Clients often talk about probate in the most derogatory of terms, as if it were something that should be avoided like rancid milk or overdue video rentals. Should it? Perhaps so, but in certain cases, perhaps not.
So, what is the truth about probate? Clients sometimes believe that if a decedent does not have a Will, his (or her) estate must go through this "thing" called probate at death. They say that probate will tie up the estate for many years. They may believe the lawyers, the court and the state will take 15 to 20% of the estate during probate. Many clients feel that the decedent's assets will be taken by the state if he has no Will.
So, again, what is the truth about probate? Probate has a two-fold purpose - to clear title to decedent's probate assets (obtain absolute certainty by court order that each assets has gone to the right person, charity or entity) and allow creditors of decedent a set amount of time to make a claim against the estate (usually about four months from start of probate) or be forever foreclosed from suing the estate or its beneficiaries. Probate is a court administered procedure in which the decedent's estate, or at least much of it, must be taken control of and accounted for by an individual, or professional fiduciary, approved by the court. This individual or professional is called the Executor (if decedent had a Will), or Administrator (if no Will), or, generically, the Personal Representative. If decedent had a Will, or a Will plus subsequent Codicils (amendments), this instrument/s must be admitted by the court as the last and true testamentary instrument of decedent. If a decedent had no Will (called dying intestate), his estate must go through probate if it were larger in value than a minimum amount established by each state. A notice of the hearing on the petition to start probate must be published several times in a local newspaper and must be mailed to all heirs of the decedent and individuals named in his Will.
Probate administration is a creature of state statute. Procedures must be followed and many acts of the Personal Representative must be approved either by the court or by the beneficiaries of the estate. During the term of probate, the Personal Representative must marshal all of the decedent's assets, protect them, invest them conservatively, and, ultimately, distribute them according to decedent's wishes set forth in the his Will. If decedent had no Will, his estate will be distributed to his "heirs" as determined by a formula set forth in the state's probate code. Obviously, in many cases, a decedent's heirs are not the individuals to whom he wished to leave his estate. The state of his residence has written his Will for him.
During the course of probate, the Personal Representative must obtain date of death appraisals of all probate assets, must see that all income tax and, if applicable, estate and inheritance tax returns are filed timely, pay all taxes owed, invite creditors of the estate to file claims before a deadline set by statute, approve or deny any filed claims, defend any litigation over any denied claims, pay all legitimate ordinary and reasonable debts incurred by decedent before his death, pay expenses of administration incurred during probate, possibly sell estate assets, including real estate, and more. The Personal Representative will be busy during probate, and will need an experienced attorney to guide and advise him through the course of probate. At the end of probate administration, the Personal Representative will petition the court, on a noticed hearing, for an order allowing him to close probate administration and distribute the probate assets to the appropriate beneficiaries or heirs. In this petition, he will seek an order allowing him to pay himself and to pay his attorney.In most states, there are two types of commissions and fees allowed the Personal Representative and the attorney, respectively. Ordinary commissions and fees are set by statute as a percentage of the estate value (not equity). In California, for instance, both ordinary commissions and attorneys fees are established according to this schedule: 4% of the first $100,000, 3% of the next $100,000, 2% of the next $300,000, 1% of the next $9,000,000, 1/2% of the next $15,000,000, and a "reasonable amount" to be determined by the court for any amount above $25,000,000. Thus, the probate of a decedent's estate holding only one asset - a residence appraised at his date of death at $1,000,000 - would yield ordinary commissions and fees each in the amount of $21,350. The value, not equity, in this residence controls for this formula, so it would be immaterial if the house had a $900,000 mortgage on it. The court must allow these ordinary commissions and fees. Often, when a beneficiary is also the Personal Representative, he waives some or all of his ordinary commissions either because he wants to keep harmony with his siblings who are also beneficiaries or because commissions are taxable income, while distributions from an estate are not.
Extraordinary commissions and extraordinary fees may be allowed in certain cases. The court must approve these extraordinary payments and will not do so unless the Personal Representative shows in the petition both an extraordinary amount of time spent on matters and that such work provided a clear benefit to the estate. An example of such extraordinary efforts is where an attorney and Personal Representative successfully defended a lawsuit by a disgruntled claimant whose creditors claim was denied. If the attorney has applied great skill and knowledge in preparing the decedent's estate tax return so as to save considerable amount of estate tax, he may well be allowed extraordinary fees. Some states allow commissions and fees based on the amount of actual time put in by the Personal Representative and attorney. This hourly billing rule is similar to a Successor Trustee and attorney's method of charging fees in a post-death administration of a Trust.
California is a statutory commission and fee state. A recent survey of California attorneys shows that $450,000 was the break-even point for their work in an average estate between statutory fees and hourly-rate fees. That is, in estates larger than $450,000, the attorney will make a larger statutory fee than his hourly-billing would have produced. The opposite result applies in estates smaller than $450,000. In California, at least four months must pass from the day the court approves the petition to start probate and appoint the Personal Representative and the date the petition to close probate can be filed. A Notice of Hearing must be given at least 15 days before the hearings on both petitions. Adding in time before the petitioner first sees an attorney, and the quickest time a probate can be finished is about 5 &Mac189; months. A creditor's dispute, sale of real estate, challenge to the petition for probate and/or admission of Will, and other issues, can hold up the close of probate by the time it takes to resolve these problems.
