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< ESTATE PLANNING & TRUSTEES

PROBATE AND THE AVOIDANCE THEREOF
© 2008 by Eric Holk
Certified Specialist in Estate Planning, Trust & Probate Law
The State Bar of California Board of Legal Specialization

So much has been said and printed about the importance of avoiding probate
that most people, if asked, will confirm that they want to avoid probate, even though
they may have no real understanding of what probate is or why one should avoid it. So
what is probate, anyway? Why do so many people say we should avoid having our
estates go through probate? How does one avoid probate? Is there anything good
about probate? These are important questions, and it may help to have some answers.

WHAT IS PROBATE?

Probate is a legal proceeding that takes place following one's death, during
which the administration of certain portions of the estate are subject to court
supervision. The primary probate proceeding takes place in the county where the
deceased person resided; and “ancillary” probates will occur in every other state where
that person owned real property in his or own name alone or as a tenant in common.
The probate period continues until the legal obligations of the estate have been met and
the court orders the final distribution of the estate. The purpose of probate is to provide
a legal forum for:

• verifying the validity of the will (or lack thereof), admitting the will to probate,
and presiding over any will contests;
• appointing an executor or administrator for the estate – this person must be
bonded, unless the will waives the bonding requirement;
• identifying, inventorying and appraising the deceased person's property;
• notifying creditors of the administration of the estate and giving them a limited
time period to present any claims they may have against the estate;
• supervising payment of the decedent’s debts and taxes and clearing title to assets;
• approving the sale of assets (if necessary) and overseeing the final distribution to
the lawful beneficiaries.

Assets that pass to one’s beneficiaries by will are going to be subject to probate, unless
the estate qualifies as a “small estate” or passes entirely to the decedent’s surviving
spouse. Most estates that include real property (land, buildings) will exceed this
minimum value. If there is no will, the deceased person's assets will pass to his or her
heirs at law in accordance with the state statutes governing intestate succession
("intestate" is a Latin term that means dying without a will). Intestate estates also are
subject to probate.

Throughout the United States, every county in every state has a probate court --
in some states referred to as surrogate, chancery, or common courts. No matter what
they are called, these courts all have the responsibility for supervising the transfers of
assets that occur by will or by intestacy. Since the purpose of the probate courts is to
protect the beneficiaries and creditors and provide for an orderly transfer of the estate,
why are so many people so anxious to avoid probate?

THE PROBLEMS WITH PROBATE

Probate has gotten a lot of negative press over the years. Back in 1965, a book
called How to Avoid Probate, by Norman F. Dacey, was published, arguing that
probate could and should be avoided. This book became a best-seller and was still in
print more than thirty years later. Dacey's book is seriously flawed in many ways, but
he did have good reasons to question the need for probate.

There are four main reasons why probate avoidance has gained such popularity
over the years. The major disadvantages of probate are the delays, the paperwork
hassle, the added expense, and the publicity. Let's examine each of these in turn.

Delays. Because probate involves a series of steps and waiting periods that must
be completed sequentially, in many states probate easily can take a year or longer
before even a simple estate is settled. There are tasks that must be completed even
before the will -- if there is a will -- can be admitted to probate: the will must be found,
an attorney must be hired (unless the executor wants to attempt to do the probate
without an attorney), the persons named in the will must be notified that the will is to
be probated, the assets must be identified, and more. Once the will is admitted to
probate, there is a required time period during which any possible creditors of the
deceased person are to be notified of the probate and given an opportunity to file their
claims against the estate with the court. This creditor claims period can take three to six
months, varying from state to state (California’s creditor claims period is four months).
Then, after creditor claims have been resolved, taxes paid, assets appraised, and other
assorted details finalized, the court may authorize the distribution of the estate assets to
the intended beneficiaries. Generally speaking, small or simple estates may take nine to
twelve months to go through probate; larger or more complicated estates can take years
before probate is completed.

