The word “probate” may be unfamiliar to you, but it is a very important concept in estate planning. Because almost everyone leaves an estate of some sort when they die, you should understand what probate is and learn to avoid it.
What Is Probate?
Merriam-Webster defines probate as "the action or process of proving before a competent judicial authority that a document offered for official recognition and registration as the last will and testament of a deceased person is genuine."
In estate planning, probate usually refers to the entire legal process of administrating and settling a decedent’s estate, including the official approving of a will, if there is one, with court supervision.
Here is my simple version of the normal probate process, which may vary from state to state and case by case.
File a petition for probate. If there is a will, the named executuor is normally selected as the administrator, unless he or she refuses or cannot perform the duty. If the decedent dies without leaving a will, the court will appoint an administrator.
Notify heirs and beneficiaries and publish a notice in local newspapers.
Prove the validity of the will.
File an inventory of the estate assets and liabilities. Appraise certain assets if necessary. (For related reading, see: Your Estate: The Best Assets to Leave to Family.)
Notify creditors and file federal and state estate tax returns.
Pay debts and taxes.
Get permission from the court and distribute property to the correct party.
Reasons to Avoid Probate if Possible
Time: The length of time needed for an estate to go through probate varies by state and case. It usually takes six months to two years for a normal probate in California. Why does it matter? It matters to your heirs because any assets being subjected to probate cannot be distributed to them until the process is complete.
Cost: The costs of probate usually include, but are not limited to, court fees, executor/administrator fees, attorney fees, accounting fees and appraisal fees. Some of the fees are dictated by the state law and can become very expensive.
Based on California Probate Code section 10810, the statutory fees attorneys can charge for probate are 4% on the first $100,000 of the estate, 3% on the next $100,000, 2% on the next $800,000, 1% on the next $9,000,000, 0.5% on the next $15,000,000 and a reasonable amount to be determined by the court for all amounts above $25,000,000. The code also allows additional compensation if approved by the court. Two things are worth mentioning here. First, liabilities are not considered in calculating attorney fees. For example, if a $1,000,000 house still carries a $400,000 mortgage, the fees will be calculated based on the value of the house$(1,000,000) rather than the equity the decedent left ($600,000). Second, even though the executor/ administrator usually will decide to waive their fees, they are entitled to the same amount as the attorneys.
Privacy: Besides the public notice requirement mentioned in the probate process above, all probate files also become part of the public records once the probate is complete. As a result, anyone can look it up and find out who passed away, what was included in the estate and even who inherited what.
How to Avoid Probate
Again, different states offer different ways to avoid probate. These are some general ways, and you can find out more about your specific state here.
Trusts: Assets owned by a trust are not subject to probate. The trustee or successor trustee will be able to transfer the decedent’s assets to the beneficiaries named in the trust document. The trust created specifically for avoiding probate is called the living trust.
Even though you might be able to create a living trust by yourself through some websites with for little to no cost, consulting an estate attorney to make sure the document can achieve what you would like to do is highly recommended. Also, remember to transfer your assets into the trust after you create it. (For related reading, see: Will vs. Trust—The Difference Between the Two.)
Joint ownership with the right of survivorship: Owning an asset with someone else with the right of survivorship is another way of avoiding probate, and it may be easier and cheaper. Right of survivorship means the decedent’s shares of the property will be passed to the surviving owner/owners upon death automatically. Some paperwork is needed, but no probate is required to transfer the property. Some of the forms include: joint tenancy/joint tenancy with right of survivorship, tenancy by the entirety, and community property with right of survivorship.
Not all states have all three forms of ownership mentioned above. Each one has its own advantages and disadvantages. To keep it simple, I would recommend using the community property with right of survivorship if you are living in one of the nine community property states, including California. There are other benefits from the estate planning perspective, but they are beyond the scope of this post.
Contracts with beneficiary designations: Most of the assets with beneficiaries designated by a contract do not need to go through probate unless the beneficiary itself is the estate. The most common ones are life insurance policies, annuity contracts, retirement accounts, 529 plans and health savings accounts (HSA). One side note: your spouse is automatically the beneficiary of your retirement accounts under the law, so you will need his or her consent in writing if you want to name someone else as the beneficiary of your retirement accounts.
You may also designate beneficiaries for your bank accounts, brokerage accounts, securities, vehicles and real estate through a type of agreement called transfer-on-death (TOD) or payable-on-death (POD). The assets under these agreements will avoid probate. Fill out a simple form to add the TOD/POD agreement and it will be reflected in the title of your assets. Not all states currently allow TOD registration for vehicles and/or TOD deeds for real estate.
Gifts: This is pretty straightforward. The assets you no longer own do not have to go through probate. It may make sense for some people to give away some properties to kids, charities or others while they are still alive. However, I would highly recommend you to consult a tax expert, an estate attorney or a financial planner to make sure your gifting strategy will not cause any unintended consequences.
Probate Shortcuts: Almost every state offers some sort of simplified probate procedures or even probate exemptions for certain groups.
Estate planning is a very important part of your financial plan, and with the proper planning, you can help your heirs avoid the costs and delays of probate.
(For more from this author, see: How to Reduce U.S. Taxes on Foreign Income.)