Probating Your Estate: Issues and Strategies

Do you want your estate to avoid Probate? If so, how should you avoid probate? Those are key questions that need to be answered as part of your estate plan. The answers often de-pend on where you live, how valuable your estate is, and the types of assets you own.

Probate is a state and local court process that oversees the transfer of an estate from the deceased owner to the new owners. The probate court determines the validity of the will (if there is one) and ensures that all assets and liabilities are accounted for. It then oversees the payment of debts and taxes, resolves any disputes about the estate, and finally oversees the distribution of the assets to the rightful heirs under either the will or state law. In legal terms, probate clears title to assets, ensuring that the new owners can prove they have legal title to them.

Probate can be both time-consuming and expensive.

Typical costs of probate are court fees, attorneys’ fees, accounting fees, appraisal costs, and the executor’s fees. The total cost will vary based on the court involved (i.e. where you live), the types and value of assets in your estate, and the records you leave behind. Of course, the cost of probate will skyrocket if someone decides to challenge the will or the distribution of assets. (You might be able to avoid that with careful writing of the will, as we discussed in our April 2013 and August 2011 visits. These are available on the members’ section of the web site.) If you own a business, investment real estate, collectibles, or other valuable but hard-to-price assets, one or more appraisals might be required.

You can reduce probate costs by leaving behind a clear description of your assets and liabilities so that accountants, attorneys, and the executor don’t have to spend a lot of time sorting through records to piece together the estate.

The state where you live or your real estate is located is the major determinant of probate’s cost and delay. Some states have streamlined processes that are faster and less expensive. (All states have a streamlined process for small estates.) But others still seem to run the probate process for the benefit of attorneys and the courts.

While most states have limits on attorneys’ and executors’ fees, the limits can be high, and many attorneys treat them as the standard fees instead of limits. The limits generally are 2% to 4% of the estate value but, as I said, vary by state.

For example, in California fee limits start at 4% of a $100,000 estate and decline as the estate’s value increases. The probate court charges $320 in California, plus surcharges might apply. There also is an appraisal fee for referees that is 0.1% of the assets. In New York, probate ranges from 2% to 7% of the estate’s value, and can rise even more if there are special assets or other complications. The executor’s fees range from 2.5% to 5%, depending on the value of the estate. Court costs are $215 to $1,250. Florida attorney’s fees for an estate are $1,500 to $165,000, depending on the value of the estate.

One of your first Estate Planning tasks is to obtain an estimate of what probate would cost in time and money. Remember that real estate must go through probate in the state in which it is located. So, if you own real estate in your own name in more than one state, you’ll have at least two probate processes. Other property must be probated in your state of legal residence. Then, you determine how much if any of your estate you want to avoid probate. Finally, select the tools for avoiding probate.

Even when you decide to avoid probate, a portion of your estate likely will go through probate and you have to plan for that. It’s very difficult to avoid probate for everything. You’ll need a will to cover the probate estate.  Also, the probate estate will need cash to pay various expenses. Be sure that all your liquid assets don’t avoid probate so that only nonliquid assets are in probate, leaving your probate estate short of cash.

Here’s a look at the tools for avoiding probate and how to use them.

Joint tenancy. Perhaps the most frequently-used way to avoid probate is joint tenancy, especially for real estate. There are several types of joint tenancy: joint tenants in common, joint title with right of survivorship, and tenancies in the entirety being the most common. Tenancy in the entirety is not available in all estates and can be used only by married couples. In all these, when one co-owner dies the other automatically is sole owner by operation of law. No probate or other process is required.

Joint tenancy does have disadvantages. When you name someone other than your spouse as joint tenant without receiving compensation, you have made a gift. The gift might be taxable. In addition, the joint tenant takes your tax basis in his or her half of the property. If you had retained full title and let the other person inherit the property, then the tax basis of the entire property would be increased to its current fair market value. This difference could result in capital gains taxes for the joint owner that are higher than the probate costs would be.

Before undertaking a joint tenancy, be sure to check your state’s laws on creditor protection. In some types of joint tenancy the property is protected from creditors of only one joint owner, but not in all cases. You also don’t want to create a joint tenancy with a minor or with someone who is financially irresponsible or might misuse the property. A special needs child or grandchild also shouldn’t be a joint owner, because it might reduce government benefits available to him or her.