During the course of probate administration, the intended beneficiaries do not
have ready access to the estate assets. This can make it hard to pay bills for a while or
sell things that need to be sold until the court allows it. A surviving spouse and
dependent children may be cut off from the only resources they have to live on, having
lost the income of the deceased breadwinner. Courts will permit certain limited
"allowances" to be paid to the family for a period of time, but there can be some tense
moments while the family waits for this.

Even in a very simple probate estate, such as that of an elderly parent with no
debts who leaves everything to his only daughter as sole beneficiary, that daughter still
must wait until the probate court authorizes distribution of the estate before she can
receive her inheritance. In California, the court in some cases may grant a preliminary
distribution of up to half the value of the estate before the probate is completed, but
even this cannot occur until several months into the probate process.

More complex estates can take years to probate, and the longer it takes, the more
costly it can be. The probate of Marilyn Monroe's estate, for example, took 18 years.
Although Marilyn died in debt, during the course of probate her estate received income
in excess of $1,600,000, mostly from movie royalties. When the estate was finally
settled, Marilyn's debts of $372,162 had been paid, the taxes were paid, the attorneys
were paid, and the executor was paid, and a grand total of $101,229 was left for
distribution to Marilyn's heirs.

It has been reported that the estate of Howard Hughes took eleven years to
probate. Thirty-two wills were filed with the court, and not one was found to be valid.
Hughes' Nevada attorney fees alone sucked $8,500,000 dollars from his estate.

Paperwork Hassle. Probate involves a lot of paperwork that normally requires
an attorney's assistance to complete and file with the court. There are petitions, notices,
appraisals, accountings, creditor claim forms, and other paperwork that can result in
case files several inches thick for even the simplest of probates. Probate in some states
is easier than in others, and if you happen to live in a state where probate is fairly
complicated, the executor almost inevitably will have to hire an attorney to handle the
court filings, notices, and other paperwork involved in the probate process. This can be
even more problematic if the executor does not live in the same county (or even the
same state) where the will is being probated. Because the executor has to sign many of
the documents that are filed with the court, this can create further time delays as
documents have to be mailed back and forth.

Is it possible to probate an estate without hiring an attorney? Theoretically, yes.
If you are inclined to try doing a probate in California without an attorney’s help, there
is an excellent resource available through Nolo Press entitled How to Probate an Estate
in California
, by Julia Nissley (be sure to get the most recent edition). The “do-it-yourself”
approach is not recommended, however, unless you happen to be highly self disciplined
and well-organized, have a lot of patience, and have a lot of free time.

The more complicated the estate happens to be, the more paperwork it will entail
to deal with the assets, the creditors, and the beneficiaries. If there are any problems,
such as a will contest or other litigation, this will only add to the paperwork hassle.

Expense. Possibly the biggest drawback to probate is the expense. The probate
estate is subject to probate fees that are payable to both the executor and the attorney for
the estate. Those fees are regulated by state statute. Depending on your state, the fees
may be stated as a fixed percentage of the assets in the probate estate, or the fees may be
stated as "reasonable compensation." Where the fees are based on a percentage of the
assets, these fees can be thousands of dollars even on smaller estates, and tens of
thousands (or more) on medium-sized to larger estates. [For California’s statutory
executor's fees, see “The Cost of Probate” at the end of this article.] In addition to the
statutory fees, typically there are court filing fees, legal notice publication fees, and
appraisal fees, all of which can add hundreds or even thousands of dollars to the cost of
probate.

In many cases, the executor's fee is not an issue because the executor, who may
also be a family member and even a beneficiary of the estate, may elect to waive his or
her fee. Seldom is that the case with the estate's attorney, however, and the attorney's
fee can equal or even exceed the statutory executor's fee for probate. If the state does
have a fee schedule for the attorney, that fee schedule will only cover those services that
are considered to be ordinary probate legal work. Any extraordinary services the
attorney may render, such as handling the sales of estate property or preparing an
estate tax return, can result in additional attorney's fees above and beyond the stated
statutory fee.

