Imagine this: your family, already dealing with their grief, now has to wait months or even years to receive their inheritance because your estate got tied up in probate. Probate can be a real hassle - costly, time-consuming, and public. But don’t worry; avoiding it isn’t as hard as it might seem. With a bit of planning, you can save your loved ones from stress and expense.
In this post, I’ll break down what probate is, why you might want to avoid it, and how you can take steps now to protect your estate and family.
What is Probate?
Probate is the court process that manages the distribution of a deceased person’s estate When someone passes away, the court steps in to validate their will (if they have one), appoint a personal representative (called executor or administrator), establish rightful heirs, and oversee the entire process. This includes paying creditor, paying taxes, and distributing what's left to the heirs. Basically, probate ensures everything’s done right and by the law.
Everything you own falls into one of two categories: probate and nonprobate assets.
Nonprobate Assets
Nonprobate assets are the easy ones. They go straight to your heirs without court delays, thanks to things like named beneficiaries or joint ownership. Think life insurance policies and retirement accounts with named beneficiaries, real estate held as joint tenants with rights of survivorship or tenants by entirety, personal property held in a revocable living trust, and financial accounts that are "payable on death" (POD) or "transferable on death" (TOD).
For example, if you have a life insurance policy where you've named your child as the beneficiary, upon your death, the insurance company pays the proceeds directly to your child – no court needed.
Probate Assets
Probate assets are those solely in your name, without any beneficiary designation. These assets must go through probate to be distributed according to your will. If there isn't a valid will, the state decides who gets what based on its own rules, which might not match your wishes.
For instance, if you own a house solely in your name and pass away without a will, the court will decide who inherits it according to state law.
Probate Process
Probate starts when someone files a petition in court. This is often done by a personal representative. Once the court gets involved, it requires that all heirs and potential creditors be notified. This is to make sure everyone who has a right to claim part of the estate or is owed money by the deceased has a chance to come forward.
Next, the court needs to validate the will. If the will is challenged or there are questions about its authenticity, this can lead to delays and legal battles. Once the will is validated, the personal representative inventories the assets, pays debts and taxes, and finally distributes the remaining assets. This can take from six months to over a year, depending on the estate’s complexity.
For instance, Casey passes away, leaving behind a will that names her son, Alex, as the executor. Casey’s estate includes a house, a car, and several bank accounts. Before Alex can distribute any assets to himself or his siblings, he’ll need to get court approval, inventory assets, notify creditors, pay off debts, and then get court approval to distribute the remaining assets. This could drag on for over a year, especially if there are disputes.
Ancillary Probate: When You Own Property in Multiple States
If you own property in multiple states, you might face ancillary probate. This is a secondary legal process needed for property outside your home state. For example, if you live in Illinois but own a vacation home in Florida, your estate will go through probate in both states.
Ancillary probate adds time, expense, and complexity to the probate process. Your heirs will need to hire an attorney in the state where the additional property is located, pay court fees, and deal with legal proceedings in both states.
Probate Cons
Open to Public
While probate serves a legal purpose, it has several significant downsides that make many people want to avoid it. First and foremost, probate is a public process. This means anyone can access the details of your estate, including what you owned, what debts you had, and how your assets are being distributed. For those who value their privacy or the privacy of their heirs, this lack of confidentiality is a major concern.
Family Conflicts
Another issue with probate is that it can lead to family conflicts. When everything is on public record, it can sometimes stir up disputes among heirs, especially if someone feels they’ve been treated unfairly or if there’s a history of family tension. These disputes can result in lengthy and costly legal battles, making the probate process even more drawn out.
High Costs
Then there’s the cost - probate isn't cheap. Between court fees, attorney fees, and executor fees, a significant portion of the estate’s value can get eaten up.
On average, probate costs can range from 3% to 10% of the total estate value.
For example, in Illinois, the fee that an executor can charge is based on “reasonable compensation,” which can vary. For an estate valued at $1 million the fee might typically range from $10,000 to $50,000, depending on the complexity of the estate and the amount of work involved. While in California, the statutory fee for a $1 million estate would be $23,000
Court-related expenses that can include court filing fees, publication fees, attorney fees, and appraisal fees, can range from about $3,000 to $10,000-$12,000
In many instances, the court will require the executor to post a bond – which is a financial guarantee to the heirs and creditors that the executor will act properly in handling estate’s assets. Although your will and heirs may waive this requirement, the court may still order that a bond be posted. In Illinois, the bond is typically set at 150% of the value of the personal estate and the annual premium for a $1M surety bond can range from 1% to 3% of the bond amount.
As you can see, costs can add up quickly and reduce what’s ultimately passed on to your heirs.
Time-Consuming
On top of the costs, there’s also the issue of time. Probate is notorious for delays. It’s not uncommon for it to take a year or more to settle an estate, which can be a long time for heirs who might need access to their inheritance sooner rather than later. For example, if your estate is mainly in real estate or business interests, your heirs may face cash flow problems while waiting for probate to conclude.
