What is Probate?
Probate is the legal court process necessary to recognize a person’s death and administer their estate.
If steps are not taken during a person’s lifetime to avoid probate, it is a necessary one to wrap up a deceased person’s affairs.
The Steps of a Probate
In general, the steps of a probate consist of the following:
Filing a petition with the local court where the decedent resided at his or her death
Posting notices of death in the newspaper
Validating the will (if there was one)
Inventorying and appraising assets
Identifying and notifying beneficiaries
And then finally....
What’s So Bad About Probate?
There are several reasons why many people want to avoid putting their loved ones through the probate
process. The reasons boil down to the time it takes to complete a probate in California, the public nature
of the process, and the cost. Each of these factors is described further below.
Probate Takes a Long Time
Probate is quite a process indeed. As you can see from the list of steps above, it involves notifying all beneficiaries under a will, all “default” heirs under state law (even if there is a will, these potential default heirs still get notified and can come forward), notifying known creditors, publishing notices of death in a local newspaper of general circulation, inventorying and appraising assets, and so on.
Notices must typically be given to all required parties at each step, formal hearings are involved, and there mandatory waiting periods along the way. As a result, even uncomplicated probates can easily take a year or two.
Probate Puts Your Affairs in the Public Record
Probate is also a public process. That means everything becomes a matter of public record. The assets, who is receiving them, who was owed money, everything can be viewed by the public.
Although you may think no one cares about your affairs, think again. After all, this is the information age we live in. Consider this: If you’ve ever bought a house, do you recall all the junk mail that followed. How do you think so many people knew you had just purchased a house? Because that information is part of the public record.
Consider the reality here, there are absolutely people who look for information about assets that go through probate and who will be inheriting them. These may be creditors or people putting together sales lists at best, and ill-intentioned predators at worst. Does that make you uncomfortable? If so, you’re not alone.
Probate is Expensive
Finally, there’s the cost of probate. To give you a rough idea of cost, it typically consumes up to 5% of the gross value of a person’s assets.
Read that again...probate cost is largely based on the gross value of an asset (not its net value after deducting loan balances). The fact that a house has a mortgage, for instance, does not reduce its cost to go through probate.
In the Bay Area, the cost to probate a median priced house can easily exceed $35,000. Higher priced homes or commercial properties can easily cost over $50,000 each. Then, if you factor in other assets such as bank accounts, business interests, life insurance payable to a person’s estate, or the myriad of other assets that can be involved, you see how expensive it can get.
Keep in mind, these costs are real and must be paid before assets can be distributed free and clear to your loved ones. When there is insufficient cash available to absorb these costs, it creates a real problem.
Ways to Avoid Probate
Fortunately, certain assets do not have to pass through probate process. These non-probate assets include the following:
• Assets held in a person’s living trust
• Life Insurance – if a living beneficiary is named
• Retirement accounts such an IRA, 401k or 403b - if a living beneficiary is named
• Annuities - if a living beneficiary is named
• Money in Transfer on Death (TOD) or Payable on Death (POD) bank accounts - if a living beneficiary is named
• Property owned in joint tenancy with a right of survivorship – if the other joint tenant is still living
• Property owned as Community Property with right of survivorship – if the other spouse is still living
As you can see, the living trust is listed as the primary probate avoidance technique, and for good reason. Unlike the other assets listed above, living trust assets do not depend on the status of the beneficiary on file with the financial institution or whether a surviving spouse or joint tenant is still living. Trusts also provide considerably more flexibility that these other methods, including asset protection (if the trust is drafted accordingly).
Finally, living trusts allow assets to be integrated into one vehicle (instead of being spread all around). This greatly simplifies things and makes accomplishing future changes much easier.