Probate

You might be wondering, “What is probate, and why is everyone trying so hard to avoid it?” The short answer is that probate is a court-supervised procedure for collecting a deceased person’s assets, paying debts and taxes, and distributing the property to the person’s beneficiaries (either according to the instructions the person set forth in his or her will or as determined by state law if the person died without a will). The probate process usually takes 12 to 18 months to complete, although it may take longer in complicated cases or instances where real property needs to be sold.

Probate is not a tax. When people refer to the high costs of probate, they are usually referring to the fees paid to attorneys and the personal representative. In California, these fees are calculated as a percentage of the gross (not net) value of the assets in the estate. These rates are set out in Probate Code §§10800 and 10810 (4 percent on the first $100,000, 3 percent on the next $100,000, 2 percent on the next $800,000, and so on). For example, let’s say that an individual who is not married dies owning one asset, a house worth $200,000 with a mortgage of $120,000. The Decedent has a will leaving the house to his two children, Jack and Jill.  Jack is named as executor. The probate fees for this case would be as follows: $7,000 to Jack’s attorney (plus any “extraordinary fees,” which are billed hourly but subject to court approval) and $7,000 to Jack (if Jack decides to take a fee). These fees are calculated without regard to the $120,000 mortgage, because the fees are based on the gross (not net) value of the estate. In addition, there are petition fees (currently at $435 for the petition to open probate and $435 to close probate), publication fees and appraisal fees.

The other objection some individuals have to probate is that it is a public forum.  Court documents are available for inspection by the public as are the hearings.  On the plus side, you are not paying for probate – your estate is.  The real issue is whether or not your want your estate diminished by the associated costs of probate.  Remember:all assets held in your individual name – whether you have a will or don’t have one – are subject to the provisions of the Probate Code.

Although living trusts have been around for centuries, only recently have they achieved a high degree of popularity among the general public. The reason for this surge in popularity is living trusts avoid probate with respect to those assets that are transferred into the living trust before death. In other words, living trusts avoid the court procedure otherwise required to transfer assets to a person’s beneficiaries at death. Even though no court procedure is involved, that does not mean there is nothing to do. The living trust makes administration easier, but it does not do away with administration altogether. For example, assets still have to be collected and managed pending distribution to the beneficiaries, appraisals of assets have to be made, debts and taxes have to be paid, tax returns may be required (living trusts do not avoid estate taxes, as some people have been led to believe), and legal documents must be prepared in connection with the distribution of the trust property to the beneficiaries. These activities are very similar to a probate. The major difference is that, with a living trust, everything is handled privately, without court supervision, which makes for (in most cases) a faster, less expensive administration process.

There is also a popular misconception that the existence of a living trust avoids all possibility of court involvement. This is true (in part) only if all of the Trustmaker’s assets were properly funded into the living trust. By California law should assets held outside the trust exceed $150,000 in gross value, a probate will be required for those assets in order for your successor Trustee to collect those assets and add them to the trust for distribution purposes.  This is why you execute a will when you have a living trust.  The beneficiary of your will is the trustee of your trust just in case some assets were not properly titled at your date of death.

It may come as a surprise to you, but there are costs associated with post death administration of a living trust.  Expenses include legal fees, accounting fees, asset transfer fees, and a Trustee fees for you successor should he or she decide to accept it. The other beneficiaries of the Trust, if any, will also need to understand that the process may take longer than they anticipated. However, in comparison to probate, these delays and costs are substantially reduced, often resulting in time savings of months and costs savings of 50 to 90 percent.

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