In a probate proceeding, the assets in the estate are valued by appraisal. Those
appraised values become the basis for the statutory fees whenever the statutory fees are
based on a percentage of the assets. It is important to note that no adjustment is made for
the liabilities of the estate
. In other words, loans and other debts are not deducted from
the value of the assets -- the statutory probate fees are based on the gross value of the
estate, not the net value. For example, the statutory fee on a $300,000 estate in California
is $9,000, which equates to 3% of the gross estate value. This amount is payable to both
the attorney for the estate and the executor, so the total statutory fee is $18,000 if both
people take their full fee. (Filing fees, legal notice publication fees, and appraisal fees
may add another $500 or more.) If the $300,000 estate consists of a $280,000 house and
$20,000 in cash and other property, but there is a mortgage on the house for $210,000
and $10,000 in other debts, that leaves a net estate value of $80,000. When the $18,000 in
fees for the attorney and executor are deducted, these fees come to 22.5% of the net
value of the estate -- a much higher percentage in terms of real dollars.

Probate avoidance for many people becomes primarily an economic issue. Even
if the executor waives his or her fee, it is highly unlikely that the attorney for the estate
will do likewise. Even if the attorney agrees to accept a fee that is less than the statutory
fee, it is still a significant expense for the heirs. Saving these fees can mean more money
that stays in the family or that is available to pass on to charity.

Publicity. Probate is a public proceeding. Any probate file in the courthouse is a
matter of public record and available for public inspection. This means that all the
assets and liabilities of the probate estate will become a matter of public record. All
beneficiaries of the estate and what they are to receive will become a matter of public
record. The appraised values of the assets are a matter of public record. Anyone who
wants to can go to the county courthouse and ask to see the probate file and get
photocopies of what is in the file unless the judge orders certain information to be
deemed “confidential” (such as a person’s Social Security number).

For most of us, this is not a big problem, because there may not be anyone
outside the immediate family who would have any interest in looking at the court file.
However, this can be a much more serious problem in some cases, particularly people
who are famous.

Bing Crosby is a good example. When Bing’s first wife died, they each had wills,
which meant that her estate went through probate. The probate process requires all of
the decedent’s probate assets to be listed and valued and all known creditors notified.

Because the probate file is a public record, reporters could simply go to the courthouse,
ask to see the probate file, and find out what Mrs. Crosby owned, what debts she had,
and who was named as a beneficiary of her estate. This was not pleasing to Mr. Crosby;
consequently, when Bing died, his estate proceedings were much more private, as his
assets were in a living trust and not subject to probate.

People who are not famous also may have good reason to avoid the publicity of
probate, especially if a small business in a competitive market is part of the estate. If the
death of a small business owner forces the sale of the business, a competitor can easily
go to the courthouse, look at the probate file, and find out what the business appraised
for and what other assets and debts the decedent had, and thereby obtain crucial
information allowing the competitor to make an offer that may be well below the true
market value if the estate is strapped for cash and cannot keep the business going.

ARE THERE ANY ADVANTAGES TO PROBATE?

Even though the disadvantages to probate give us good reasons to want to avoid
probate, there are nevertheless some benefits to probate that must be considered.

Formal proceedings. A formal probate will help to ensure that the estate is
properly settled and everything that ought to be done gets done. Informal estate
settlement often leaves important matters unfinished, and problems can arise years
later.

Automatic creditor claims cutoff. A probate requires notice be sent to all known
creditors. If those creditors don't file a formal claim against the estate, their claims will
be forever barred after the passage of the creditor claims period. This can be
particularly important for estates where contingent liabilities may exist (e.g., pending
litigation or potential future malpractice claims). Once the creditor claims period has
passed, the law protects the estate from future liability for those past claims. This
doesn't mean that probate will free the family of moral obligations to pay the decedent’s
debts, but the executor must exercise caution in paying bills that are not legally
enforceable. The heirs could challenge the executor’s right to use their inheritance to
pay creditors if claims are not filed properly and in a timely manner.

