After reading my last blog post, a friend pointed out that you can only understand the benefits of a living trust if you know about the process of probate, and why you would want to avoid going through it. Probate is the procedure by which a court determines that your Will is valid and then supervises the distribution of your assets to your heirs. If you have no Will, the court determines your heirs-at-law and supervises the distribution of your assets to them. Although this description makes probate seem rather innocuous, the reality is not quite as painless.
For example, probate is a public proceeding. As a result, the terms of your will become part of the public record. So anyone can find out that you left a precious family heirloom to your niece and not your daughter, that you left bequests to certain social and religious charities, or that you left more money to one son than the others. Similarly, the accountings given by your executor also become part of the public record, so anyone can look up how much money you had in your savings account, how well you did with your stock portfolio, or how much money your business was making. Of course, you’re no longer among the living, so this sort of disclosure will not affect you personally. But there are many reasons why, for the sake of your loved ones, you might want to avoid exposing this information.
The other disadvantage to probate is its cost to your estate. The court fees and appraisal fees and court fees for probating a typical estate may cost the estate – and therefore your heirs – $1,000 to $3,000. And that does not include your attorney and executor fees. The minimum amount of these fees, for probating a simple estate, is set by law as a certain percentage of the value of your estate. (See Cal. Probate Code, Section 10810 et seq.) So for probating an estate valued at $100,000, your estate pays the attorney and the executor each at least $4,000. For probating an estate valued at $500,000, your estate pays the attorney and the executor each $13,000. For an estate valued at $900,000, your estate the attorney and the executor each $21,000. Keep in mind that this is the minimum fee for probating a simple estate. The attorney and the executor can request and be granted additional compensation for “extraordinary” services such as the sale of your home, resolving complicated tax issues, or defending a will contest. And remember that the value of your estate is not discounted by certain debts that you owe. For instance, if you have $200,000 of equity in your house, but the fair market price of the house is $900,000, the entire $900,000 is counted toward the value of your estate for the purposes of determining probate costs. So a typical homeowner in Silicon Valley whose estate is not carefully planned could leave his or her heirs $25,000 or more in probate costs, without realizing it!
To avoid the costs and exposure of private information, many people avoid probate by jointly titling their assets with their heirs; by adding pay-on-death, transfer-on-death, or beneficiary designations on their accounts; or by giving away their assets while they are alive. But each of these options has disadvantages and, depending on the circumstances, they can create significant negative consequences. The safest way to avoid probate is by putting your assets in a living trust that includes instructions for your successor trustee to distribute your assets according to your wishes – outside of the probate process. But is this overkill for your situation?
Anyone who tries to convince you there is a one-size-fits-all solution is not giving you good advice. Consulting an estate planner is the most cost-effective way to get an answer tailored to your situation.
For more information about the costs of probate or for help structuring your estate to avoid probate contact Christl@DeneckePlanning.com or see DeneckePlanning.com.
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