Posts Tagged ‘How to Avoid Probate’

Is It Important to Avoid Probate? Why, or Why Not?

SEPTEMBER 10, 2012 VOLUME 19 NUMBER 35
Earlier this year we wrote about how to avoid probate. We told you at the time that we might later address whether to avoid probate. This week we’re going to tackle that topic.

You might be thinking something like: “‘whether to avoid probate’? Isn’t that foolish? Of course I want to avoid probate.” There is simply no question that the whole process of probate (by which we mean the court proceeding required to transfer a decedent’s assets to his or her family or the beneficiaries named in a will) has gotten a bad name. Our purpose here is not to try to rehabilitate the public image of probate, but to give you some of the details about how the process works. Armed with that, you can decide how bad probate really is, and how badly you want to try to avoid it for your estate.

First, a handful of generalizations. Please note that they are generalizations, not absolute truths:

  1. Probate is not as bad as it was a half-century ago. When Norman Dacey published “How to Avoid Probate!” in the mid-1960s, the negative image of the probate process was already widespread. His book galvanized opposition, and popularized the notion of revocable living trusts as an efficient probate avoidance tool. It also woke up the legal establishment; within a decade, a number of states (including Arizona) had adopted the Uniform Probate Code, which had been crafted to simplify the process. Even states which did not adopt the Uniform Probate Code drew a lot of the ideas and processes from it. The result: in most (but not all) states probate has gotten much, much simpler.
  2. Relatively few deaths result in a probate proceeding being filed. For example, the Tucson area probably sees about 10,000 deaths a year (extrapolating from U.S. Census data for Arizona, which reported 46,000 deaths in 2008). Yet only about 1,300 probates were filed in Tucson last year — and that number includes cases where a trust was filed for review, interpretation or supervision. We predict that similar numbers — about 10% of deaths leading to a probate proceeding — will apply in other jurisdictions, too.
  3. Avoiding the probate process does not, by itself, have any effect on taxes and does not prevent family fights. As to the former, there are no income taxes due upon receipt of an inheritance regardless of whether it comes through probate or not. Estate (or inheritance) taxes are a different animal; there is no estate tax in Arizona, and no federal estate tax (in 2012) on an estate of less than $5.12 million. But the value calculation is not based on probate estates — it is applied to trusts, joint tenancy, beneficiary designations and anything else the decedent owned or had control of just before death.
  4. There is tremendous state-to-state variation. There are a number of states in which one item or another from the list below would completely change your analysis. DO NOT use this guide to judge whether you want to avoid probate in California, in Texas, in Ohio — in fact, in any state other than Arizona. Ask your local lawyer about your state. Feel free to share this article and go over the list, but do not be the least bit surprised if his or her answer is completely different, based on your state’s laws. (Incidentally, if you, gentle reader, are an attorney practicing in a different state — please feel free to comment about how, precisely, you would adjust our advice for your state. We’d be happy to include such comments on our website, along with your contact information. We won’t vouch for your accuracy, but you do know your state law way better than we do.)

Let’s get started. We propose to set up a series of the most common objections to probate, and then explain how seriously you should consider those objections.

Probate is expensive. It does cost something to go through the probate process. There are filing fees, publications of notice in local newspapers, and lawyer’s fees. They can be substantial. But one thing about the Uniform Probate Code: it moved states from a fixed percentage of the value of the estate to a “reasonable” fee. In general terms, that has meant average fees about 1/3 of what they were under the old fixed-fee schedules. Still more than some people want to pay, but much less than they have heard about. Did you read that some celebrity’s estate paid 40% of its value in fees and taxes? Well, we bet that (a) most of that was taxes and (b) there was a will contest. If your competence is going to be challenged, avoiding probate may not reduce that cost. If your estate pays taxes, avoiding probate will not change that.

It is also important to remember that avoiding probate does not mean avoiding lawyers — and costs — altogether. Resolving the division and distribution of a living trust (a popular probate-avoidance device) will cost some money. It will probably be considerably less than the probate cost, but it won’t be $0. And accountants are still likely to be involved (there are, after all, the same number of tax returns to file either way).

Probate means public disclosure of private matters. Not any more. Or at least, not in Arizona. No inventory has to be filed in the probate court (a copy gets sent directly to beneficiaries, but it need not be filed in court). No formal accounting is required (assuming, of course, that no one objects to the administration of the estate). Anything with confidential information can be filed in a sealed envelope with the court. In short, the only thing publicly available is likely to be the text of your will itself (plus, of course, the fact of your death). That may be enough of a violation of privacy that you want to avoid the process, but for most people that’s not terribly invasive.

It takes a long time to go through the probate process. It can, but it doesn’t have to. Most probates can be closed once a four-month waiting period is completed. Given ordinary delays in getting things filed, that usually means the probate process is wrapping up at about six months after filing. Of course there are exceptions. We have decades-old probates hanging around in our office. We once took over a probate that had languished for over forty years. It happens. But it is not inherent in the probate process. PS: we closed that 40+-year-old probate with two phone calls and one court filing. It took about two more weeks. We apologized to the now-elderly heirs for an unconscionable delay. They said they had wondered why they’d never gotten their small inheritances. But they had never called to ask the prior lawyer what was taking so long — it wasn’t until the lawyer’s death that that particular sad little file got closed up.

