What is Probate? Should You Avoid Probate Court?
Many wonder if they should avoid probate, and if so how
PROBATE. The mere word sends shudders down many people’s spines. Your friends and neighbors have probably told you horror stories about experiences they have had with a loved one’s probate. It seems today that everyone is telling you to avoid probate. But should you avoid probate? Are there any advantages to the process? Before answering those questions, let me explain what probate is and is not. The decision to avoid probate (or not) is one that involves your assets. As such, the decision should be made by you … not your friends, neighbors, or colleagues.
What is probate?
Probate is simply the legal process whereby the estate of a deceased individual is administered. During this process, the validity of the deceased’s will is determined, assets are gathered and inventoried by the Probate Court, debts and taxes are paid, and finally, assets are distributed according to the will to their rightful heirs.
What you need to know about probate:
What’s probate-able: Only assets in your individual name alone are probated. Therefore, if a bank account is titled in the name of “Mark White,” when Mark dies, that bank account will have to pass through probate in order to be distributed to the rightful beneficiary.
Who’s involved in the probate process: The probate process is monitored by the probate court judge, and the person named “executor” of your will handles your probate estate. This includes preparing and filing the inventory of the assets held in your name alone at the time of your death. Additionally, the executor must pay any final expenses and file an “estate tax return” for the estate. Please note that whether or not probate is avoided, estate taxes generally cannot be avoided. Finally, the executor handles the distribution of your assets to the rightful beneficiaries.
What are the costs associated with probate: There are costs and other issues involved in the probate process which must be evaluated. The main cost in the probate process is attorney’s fees. Attorney’s fees can range from 2 percent to 10 percent of the total value of the assets for probate purposes. Additionally, court costs can be expensive, often reaching as high as $400 to $500 for the probate. Finally, your executor is entitled to a percentage fee ranging from 2 percent to 4 percent of the assets.
How long does the probate process take: For simple cases, the probate process can take six months to a year. But in more complicated situations or if litigation is involved, probate can take as long as three years.
Who has access to probate records: Because the probate process involves the court, all court filings involved in the probate process become public record. That means, your neighbors or colleagues can go down to probate court, pull your file, and see what assets you owned, how much your bills were, and who is receiving your estate. Many people do not like the public record aspect of the probate process. On the other hand, if there are family issues or complicated assets, the court oversight in probate might be desirable.
If you determine that you want to avoid probate, there are various ways to achieve that goal:
Name beneficiaries on your assets: Assets on which you name a beneficiary do not pass through probate. For example, retirement plans, IRAs, annuities and, life insurance which are owned by you but which have a named beneficiary, do not go through probate. These assets pass to the surviving beneficiary by virtue of the contract which you enter into with the financial institution holding the asset. For assets such as these, it is important to be sure that a beneficiary is always named. Additionally, it is always important to name a contingent or successor beneficiary on these types of assets.
Own assets “jointly with the right of survivorship:” For real estate, bank accounts, stocks and bonds, and other types of liquid assets, many people swear by owning these assets “jointly with right of survivorship.” Ownership in this manner does avoid probate; however, it can have some unexpected adverse consequences for you. For example, if you have a bank account held jointly with rights of survivorship with your son, you both are owners on the account and have complete access to all of the money. Your son could take your money and close out the account. Additionally, if he has creditors pursuing his assets, they may also pursue your bank account because he is a joint owner on it.
Title your assets with a “payable on death” or “transfer on death” designation: These types of problems can be avoided by avoiding joint ownership. Instead, you should own these assets individually, but name a beneficiary to take those assets upon your death. For bank accounts, this means titling a bank account in your individual name with a Payable on Death (“POD”) designation to a named beneficiary. For real estate, cars, stocks and other securities, it means titling the assets in your name individually with a Transfer on Death (“TOD”) designation to a named beneficiary. This prevents your beneficiary from having any ownership rights in your assets until your death, at which point they inherit the asset outright. Keep in mind, however, that if your named beneficiary dies before you do, and you fail to name another beneficiary, your assets will have to go through probate because it will be in your name alone with no living beneficiary.
Draw up a trust agreement: There are drawbacks to the asset titling described above. In many circumstances, probate avoidance using a trust agreement can be a better way to hold your assets as it enables you to achieve significant estate tax savings in the process. A trust agreement is simply a legal document which has three parties to it: (1) the settlor (that’s you) who sets up the trust; (2) the trustee who administers the trust according to its terms; and (3) the beneficiary of the trust for whom the trust is held. The most important part of establishing a trust is titling your assets into the trust, which is necessary in order to avoid probate. A trust can be a great probate avoidance, property management, and estate tax savings tool. But just as with probate process, there are costs associated with the establishment of the trust agreement, including attorney’s fees.
Ultimately, the choice is yours, with input from your estate planning team: your attorney, accountant, tax preparer, and family.
This article is part of the eFuneral Resource Center and was written by Laurie G. Steiner, Esq., a Certified Elder Law Attorney and Accredited Attorney for the Veterans Administration. Ms. Steiner practices with the law firm of Budish, Solomon, Steiner & Peck, Ltd. in Beachwood, Ohio. To begin planning a funeral and comparing funeral home prices, ratings, and reviews, visit eFuneral.com.