Court supervision. The actions of the executor or administrator are subject to
court supervision, and that person must account to the court for his/her actions. Nonprobate
estates do not have this safeguard, although court supervision can be requested
if desired. In some cases, court supervision is the best way to protect the interests of all
parties concerned, especially if there are disgruntled heirs who seek to challenge the
will.

Court-ordered transfers of assets. A probate proceeding will result in a court
order stating who is to receive what from the estate and authorizing the
executor/administrator to transfer the assets to the proper persons. In some cases (nonprobate
situations), the lack of a court order can create problems or delays in getting the
assets transferred to the proper persons. There may even be a cloud on the title to
assets that ultimately cannot be cleared up until a formal probate is finally done, years
after the death of the original owner.

DOES EVERYTHING HAVE TO GO THROUGH PROBATE?

No! Many assets do not go through probate, including assets held in joint
tenancy, assets that have named beneficiaries, and assets held in living trusts. Small
estates may avoid probate, and estates passing entirely to a surviving spouse may avoid
probate.

Assets that are held in joint tenancy titling – “Joint Tenants,” “Joint Tenants
With Right of Survivorship,” “JT TEN”, or “JTWROS” – will not go through probate, so
long as there is one joint tenant still living. Title passes entirely to the surviving joint
tenant, although some paperwork may be necessary to document the change. Note,
however, that probate most likely will not be avoided at the death of the last surviving
joint tenant if the asset passes to that person’s beneficiaries through his or her will. In
California, spouses may hold title to assets as “Community Property With Right of
Survivorship”, which operates similarly to joint tenancy in avoiding probate at the first
person’s death.

Assets payable to a surviving named beneficiary will avoid probate. Examples
include life insurance proceeds, annuities, IRAs and most other retirement plans that
provide for beneficiary designations. Even U.S. savings bonds allow the owner to name
a designated beneficiary. The designated beneficiary must be a living person; otherwise
the asset still may be subject to probate. If you name “my estate” or “the estate” as your
beneficiary on such assets, this will subject the asset to probate.

Assets held in the form of a “pay on death” (P.O.D.) or “transfer on death”
(T.O.D.) account will pass to the person named to receive that account upon the death
of the account owner. Most banks and many mutual funds and brokerage accounts can
be set up with a P.O.D. or T.O.D. beneficiary designation. So long as the named
beneficiary survives the account owner, this arrangement will eliminate the need to
probate the account. Another variation of this is the “in trust for” (ITF) account. Such
an account might be titled, “Mary Jones, in trust for Daniel Jones.” Even though there is
no actual trust per se, this operates the same as a P.O.D. or T.O.D. account, and Daniel
Jones can access the account upon presentation of Mary Jones’ death certificate. If the
named beneficiary does not survive the account owner, the account may end up going
through probate.

Assets held in living trusts will avoid probate. Living trusts may be revocable
during the lifetime of the creator of the trust, or they may be irrevocable. Either way,
the assets in such trusts pass to the trust beneficiaries according to the terms of the trust
and are not subject to probate proceedings. If one has a living trust, but some assets are
not in the trust at the time of death, those non-trust assets may have to go through
probate in order to get put into the trust.

For any of these methods of avoiding probate, it is important to remember that
assets held in joint tenancy, or with designated beneficiaries, or in living trusts, will not
be subject to your will. If you leave a particular asset to one person in your will, but
then you put someone else on title as a joint tenant, that asset will go to the surviving
joint tenant, not to the named beneficiary in your will. One elderly woman wrote her
will, leaving her entire estate to her son and daughter in equal shares. Most of her
estate consisted of about $300,000 in bank accounts. Because her daughter lived locally
and her son was back East, Mom added daughter on as a joint signer on the bank
accounts so that daughter could access the funds to pay for Mom’s care if necessary.
Mom died. Son expected his sister to comply with the terms of the will and divide all
assets equally with him, but his sister said that all the bank funds were hers, since she
was a joint signer on the accounts. Son sued his sister to get his share of the inheritance.
He lost. The accounts passed to the surviving joint tenant, and the bequest in the will
was of no effect.

