Probate Is Not Always As Bad As Some Make It Sound
Written by Craig Wisnom
“Probate” is one of the most loaded and misunderstood terms in estate planning. It is used as a boogeyman to scare people into expensive estate planning devices, which may or may not be appropriate for them. It is used as invective to sum up the horrors that a family packed with enmity can experience when someone dies. With such pejorative associations, it’s helpful to step back and learn what it really is – and isn’t.
What is “Probate”?
Probate, technically, is filing the Will with the court, so that the court can make a binding, legal determination that the document submitted is the final Will of the decedent. Usually this process is tied to the court’s appointment of a Personal Representative (the term used in Arizona for an “executor”). The appointment gives an individual or corporation the legal ability to act for the person who died. For example, if Mr. Jones dies owning his home, just in his name, then the legal appointment of the Personal Representative, as part of the probate process, is necessary so the person appointed can legally transfer or sell Mr. Jones’s home.
How Can You Avoid Probate?
There are various ways probate can be avoided. If an individual has assets under certain limits ($75,000 is the general threshold for personal property, and $100,000 is the limit for real estate) in his or her own name at death, the court appointment of a Personal Representative and probate will not be necessary.
There are also planning techniques that pass assets outside of probate. Assets naming individuals directly through beneficiary designations will pass directly and not be involved in the court administration. For instance, IRA’s or life insurance policies with beneficiaries won’t require probate, nor will bank or brokerage accounts with specifically named beneficiaries at death, frequently referred to by designations like “POD” or “TOD.” Arizona even allows a Beneficiary Deed to be recorded on real estate, which serves the same purpose. Assets held in joint tenancy or community property with right of survivorship automatically pass to the surviving owner.
Finally, assets properly funded into a Revocable Trust prior to death will also avoid the probate process. This technique allows the most comprehensive planning for a wide range of beneficiaries, handling distributions for minors, continuing trusts for beneficiaries, and a variety of complexities that aren’t always practical for beneficiary designations.
To illustrate, if a client’s estate is to be distributed to four different charities, and seven different individuals in varying shares, direct beneficiary designations may not be very practical, and may cause more problems and complexity than an actual probate proceeding.
What is the Real Cost of Probate?
The general difference between having to file a probate proceeding for appointment of a Personal Representative, at least in Arizona, is money, namely, the court costs and attorney fees to get court authority for administration. Under current fees and costs, we estimate the total additional costs of filing a probate (compared to avoiding it with a fully funded Revocable Trust) is about $4,000, and those fees are generally unrelated to the value of the estate.
It can make sense to avoid this step and save this money, but compared to most of the other factors and concerns in estate planning, it may be toward the bottom of your priorities. In Arizona, with an original Will, a probate can be opened fairly quickly, appointment made within a few weeks. While it will take at least four months to completely finalize, assets can be sold in the meantime, and the waiting period protects the beneficiaries from future creditors and will contests once it is over. Actual court appearances can usually be avoided in straight-forward situations.
The More States . . . The More Costs
It should be noted that other states may have probate proceedings that are far more expensive, time consuming, and cumbersome than Arizona. Some have “fee schedules” under which the state takes a percentage of the total asset value, while others require in-person court appearances and lengthy delays prior to appointment. A probate in other jurisdictions may be $20,000, or even $50,000. If a client dies as a resident of Arizona, but has real estate located in other states that is not held in a Trust or in another probate-avoiding manner, some form of a probate must be done in each state. This can quickly become a far bigger issue than only having to file an Arizona probate.
Therefore, clients with real estate in multiple states may have greater incentive to create a Revocable Trust and transfer out of state real estate to the trust during lifetime. This usually increases the fees involved in funding the trust, because attorneys in the other states should be hired to prepare a binding deed in that state. However, while it adds a bit to the up front cost, it saves far more money and time after a person dies.
What Probate Isn’t
Probably the biggest myth tied to the horrors of probate involve all the things that can go wrong in an estate administration. There are no shortage of factors that can turn a postmortem financial administration into a maelstrom of time, expenses, emotional distress, and other problems. However, they’re generally not tied to fact that a “probate” had to be filed with the court.
The biggest problems that arise in estates involve arguments and bad blood between beneficiaries and family members. Sibling rivalries, evil stepmothers (or stepchildren), prodigal administrators, contests of documents, accusations of exploitation, tax problems, and arguments with creditors are all some of the factors that can derail an administration into sisyphean chaos and unpleasantness. But all of these problems and delays can arise whether the administration started as a probate proceeding, or is all being done without court involvement through a Revocable Trust administration.
Less dramatic, most standard administrative tasks are the same regardless of whether there is a probate opened with the court. Selling homes, disposing of tangible personal property, paying bills, etc., often take a great deal of time, especially for individuals are also doing their own jobs and handling their own finances. Even in less internecine situations, it can take months and months to get the basic tasks done, and it makes no difference whether a court filing is required.
No Simple Answers
As with most legal issues, heck, most issues in general, the realities of “probate” are more complex than the blurbs people throw out there. It’s natural for people to simplify, for good or ill, and one must look at the incentive behind some of these myths. Some companies, many not even including lawyers, make quite a bit of money selling trusts to individuals. These can literally be door-to-door salesman, charging as much for a standard form trust as a lawyer does, and their selling point can be fear. “Why, if you don’t have a Revocable Trust, you have to go through PROBATE!” They may overstate the fees, time involved, and other factors, and by the time they’re done, people may imagine their surviving loved ones suffering greatly if their estate must pass through this dreaded gauntlet.
When determining what plan you want to create, get a realistic understanding of the costs and benefits of various techniques available, so you can use your own judgment and not be controlled by fear.
Coming soon: Avoiding Probate With a Revocable Trust