Not all assets of a decedent must be part of the probate estate. Excepted from probate are all contractual assets, such as life insurance, IRAs, annuities, etc., have death beneficiary designations which state to whom the asset will go. If a decedent's estate is named as that death beneficiary, the asset must go through probate, however. Assets held in true joint tenancy form avoid probate. A simple affidavit of joint tenancy, with certified death certificate attached, will pass title in such asset. Many bank accounts, and even some mutual funds, have POD ("payable on death") designations, which determine to whom the particular account shall go.
A decedent's community property share of an asset, which will go to the other spouse, does not have to go through probate. A short one-month confirmation process is available in most community property states to allow for the transfer to the spouse. If the community property share is designated by Will to go to someone other than the spouse, probate administration will be required. Assets held in a Trust do not go through probate, which, of course, is a prime reason the revocable Living Trust has become so popular.
If a decedent owned property titled only in his name (e.g. it is not joint tenancy property) and this property does not have a death beneficiary designation, that property must be submitted to probate administration if the total value of such property is greater than $100,000 in the State of California at his date of death. If the total value is less than this threshold amount, all of these assets can be transferred to the appropriate beneficiaries by a declaration made under penalty of perjury by the entitled beneficiary or beneficiaries. In most states, this is called the. "small estate declaration." In California, the Department of Motor Vehicles has prepared its own one-page small estate declaration for the transfer of automobiles. The appropriate beneficiary is the one named in decedent's Will, or his intestate heir or heirs. Most other states have this "small estate" exception to probate, although the threshold amount may be different. In most Western states, the threshold amount is currently lower than California's, generally in the $50,000 to $75,000 range. In California, in computing the $100,000 threshold figure, one does not include joint tenancy assets, POD accounts, etc., and, in a statutory quirk, the value of assets titled with the State or federal government, such as automobiles, motor homes, mobile homes, vessels, etc. Thus, a decedent could own two assets solely in his own name - a bank account of $90,000, and a motor home valued at $400,000 - and at his death, these two assets could be transferred with a small estate declaration with no probate being required.
So this is truth about probate. How does one now respond to the four beliefs clients often have about probate, which were described in the second paragraph of this article? Here are those beliefs again in italics.
Clients sometimes believe that if a decedent does not have a Will, his (or her) estate must go through this "thing called probate" at death. They say that probate will tie up the estate for many years. They may believe the lawyers, the court and the state will take 15 to 20% of the estate during probate. Many clients feel that the decedent's assets will be taken by the state if he has no Will.
Please ignore those beliefs. As stated above, here is the truth about probate in summary form.
• Having a Will or not having a Will does not determine whether probate is required. Instead, the nature (solely owned or not) and total value of the estate assets determines necessity for probate.
• Estates are rarely tied up for years. A good attorney, and a Personal Representative who is willing to act timely, can wrap up a probate in six months, assuming no problems occur.
• Extraordinary commissions and fees are rarely sought, and when they are, courts rarely allow the entire amount sought, and often allow very little or none. Commissions and fees generally average about 4% to 5% of an average probated estate's value. The state takes nothing of the estate. The court takes nothing also, but, it along with the appraiser and county recorder, if there is real estate, generally combine for charges of about 1/2% to 1% of the estate's value.
• If a person dies without a Will, and his estate must be probated, his heirs will take his estate. A probate estate will go to the State (called "escheat") only if no heirs can be found. Keep in mind that every person has an heir or heirs. That heir may be many generations removed, both vertically and laterally, but such distant relationship is irrelevant. The probate code sets forth rules on how to determine heirship. These rules, enforceable by law, determine without question who a person's heir is or heirs are. So, what if such heir or heirs can not be found?. In a probate estate, which is a matter of public record, there are for-profit outfits called "heir hunters" who scour petitions for probate for intestate estates. If the petition reveals non-parent, non-spouse, non-children and other more distant heirs, or even state that decedent's heirs are unknown at this time, these heir hunters will use their search tools and sources to look for additional heirs, or the actual heirs. Sometimes the petition incorrectly states the correct heirs, or only names some of the heirs, because of lack of information on the part of the petitioner. The heir hunter, after finding additional or correct heirs, will charge the heirs a percentage (usually one-third) of each heir's share of the estate before the heir hunter will reveal the decedent's identity. Sometimes the heirs live in a foreign country.
Should probate be avoided? In the majority of cases, the post-death administration of a revocable Living Trust after the Trustor (creator of Trust) dies is more desirable than probate administration. Fees for the post-death administration are generally smaller, especially in the larger estates, and in the smaller Trust estates, the administration can be completed faster than four months and therefore assets can be distributed faster. Privacy in a post-death Trust administration, as opposed to the public record of a probate, may be more desirable. It is critical that the successor Trustee in a Trust administration be efficient, be honest and be able to work effectively with his or her attorney. Otherwise, a successor Trustee who does not possess these qualities may likely bring the Trust administration into court because of a petition filed by disgruntled beneficiaries and/or creditors.
If a decedent is likely to have claims against the estate, some of which may ripen shortly after his death, probate administration gives the protection of a four-month creditors claim statute. Trust administration relies on the general one-year statute of limitations on a lawsuit against a decedent's estate. However, it is possible in a Trust administration to employ a four-month statutory period, but only if notice is published and any known creditors are specifically mailed notice of the administration.
In certain cases where a successor Trustee has a pre-existing bad relationship with a Trust beneficiary or beneficiaries, and especially if he or she is also a beneficiary, it may be better for the client to invite probate by means of a Will and not a Living Trust in order to get the entire administration before the court from the start. Such court involvement both protects the successor Trustee and forces him or her to act in a proper fiduciary manner, and also provides a certain comfort level to the beneficiaries, reducing any paranoia they may have. Paying the extra cost of probate from the estate may be money well spent.