Assuming your assets do not pass to someone via any of the above methods,
what happens if you die without a will?
That depends on whether you are survived
by a spouse (or a surviving registered domestic partner) and/or have children who
survive you. It also depends on whether your assets are community property or
separate property. In California, if you die intestate (without a will) and all your assets
are community property, your entire California estate will go to your surviving spouse
or registered domestic partner. If you have separate property, who will be entitled to it
depends on whether you have children and how many children you have. If you die
leaving a surviving spouse (or registered domestic partner) and one child, half of your
separate property will pass to the surviving spouse/partner, and half will pass to the
surviving child. If you die leaving a surviving spouse (or registered domestic partner)
and two or more children, one-third of your separate property will pass to the surviving
spouse/partner, and two-thirds will pass to the surviving children in equal shares. If
you die leaving no surviving spouse or partner, your estate will all go to your children
(or grandchildren, if a child is deceased but left surviving children of his or her own). If
you have no surviving spouse/partner or “issue” (children, grandchildren, great-grand-children,
etc.) and you die without a will, your estate goes to your surviving
“heirs at law”: parents, if living, otherwise siblings, if any, or their issue, if any,
otherwise to grandparents, or aunts or uncles, or cousins, etc. There is a common
misconception that if you die intestate, your estate will go to the State. This only
happens if you die intestate with no surviving relatives.

If you die without a will, or if you fail to keep your will (or trust) current, your
estate very well may end up going to relatives you don’t know or don’t like. One
woman’s will was poorly written, leaving specific assets to various people and charities,
and failing to include a “residuary” clause (a provision leaving “everything else” to
someone). At the time of her death, everything she gave to beneficiaries in her will had
been sold during her lifetime, so those specific gifts were no longer valid. Without a
designated residuary beneficiary, the court ruled that her estate would go to her
adopted daughter, from whom she had been estranged for eighteen years because of the
daughter’s drug abuse and lifestyle, even though the mother had intentionally made no
provision for this daughter in her will.

OTHER PROBATE AVOIDANCE METHODS

Small Estate Proceedings.
In California, a “small estate” is defined as an estate
totaling less than $150,000, with real property not exceeding $20,000 in value. If the
assets are all in the name of the decedent and do not pass to someone else by joint
tenancy, beneficiary designation, or some other means, the assets in a small estate may
be transferred without probate by using a notarized “small estate affidavit” procedure
(see Probate Code §13101), but only after at least 40 days have passed since the death of
the owner of the asset. If there are no individual assets worth more than $150,000 but
the combined total of those assets exceeds $150,000, those assets generally will have to go
through probate.

Property Passing to Surviving Spouse. Another exemption from probate in
California is available when the decedent’s entire estate passes solely to the surviving
spouse. This doesn’t work if any portion of the estate is left to anyone other than the
surviving spouse. It also doesn’t work if the estate is left to a trust for the benefit of the
surviving spouse.

Lifetime Gifting.
If assets are given away to one’s intended beneficiaries during
one’s lifetime, then probate can be avoided for those assets. But if you give something
away, you don’t own it any longer. Also, there may be gift tax implications to deal
with, and the gift recipient will lose out on the step-up in cost basis that would
otherwise occur if the asset was retained and transferred at the owner’s death.

COMMON MISCONCEPTIONS ABOUT PROBATE

“If I have a will, that means my estate won’t have to go through probate.”
WRONG! Many people somehow think that your estate will only go through probate
if you don’t have a will. Actually, your estate will go through probate whether you
have a will or not if your estate is large enough and you don’t have a valid plan in place
for avoiding probate. Some confusion may arise from the fact that assets held in a living
trust will not have to go through probate.

