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:
- 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.
- 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.
- 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.
- 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.