trust assets are not subject to conservatorship. Should you become unable to manage your living trust assets, your named alternate or successor trustee takes over with no need for court action.
- Changing or revoking at anytime — Until the trustor dies, a living trust can be amended or revoked. Upon death, it becomes irrevocable, and the trustor's wishes must be carried out.
- Having no effect on real estate taxes — Placing your real estate and other major assets into a living trust has no effect on your property taxes or your income tax situation.
- Retaining complete control until death — While you are alive and managing your living trust, you treat the assets the same as you did before you created the living trust.
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