What Is Probate and Why You Should Avoid It.

So, what is probate exactly? Well, it’s basically a judicial proceeding where a judge supervises the settling of an estate. The judge reviews your will and determines if it is valid or not. If the judge finds your will to be valid, then an executor will be appointed and an order will be issued outlining how your assets should be distributed. Please note, any estate worth more than $150,000 will automatically go through probate in California (but we can avoid probate all together as discussed below). The executor must give notice to all potential creditors, allowing them a chance to make a claim on the estate. The executor must also prepare and submit an inventory of all estate assets and their value. Once all the outstanding debts and taxes are paid, whatever is left gets distributed to the beneficiaries named in the will.

Now, this process is very lengthy. You’re looking at least four months before the estate can be settled, but it most cases it can take up to a year! That’s super inconvenient for your beneficiaries, especially considering they are already going through a difficult time after losing a loved one. I’ve never had a client who wants to make settling their estate as painful a process as possible, and although probate was set up with good intentions, the process can be extremely daunting. In addition to the length it takes to traverse through the California probate system, there’s also a cost involved. In California, the cost of probate is based on the value of your estate or more specifically the value of the assets in your estate. There is a common misconception that probate fees are taxes, but that is not the case. The probate fees, which are specified by statute, go to the attorney representing the estate and the executor appointed by the court. Most attorneys will request the full statutory fee (not surprising), while the executor will often waive the fee if they are inheriting assets in the estate. So, how do we calculate how much probate will cost a particular estate? Well, we will double the statutory probate fee. The value of your estate assets is the fair market value (FMV) of those assets i.e. what they would be worth if you sold them on the date of your death.

Let’s try out an example to get an idea of what we’re talking about here. Let’s say you own a house worth $300,00, which you leave to your children in a will (it should be in a trust, but we will discuss that below). The first $100,000 is calculated at 4% or $4000. The next $100,000, is calculated at 3% or $3000, and anything up to the next $100,000 (all the way up to $800,000) is calculated at 2% or $2000. Adding those fees up we get a total of $9000 paid in probate fees. Yikes! Please note, as the value of your estate increases, so do the probate fees. An estate worth up to $1 million would result in $23,000 in statutory probate fees! Scary times! As you can see, probate can significantly reduce the value of an estate and that certainly won’t make your beneficiaries happy. You heirs gain nothing by going through probate and as you can see in the example above, probate actually costs your heirs thousands of dollars that would otherwise go to them.

So, what can we do to avoid probate all together? Well, first of all, only certain assets are subject to probate. For example, cash, stocks, bonds, brokerage accounts, personal property such as jewelry, and property not in a trust (ding ding), are all subject to probate. However, you can transfer these assets to a living trust in order to avoid probate. Additionally, any assets with a beneficiary designation, i.e. life insurance policy, is not subject to probate because technically that is a binding, legal contract stating where the assets should be distributed. Probate is a public proceeding and so in order to keep the terms of your estate private, you will want to create a living trust. Although, your heirs and beneficiaries are entitled to a copy of the trust upon your death, a living trust does not get filed with the court, maintaining your privacy. Another way to avoid probate is to keep you estate under $150,000, which will automatically get distributed to your heirs without a probate proceeding. Conceptually, this should make sense but practically speaking, most clients have an estate worth more than the $150,000 threshold. If you own any property at all, odds are you’ve already passed this threshold and therefore need to pout the property in a living trust to avoid probate. Other ways to avoid probate include making use of beneficiary account designations, joint tenancy, community property with right of survivorship, and transfer on death deeds. These types of property/asset ownership will be discussed in more detail in a subsequent blog post.

Although there are many ways to avoid probate all together, please keep in mind there is no substitute for a well-executed estate plan. That’s where we come in to help. No matter the value of your estate, we can help guide you through the estate planning process and ensure your most valuable assets are protected and distributed accordingly upon your death. What you’ll pay today for your estate plan package is a fraction of what your heirs will pay in probate fees! Sign up for an initial consultation today and let’s get to work on avoiding probate at all costs! Remember, it’s never too early to set up your estate plan. Stay safe and healthy out there!