Unintended Outcomes
Probate can occasionally lead to unintended outcomes. It's vital that your will is clear and includes all key provisions. If it's unclear or outdated, the court may need to interpret it, which could result in decisions that don’t align with the deceased’s true wishes. This is why many opt to plan in advance and avoid probate when feasible.
Will Contests
Lastly, wills can be contested and potentially overturned. When a will is challenged, the estate is put on hold, preventing assets from being distributed to loved ones. Since the will is already in probate court, it’s relatively easy for a dissatisfied heir to initiate a contest.
Are There Any Positives to Probate?
While many people prefer to avoid probate, there are some benefits. One benefit is the court supervision itself. For estates where there may be disputes or concerns about fair distribution, probate provides a structured process overseen by the court, which can help ensure that the personal representative is acting appropriately and that all debts and taxes are paid before the estate is distributed. This can offer some peace of mind to the heirs that everything is being handled properly.
Probate can also be beneficial when there are complex assets or unclear titles that need to be legally clarified or transferred. The probate process helps clear titles, resolve claims, and ensures a legal transfer of assets, providing a layer of protection against future legal disputes. For some families, this oversight might be worth the costs and delays.
How to Avoid Probate
Despite the few positives, we recommend our clients avoid probate if possible. There are several strategies you can use to make that happen.
Create a Revocable Living Trust
One of the most effective ways is to create a revocable living trust. A trust allows you to place your assets in it while still maintaining control during your lifetime. After your death, those assets can be transferred directly to your beneficiaries without going through probate. For example, if you place your home and bank accounts into a revocable living trust, they can pass directly to your children upon your death without any court involvement. It’s a great way to make sure your wishes are carried out promptly and privately.
Joint Tenancy with Rights of Survivorship
Another approach is to ensure your assets are jointly owned with rights of survivorship. If you own property or financial accounts with someone else, like your spouse or a child, and you’ve designated them as having rights of survivorship, those assets automatically pass to them upon your death. This is a simple way to keep those assets out of probate. For example, a house owned as "joint tenants with rights of survivorship" will go directly to the surviving owner.
However, be cautious when adding an heir as a joint tenant, as it can lead to significant tax implications.
In most cases, adding an heir as a joint tenant is considered a gift. Additionally, there may be negative federal estate tax consequences if the heir passes away before you do. The surviving joint tenant would only receive a partial step-up in the tax basis for the portion they inherit, which could lead to higher taxes if the property is later sold.
POD & TOD
For things like bank accounts or investment accounts, you can set them up as "payable on death" or "transfer on death". This means that the assets in those accounts will go directly to the named beneficiaries when you pass away, again bypassing probate. For instance, a POD account with your daughter named as the beneficiary will ensure she receives the funds immediately after your death.
Life Estate
Real estate can also be structured to avoid probate. You might consider creating a life estate, where you retain the right to live in and use the property during your lifetime, but upon your death, it passes automatically to someone you’ve named as the remainderman. This avoids the need for probate entirely. For example, if you establish a life estate for your home with your son as the remainderman, he will automatically receive the property upon your death without probate.
Designate Beneficiaries
Retirement accounts like IRAs and 401(k)s, along with life insurance policies, should always have designated beneficiaries. When these are properly set up, they too pass directly to the named beneficiaries without going through probate. Make sure these designations are updated regularly, especially after major life changes like a divorce or the birth of a child.
Lifetime Gifts
Additionally, consider gifting assets while you’re still alive. Not only does this reduce the size of your estate (which can also help with estate taxes), but it also ensures your assets go exactly where you want them to, without any court involvement.
Beneficiary Deeds
A more advanced strategy is the use of "beneficiary deeds" or "transfer-on-death deeds" for real estate. This allows you to designate a beneficiary to receive your property - such as a home, retail space, or farmland - upon your death without going through probate. These types of deeds are not available in every state, so you’ll want to check local laws.
For instance, Illinois offers Transfer on Death Instrument (TODI), which function similarly to beneficiary deeds. A TODI allow property owners to name one or more beneficiaries to inherit the property after the owner's death, effectively bypassing probate.
Probate Exemptions
Finally, smaller estates may qualify for simplified probate processes or even probate exemptions. If your estate falls below a certain threshold, many states offer more streamlined options, which can save both time and money.
For example, in Illinois, if the estate's total assets are valued at $100,000 or less and do not include real estate, the estate can bypass the formal probate process.
Knowing your state's rules can be beneficial here.
Final Thoughts
Avoiding probate might not always be possible, but with the right planning, you can certainly minimize its impact on your estate. Whether it’s setting up a living trust, designating beneficiaries, or using joint ownership, there are several strategies available to help you sidestep this often cumbersome process. Probate can be costly, time-consuming, and public, but careful planning today can help protect your assets and your loved ones tomorrow.
Keep in mind that every situation is different, so consulting with an estate planning attorney and a financial advisor is essential to create a well-rounded estate plan that fits your individual needs. Additionally, reviewing your estate plan annually is crucial to ensure it continues to reflect your wishes and adapts to any changes in laws or personal circumstances.
If you’re looking for tax-efficient strategies to transfer your wealth to heirs and charities, while avoiding probate, feel free to book an estate clarity meeting with us.
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