Probate proceedings are easy (easier?) to contest. This one is correct, although not (for most people) a very big deal. If you have disinherited a spouse or child, you might want to consider a living trust. Your will isn’t literally easier to contest than your trust — the same principles apply in both cases. But probate does mean that there’s already a court file, and a letter has to be sent out to the disinherited heir (which might invite a contest that they otherwise wouldn’t get around to filing).

Why isn’t this a big deal for most people? Because most people don’t deviate very much — or even at all — from what would have happened if they did not sign a will or trust. If you don’t leave anything to your long-lost cousin in Colorado, she doesn’t have any basis for contesting your will OR your trust — because she wouldn’t inherit even if you were batty as a bedbug (is that the right metaphor?). If you had no will or trust your estate would go to your spouse and kids in some proportion. Your goofy cousin will never get any part of your estate (unless you die without spouse, children, siblings, nieces, nephews, parents, grandparents, uncles or aunts), so a will contest is pretty much a theoretical idea for most of our clients.

If you own real estate in more than one state, the cost and trouble of probate will be magnified. Yup. And we can’t tell you how hard or expensive it will be to handle the probate in the other state. You’re a good candidate for a living trust. Note, however, that we’re going to have to go to the expense of getting that other state’s real estate transferred into your trust, and that’s going to increase the cost of creating the trust in the first place.

So what does it all mean? Should you be trying to avoid probate? Probably, but maybe not if it’s very expensive to do so, or you aren’t too worried about your heirs incurring some additional costs, or you haven’t decided exactly what you want to do. If you decide probate avoidance isn’t too important we won’t call you foolish or misguided.

But are there any positives about probate? Any reason to want to have your estate go through the probate court? Well, we’re well beyond our usual self-imposed word limit for this week, so we’re going to leave you with that question as a cliffhanger. But we can promise that next week, when we answer it, our weekly newsletter will be shorter.

How To Avoid Probate — And What Doesn’t

APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.

Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.

Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:

Die poor. In Arizona, an estate consisting of up to $75,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $100,000 in value. Most other states have a similar law, but with dollar limits that vary widely. [Note: the small estates numbers were updated to the figures listed here by the Arizona legislature in 2013.]

Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.

As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.

Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.

Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.

Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.

Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.

Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?

  • POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
  • TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
  • Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).

What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.

Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.

So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:

Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.

Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.

We have more information in our YouTube channel on this subject: .

Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.

Court Can Order Reduction Of Personal Representative’s Fees

MARCH 12, 2001 VOLUME 8, NUMBER 37

In 1966 Norman Dacy published his now-famous book “How to Avoid Probate.” Dacy’s book made several claims that have since become practically articles of faith: probate is always too expensive, takes too long and requires disclosure of too much information.

The cost of probate has been reduced in most cases since Dacy’s book first appeared. About half of the states still permit executors (often called “personal representatives”) and their lawyers to charge a percentage of the estate’s value as fees. The growing trend, however, is to require the fees of both the personal representative and his or her attorney to be “reasonable.” That usually translates into a much lower fee than the percentage arrangement.

That is not always the case. Robert Sweetland’s estate in the Maine courts illustrates both how fees can consume a large portion of the estate and how courts can stop abuses by personal representatives and attorneys.

Mr. Sweetland had named a Massachusetts friend, Irene Mailhiot, as personal represenative, and the probate court appointed her as the will directed. Ms. Mailhiot then charged the estate fees of $36,000 and travel and other expenses of over $14,000. Since the estate was modest, Ms. Mailhiot collected fees and costs of almost 20% of the estate.

Mr. Sweetland’s will divided his estate among six charities. Ms. Mailhiot sent a form to each beneficiary for signature approving payment of her fees and costs before they would receive any distribution. Five of the six beneficiaries signed and returned forms, but the Maine State Society for the Protection of Animals refused. The Society was entitled to 10% of Mr. Sweetland’s estate, and it decided to challenge the fees.

After a hearing, the probate judge agreed with the Society. The judge noted that Ms. Mailhiot had routinely charged the estate for lunches and dinners at fancy restaurants, and claimed 56 trips to Maine to settle estate business. Her fees were reduced to $10,000 and her costs to $3,000; she was also charged with $4,700 in fees paid by the Society to protect its interests. In total, she was ordered to return more than $40,000 of the $50,000 she had charged the estate.

Ms. Mailhiot appealed the probate judge’s ruling, and made a novel argument. Because five of the six charities had signed waivers of any claims against her before the Society filed its objection, she argued that she should only be required to repay the Society’s share of the $40,000 judgment. In other words, she sought to reduce her repayment to $4,000.

The Maine Supreme Court scoffed at Ms. Mailhiot’s suggestion. She was ordered to repay the entire amount of overcharges to the estate, and was charged additional attorneys’ fees for her appeal. Estate of Sweetland, January 30, 2001.

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