By Stephen W. Bedikian, Associate Wealth Advisor
Probate is the legal process of administering a deceased person’s estate and creating an orderly transfer of their assets to heirs. It may also involve proving the validity of the will; identifying and managing assets; and paying taxes and debts.
Most Americans do not have personal experience with probate until a parent or relative passes away – and they’re sometimes unpleasantly surprised by aspects of the process that could have been avoided with advanced planning. Since probate is a matter of public record, the deceased person’s will, estate inventory, and a final estate accounting become available to any interested acquaintance or nosy neighbor. For those who are private about their finances, this can be a very uncomfortable outcome.
The probate process: What you can expect
Each state has its own rules for the probate process, including which estates must go through it. In Texas for example, probate is mandatory if an estate’s value exceeds $75,000.
To start the probate process, an application is filed with the court and accompanied by the deceased’s will (if one exists), a death certificate, and an inventory of assets, financial records, tax returns, and debts or expenses. The court will then appoint a personal representative to manage the estate during the probate process.
Often there is no will. According to legal services firm LegalZoom, only about 45% of U.S. adults have created estate planning documents.
If there is a will, the court will appoint a personal representative or executor and provide them with Letters Testamentary. If there is no will, the personal representative or administrator appointed by the court will receive Letters of Administration. Typically, these court-issued documents are required by financial institutions to access and manage accounts of the deceased.
Family members and other participants in the probate process can encounter several unexpected issues:
Demands on your time – and a long waiting period.
At a time when the family may be grieving, they also will need to spend time locating documents like account statements, tax returns and titles to property. If the deceased person wasn’t particularly organized, this can be challenging, especially without account credentials to access online accounts.
Once the application is filed with the court, it can be weeks or months before a personal representative is appointed. Meanwhile, bills must still be paid, and a house or other real estate may be sitting vacant. Typically, financial institutions will freeze any account that used the deceased person’s Social Security number for tax reporting or any trust account for which the deceased was the sole trustee.
This means the surviving family may lose access to those funds while still having to pay bills for months. If the deceased person’s will is contested by a disgruntled relative, many more months could be added to the timeline.
How long does the probate process take?
Typically, from six months to a year, depending on the complexity of the estate and your state’s legal requirements.
Costs of the probate process
The surviving spouse or family will need to retain an estate attorney to prepare court filings and navigate the process – and the legal fee meter will be running. In California, there is a statutory fee structure for probate lawyers that starts at 4% of the first $100,000 of estate value and then decreases based on estate value. For a median-priced home in Los Angeles (about $1 million), the probate fee for the attorney alone for the average home could be $23,000.
Who pays probate attorney fees?
These fees typically are paid through the estate’s assets – but this of course reduces the value of the estate.
Lack of privacy.
Probate records like real estate transactions are matters of public record. In some jurisdictions, access requires a visit to the courthouse; in others that have gone digital, that information is just a few keystrokes away. Never underestimate people’s curiosity about others’ finances.
How can you avoid probate?
Different types of assets can pass to heirs and beneficiaries by different methods. These include state titling or operation of law; by contract directly as beneficiaries; and through a will via probate or through a trust that bypasses probate.
Proper estate planning involves conducting an inventory of all assets and then determining the best method to pass each asset to heirs and beneficiaries.
Examples include:
- Real property, such as a primary residence or rental property. Married couples often hold titles The property title might read: John Smith and Mary Smith, Husband and Wife as Joint Tenants. When one spouse passes away, the property will have to go through probate unless the property was held in a trust, or the property was held as ‘joint tenants with rights of survivorship’ (JTWROS). In the latter case, the deceased spouse’s interest goes to the surviving spouse by operation of state law, so probate is avoided.
- Investment and bank accounts. Typically, these accounts have designated beneficiaries. By contract, the assets in the account go to the named beneficiary and avoid probate. It’s important to keep in mind that whatever your will or trust says doesn’t matter if you forget to update your account beneficiaries after a divorce or other life change.
Another potential mistake can occur when an IRA account owner names their revocable trust as a beneficiary. Unless the trust is set up as a ‘conduit or pass-through’ trust, the IRS may view the trust as a ‘non-designated beneficiary.’ This can have a very real impact for your heirs. If an account owner designates a child as a beneficiary of their IRA, that heir would have 10 years to deplete the account. If they inherit those funds via the trust, that period could be cut in half to just five years. This could push them into a higher tax bracket, directly reducing the value of their inheritance.
Build your estate plan with probate in mind
Careful planning for your estate isn’t just about avoiding probate and a big tax bite – it’s also about peace of mind. A well-constructed estate plan is essential. At Halbert Hargrove, we’ll work with you to help you define your estate planning goals. We can also help you find the right estate attorney to draft the necessary documents.
Estate planning is not a one-time event; we urge you to continue to have conversations with your financial advisor when you transition through major life changes and as tax laws evolve. And we’ll check in with you periodically to reconfirm the designated beneficiaries on your accounts.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser with its principal place of business in Long Beach, California. HH may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of HH, please contact HH or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com.
This blog is provided for general information purposes only. No portion of the content serves as the receipt of, or as a substitute for, personalized investment advice from HH or any other investment professional of your choosing. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
