In our last article on estate planning, we explained why estate planning is essential and discussed the basics of wills and powers of attorney. You probably know you want to avoid probate, but you might not know precisely why..
Probate
This process proves a decedent’s in court as legal and determines whether the decedent’s intentions have been carried out. Wills can be contested during this process since the probate court is public. The estate of someone who dies intestate (without a will) goes through probate to determine how to handle the assets.
It can take months to years to settle probate, depending on the estate’s size and other issues.
Once someone dies, all their assets (that aren’t jointly owned) are considered part of their estate. Financial assets that have named beneficiaries, such as retirement accounts and life insurance policies, and accounts with a transfer-on-death/payable-on-death designation are exempted from probate, as are trusts.
In California, if set up correctly, houses can be transferred on death, as can vehicles. Bear in mind that the law on transferring houses sunsets 1/1/21.
The will is legally verified by the judge, showing that the decedent signed the will in the presence of two witnesses. Then an executor or court-appointed administrator sets out to execute the terms of the will.
Executors get the death certificates to show the decedent is in fact, deceased. They find all the assets and have them appraised and notify creditors. (Note the beneficiaries don’t owe any money as long as they weren’t joint signers on any debt.)
The executor also needs to pay taxes, including income and estate tax, from the estate and make any payments like homeowners’ insurance and utility bills. They notify the beneficiaries named in the will.
After paying all the liabilities and taxes, the remainder or residue is distributed to the beneficiaries. The executor or administrator gets compensated for performing all these duties.
If you have a spouse, on first death, there’s no probate. Your spouse can claim the assets. But the will of the second to die must be probated. Almost all states have a “small estate” exemption, and if the total estate is less than the limit, the will doesn’t need to be probated. In California, the limit is $166,250.
Why you want to avoid probate
There are several reasons why you might want to avoid probate, or at least have as much of your assets bypass the “probate estate” as possible. Trusts are commonly used for any property that doesn’t have a beneficiary or payable-on-death designation, especially in California.
Public
Court records, except in some instances, are available to the public. Anything that’s in the will can be discovered by anyone willing to do the research. The will can be contested in court. If you’re a private person or there are some skeletons in the closet that your family wouldn’t want to be made public, you want to avoid probate as much as you can.
Assets that don’t pass through probate, such as trust and retirement accounts, don’t have these issues.
Length of time
The entire process can easily take years. Some courts are severely backlogged, or there may be provisions in the will that could be difficult to execute. For example, the testator (decedent) might have left small bequests to people whose addresses the executor doesn’t have. However, they must still notify the beneficiaries and distribute the assets.
In California probate takes a minimum of 7-8 months (when there’s no pandemic on) and can go for up to two years.
Cost
As noted earlier, this varies by state. Some states have a less lengthy probate process that costs less than others. However, if you live in California, the executor’s fee starts at $4,000 for a $100,000 estate. It reaches $23,000 for $1mm estate up to $163,000 for a $20mm estate.
It’s important to note that for these purposes, the debts don’t reduce the value of the property. For example, if the house is worth $1,500,000 and it has a $1,250,000 mortgage, it’s still valued at $1.5 million.
Also, filing fees range from $60 to several hundred dollars for probate petitions and fees for copies of the death certificate. Notice of the probate hearing must be published in a newspaper, and that can cost $200.
However, there is one instance where it might be preferable to allow the assets to go through probate. That’s if there are a lot of lawsuits or liabilities against the property.
After the creditor has been notified, there’s a small window – typically six months – where creditors must notify the estate that they’ll file a claim against it. If they don’t make the notification within the window, their claim expires.
Trusts
For probate to be reduced to the minimum possible, people often use trusts to hold their property. Upon death, the assets go by the language of the trust and sit outside the probate estate.
However, it’s not enough to have a trust; the assets must be placed into it. For example, if you want to put your house in a trust (almost always a good idea in California), then the house’s title must name the trust as owner. It’s not enough to write it into the trust.
Most people use a “living” trust to hold their assets. You can put real estate, bank accounts, vehicles, artwork, and other assets into a living trust. It doesn’t make sense to put retirement accounts or transfer-on-death assets into a trust, because they already operate outside probate.
You will be the trustee of the living trust, naming a successor trustee who takes over when you’re gone. Your successor trustee can also act on your behalf if you become incapacitated. They distribute the property as spelled out in the trust once you’re gone, without involving the courts.
These living trusts are usually also revocable so that you can make changes to them during your lifetime. (An irrevocable trust is set in stone.)
Trusts require you to deal with some paperwork while you’re setting them up, and the attorney’s fees to handle it. Yes, there are DIY trust documents out there, but you want to make sure that your trust is air-tight, so it’s worth having a professional do the work for you.
There’s not much ongoing record keeping required, except when you transfer property in or out of the trust. You do need to keep written records of those transfers.
As always, there’s no free lunch. You will pay to have the trust created and assets re-titled. It’s sometimes more challenging to refinance a property that’s held in a trust. If you can’t get over the hurdle by finding another lender who understands trust property, you could always transfer it back to yourself as owner for the refinance. Then transfer it back in afterward.
Creditors can sue the trust because there’s no creditor cutoff window like there is in probate.
Do you want to talk to us about your estate plan or need a recommendation for a good attorney? Give us a call at 619.255.9554 or send us an email and we’ll be glad to set up an appointment.
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