JULY 2, 2012 VOLUME 19 NUMBER 25
It's a slow week (with the Fourth of July holiday breaking it up on a Wednesday) and it's too hot to think about actual controversies this week. So let's take a minute to clear out some longstanding items we've been meaning to get around to. One thing we've meant to do for quite a while is to try to explode some common myths about legal issues -- and particularly about the probate process. Here are some of the mistakes we most commonly hear from clients, questioners and (occasionally) professionals who have given not-so-good legal advice to our clients:
If you want to avoid probate, you should sign a will. Sorry, but that doesn't help. Upon your death a probate proceeding will have to be initiated to transfer property owned in your (individual) name alone, with not beneficiary designation. Property that doesn't meet that description will ordinarily not need to be subjected to probate. Signing a will does not change that answer in any particular. For that matter, merely signing a trust does not change the answer, either. The way a trust can help you avoid probate is by creating an entity which can become the owner of your property; that entity (the trust) does not "die" with you, and so assets transferred to its name should not be subject to the probate process. But it is the funding of the trust (that's what lawyers call the process of retitling your assets to the trust's name) that avoids probate.
There is one significant exception to the rule that everything in your name has to go through probate on your death. In most states there is some sort of simple affidavit process to bypass probate for small estates. The definition of "small" varies, though. In Arizona it is (for most purposes) $50,000; if you die with assets of over that $50,000 threshold in your name alone, with no beneficiary designation, your estate will be subjected to probate.
What do we mean by that "in your name alone, with no beneficiary designation" phrase? Only property that is not held as joint tenants with right of survivorship, community property with right of survivorship, or as POD (payable on death) or TOD (transfer on death). Be careful about those ownership options, however -- avoiding probate may not be worth the problems you can create by changing ownership of property.
Probate avoidance is critically important for everyone. There are two ways in which this common belief is mistaken. First, there are a small number of circumstances in which probate may actually be beneficial. Second, for the greater majority of people who ought to be thinking of probate avoidance, the cost of implementing, managing and periodically reviewing probate avoidance plans is sometimes simply not worth incurring.
Let's deal with the first one first. When is probate actually a good thing? There are very limited circumstances where it is a good idea -- but those circumstances do sometimes appear. One is where the decedent had potential claims that might be asserted against her or his estate. A good illustration: a deceased professional (doctor, lawyer, architect, accountant, nurse) who might have an unknown malpractice claim. Filing a probate, and publishing notice of that probate in local newspapers, can help cut off those uncertain and potential claims. Note, though, that in Arizona and some other states you can actually publish notice to creditors without needing to open a probate, so that argument in favor of probate is further limited.
Here's a better one: when you are managing the affairs of someone who has died, and you know there will be disputes about what you have done, you might prefer to have the entire process supervised by the court. That doesn't come up very often, but sometimes it can be very beneficial to your peace of mind to know that everything you do has already been blessed by the judge who has the authority to review your administration, your bills and your proposed course of action.
Let's deal with the other side of the coin: probate avoidance is often not worth the trouble or expense. With updated probate administration rules (like those in place in Arizona for nearly forty years now), the cost, hassle, and public disclosure associated with probate proceedings have all been dramatically reduced. The cost of preparing, funding and monitoring a probate-avoidance trust may simply be more than the cost of probate itself.
Lawyers try to talk clients out of doing probate avoidance in order to protect their future probate fees. Let's imagine for just a moment that we lawyers are as venal as that assertion suggests. So here we are, with (say) twenty years of professional life ahead of us, and you come visit us at age 60. Which is better for us: (1) we collect, say, $2,000 from you right now in order to create a probate-avoidance trust plan, or (2) we collect $500 from you today and cross our fingers that you will die before you turn 80 so we can get another $2,500 in probate fees -- for which, incidentally, we will have to do quite a lot of work. Do you begin to see just how insulted we are by this popular myth?
There are a number of other reasons we lawyers might actually be better off if you sign the probate-avoidance trust, incidentally. In five years, when you come to see us to make changes, amending your trust will probably generate slightly more in legal fees than creating a new will would be. And we do count on seeing you in five years -- no matter how well your estate plan is crafted, you should assume that it needs to be reviewed at about that time. Your interests and ours are mostly in alignment: we both want to get the right estate plan for you, at the most appropriate cost, and not opt either for more expense than you need or less coverage than you are entitled to expect.
I don't need to do estate planning because my family knows what I want. Really? How do they know? Have you had a big family meeting where you detailed your wishes to everyone at the same time, and gotten them to agree that they understand and will follow your wishes? Did their wives, husbands, children and grandchildren all agree? (Because, you realize, one or more of your immediate family members might actually die before you do.) Did it all get reduced to writing to make sure everyone remembers the agreement twenty years down the road? If you did all that, congratulations -- and you'll be one of the few people we consult with who appreciate how much simpler it actually is for you to sign a real estate plan. We are also, incidentally, trained to probe the things you didn't think about -- like what happens if your estate is significantly larger or smaller, or if the kinds of assets you own are quite different, at your death? What happens if you loan (or have loaned) money to one or more of your children? How about naming a back-up personal representative? Did you even realize they are called "personal representative" instead of the more common -- and inaccurate -- "executor"? All of that, and more, is what you get when you hire a professional -- like, for example, us.
So what's your favorite probate myth? Let us know, and maybe we'll continue the explosions after the Fourth of July holiday.