“If I avoid probate, I won't have to pay any estate taxes.” FALSE. Your taxable
estate includes everything you own or have an interest in at death, whether it goes
through probate or not. Avoiding probate eliminates certain statutory fees, but it does
not eliminate estate taxes. [Most estates over $2,000,000* will have estate taxes to pay.]
*2008 estate tax exemption amount. The exemption increases to $3,500,000 in 2009.

“Some people simply don't bother with a probate when their spouse dies and
they don't have any problems, so probate isn’t really necessary.”
WARNING: many
who have done this still have the deceased spouse on title to real estate or other assets,
and some day they will find that it may not be possible to sell these assets until the
deceased spouse's estate has been probated.

“I can avoid probate just by putting all my assets in joint tenancy.” MAYBE,
but there are potential problems with using joint tenancy as a probate-avoidance
strategy. First, it requires the joint tenant to survive you. This isn’t as sure a thing as
one might expect. Second, there may be gift taxes implications when making someone
a joint tenant. Third, an untrustworthy joint tenant could abscond with bank or
brokerage account assets. Fourth, adding someone as a joint tenant on your assets can
expose your assets to the other person’s creditor claims or other liens.

CONCLUSION

There are still lots of people who don’t feel any compelling reason to avoid
probate. Ultimately, setting up a revocable living trust or coming up with some other
probate avoidance plan can be more hassle and expense than some folks want to bother
with. Having the estate go through probate is not an inconvenience for the person who
just died; it is the beneficiaries who are inconvenienced. If the beneficiaries are distant
relatives or charities, the testator may not care if the estate goes through probate. In
some cases, if a challenge to the estate plan is expected, it may make more sense to
probate the estate so that the court can deal with the disgruntled heirs. It is important
to make an informed decision about the best way to leave your estate to your intended
beneficiaries, and whatever you decide to do, get it done. Don’t leave things to chance.

THE COST OF PROBATE

The fees paid to the executor and to the estate's attorney in California for their services in
handling a probated estate are set by law (See California Probate Code Sections 10800 through 10814),
and represent a portion of the value of the assets that go through probate. These "statutory fees" range
from 4% of the first $100,000 of assets that go through probate down to 1/2 % or a "reasonable amount to
be determined by the court" for probate estates in excess of $25,000,000. [Note that estates valued below
$100,000 are normally exempt from full probate proceedings; assets are typically transferred by affidavit.]

The percentages set forth in the California Probate Code are as follows:
4% of the first $ 100,000
3% of the next 100,000
2% of the next 800,000
1% of the next 9,000,000
1/2% of the next 15,000,000

These fees work out to the following amounts paid to both the executor and the attorney for the
estate:
Value of Probate Estate Statutory Fee
$100,000 $ 4,000
200,000 7,000
300,000 9,000
400,000 11,000
500,000 13,000
600,000 15,000
700,000 17,000
800,000 19,000
900,000 21,000
1,000,000 23,000
1,200,000 25,000
1,500,000 28,000
1,800,000 31,000
2,000,000 33,000
2,500,000 38,000
3,000,000 43,000
3,500,000 48,000
4,000,000 53,000
5,000,000 63,000
6,000,000 73,000


These fees are based upon the gross value of the assets that go through probate as shown on the
estate inventory, plus the income (dividends, rents, interest) collected during probate, plus any gains
from the sale of estate assets, less any losses upon the sale of estate assets. Either the executor or the
attorney can waive all or a part of their statutory fee. If taken, the fee is taxable income to the recipient. If
there is more than one executor or attorney, the fee is divided accordingly.

Extraordinary fees (i.e., fees payable in addition to the above statutory fees) are granted for
appraisals, tax work, costs of sale of estate assets, litigation, expenses for running the decedent's business,
and any unusual matters. All of the statutory and extraordinary fees are paid by the estate at the
conclusion of probate and upon a court order.

In addition to these fees, there are separate fees for the probate court filing fee (which can range
from a few hundred dollars to several thousand dollars, depending on the size of the estate), a legal
notice publication fee, appraisal fees, and fees for certified copies of court documents.
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