The Need to Avoid Probate

Although it may be widely understood that avoidance of probate is a good idea, it is often not fully understood that probate avoidance is easily accomplished and may result in considerable savings. The basic concept is that a little planning now can lead to significant savings later in both time and money. The costs involved in the probate process can easily be avoided by simply executing and funding a living trust. Unfortunately, many people die without a living trust, or worse – the person had a living trust but did not completely fund the Trust during their lifetime. The executors are then forced to probate the decedent’s assets to distribute the assets of the estate to the beneficiaries. 

The Probate Process. Generally, probate is needed to change title on assets of a deceased person.  For example, upon the death of a person (the “decedent”), if there is a house titled in the decedent’s name, and the decedent had only a will, and not a living trust, the beneficiaries will be unable to sell, refinance, transfer, etc. the house until they become the legal owners of the property. To become the legal owners of the property, the beneficiaries must submit the will to the probate court and go through the probate process.

The probate process is the court supervised administration of the will.  The process involves ascertaining the nature, extent and total value of the decedent’s property, providing notice to potential creditors, submitting documents to the court at specific time intervals, and court hearings open to the public to determine, among other things, whether the will is valid, whether the will should be enforced as it is written, or if other persons or creditors have a claim to the assets in the estate. 

Exceptions to Probate. If property is held as joint tenants with right of survivorship or as community property with right of survivorship, then that property is not subject to the probate process. However, this planning will only avoid probate on the first person’s death, since when the survivor of the joint tenancy dies, the assets previously held as joint tenants will be subject to probate. There are other small exceptions in California, particularly for small estates. If total probate assets are less than $100,000, then no probate process is required, and if real property has a value less than $25,000, no probate is required. These situations are obviously extremely rare.

The costs of probate can be significant. Although a living trust provides a host of benefits, including potential estate tax savings and distribution of property to heirs according to the desires of the settlor, the avoidance of the costs of probate is another significant benefit.

Probate Fees.  Probate fees are based on the gross value of the estate, and are paid to the attorney handling the probate and to the personal representative. For example, if a house has a fair market value of $500,000 with a mortgage of $175,000, for probate fee calculation purposes, the probate fees are on the full $500,000 GROSS VALUE, not the equity of $325,000.

If the probate estate consisted of other property (e.g. bank accounts, autos, etc.) with a value of $500,000, then the total probate estate would be $1,000,000 (i.e. $500,000 real estate gross value plus $500,000 of other property).  The probate fees paid on a $1,000,000 estate are $46,000, consisting of $23,000 to the attorney and $23,000 to the personal representative named in the will.

The following rate table, which is a set statutory rate of fees in the Probate Code, illustrates the amount of probate fees that apply to all estates based on the “gross value.” 

Reasonable Amount Over $25,000,000

The Living Trust. A properly drafted living trust may save thousands of dollars by avoiding these probate fees. The concept of the living trust for probate avoidance purposes is that the living trust, not the individual who created the living trust, is technically the owner of the assets.  Therefore, the decedent owns no assets on his or her death, even though during his or her lifetime, as trustee of the living trust, he or she still had complete control over all the assets. 

After the death of the settlor of the living trust, the successor trustee becomes the current trustee, and that person then is required to either distribute the trust assets or continue the trust under the terms and conditions of the living trust. There are fees associated with trust administration on the death of the first and second spouse in a two-settlor living trust, but these fees are generally substantially less than probate fees.

Although the probate process is time consuming, taking anywhere from six months to over a year, it is likely that an estate tax return is also due for the estate, and this usually takes nine months to prepare.

However, if the decedent’s assets were less than his or her remaining applicable credit ($1,000,000 in 2003 and $1,500,000 in 2004), then no estate tax return is technically required.  In this situation, with a living trust your beneficiaries can receive their inheritance immediately upon your death, or if you decide, at periodic intervals, with minimal time to finalize trust administration matters.

Probate fees can be easily avoided by implementing and funding a living trust, but the living trust also provides you with potential estate tax savings and the piece of mind that your estate is distributed according to your wishes.

Any questions or comments about this article can be directed to Scott Harshman at The Busch Firm, (949) 474-7368 Ext. 254, or via email: sharshman@ buschfirm.com.