Payable on death (POD). A variation of this is transfer on death (TOD). This title used to be rare but has become more popular in recent years, especially for financial accounts. Sometimes the POD is used for real estate. In effect, you are naming a beneficiary for the asset as you do with an IRA. Upon the account owner’s death, the account automatically belongs to the beneficiary or beneficiaries. The difference between the two forms is that in the POD the beneficiary is paid the account while in the TOD the account title is transferred to the beneficiary.

This is another strategy you don’t want to use with a minor, special needs person, or with someone who might be irresponsible with or abuse the property. For example, a beneficiary might present the account custodian with a false death certificate and seize control of the account.

It probably also is not a good idea to use this strategy if you plan to name multiple beneficiaries of the asset. They could have disputes and disagreements over what to do with the asset. That might result in costly litigation, missed opportunities, or waste of the asset.

Living trust. Also known as an inter vivos trust or revocable living trust, this is a flexible tool. It is an estate plan standard in states with expensive or long probate procedures.

In a standard living trust, a married couple creates a trust that names themselves as joint trustees and lifetime beneficiaries. Their children or other loved ones are named as remainder beneficiaries. (An alternative is for each spouse to have a separate living trust naming the other as either a co-lifetime beneficiary or initial remainder beneficiary and successor trustee.) Legal title to as many assets as possible is transferred to the trust. The property now is owned by the trust, or technically by the trustees acting as trustees and not as individuals. But you should notice little difference during your lifetime in how assets are managed and used. Assets can be moved in and out of the trust with little difficulty.

Anything owned by the trust is not included in the probate estate of an individual, including the trustees and beneficiaries.

A living trust has additional advantages. The terms of the trust help in disability planning. The trust agreement names who would take over if the initial trustee becomes disabled. In effect, the financial power of attorney is part of the trust agreement.

Privacy also is increased with a living trust, because the trust agreement is not a public document. The only document that needs to be presented to most outsiders is the trust certificate. Unlike a will, the trust agreement isn’t on the public record, unless a lawsuit is initiated.

After the initial beneficiary or beneficiaries pass away, the trust agreement determines who benefits from the property. You determine this when the trust agreement is drafted, just as you would with a will. Since the trust is revocable, you can change the terms at any time. You might provide that the property is distributed to your children or grandchildren, or you might provide that a new trustee takes over and manages the property for the beneficiaries’ benefit for a period of time. Whatever you can put in a will you can put in a living trust.

A disadvantage of the living trust is that it costs more to create than an estate plan with only a will. There also can be annual costs, especially if an outside trustee is needed. A significant issue for many people is that legal title to assets must be transferred to the trust for it to be effective. That means changing the title of real estate, cars, financial accounts, and more. Many people don’t finish this process, so they pay for living trusts but don’t receive all the benefits of that expense.

You still need a will when you have a living trust, because it won’t be possible to have all assets owned by the trust and all estate planning issues covered by the trust.

Some people have told me that after the first spouse passes away the transition to having the other spouse take over as trustee and beneficiary wasn’t smooth. Financial firms require documentation that some find burdensome. Many require copies of the trust agreement be on file with them when the account is opened or transferred to the trust. After one spouse passes away, they’ll want a death certificate and proof that the successor trustee is who he or she claims to be.

A living trust provides oversight and scrutiny by the probate court and has a public record. Some people want that with at least part of their estates.

Other vehicles. When real estate is owned in a state other than your state of residence, you can avoid probate in that state by transferring the property’s title to another legal entity, such as a trust, partnership, limited liability company, or corporation. The choice of vehicle will depend on the state, the type of real estate, and perhaps your tax situation. After the transfer, you no longer own real estate in another state. Instead, you are beneficiary of a trust, which avoids probate. Or you own shares in a partner-ship, LLC, or corporation. These are considered personal property and go through probate in your state of residence or avoid probate through one of the strategies already discussed.

Assets that avoid probate. Some types of assets avoid probate by law and are transferred automatically to named beneficiaries. These assets include qualified retirement accounts (401(k)s, IRAs, etc.), annuities, and life insurance. It is important that you keep the beneficiary designations on these assets up to date. Nothing in your will or other documents influences how they are distributed. The beneficiary form on file with the asset sponsor or custodian determines who receives the assets.

You also should name contingent beneficiaries of these assets, for your living trust, and in your will. A beneficiary might pass away or be unable to inherit an asset. You probably want to determine who is next in line instead of having state law do that.

There are advantages and disadvantages to avoiding probate, and there are different ways to avoid probate. Don’t let anyone sell you a cookie-cutter solution. Discuss how probate would affect your estate and what it would cost in the state where you live. Then, develop a strategy to achieve the results you want.

RW June 2015.