Why Having a "Will-Only" Estate Plan Is a Costly Mistake
WHY ONLY HAVING A WILL IS NOT ENOUGH
Last month, I had a conversation with an aunt of mine who said that she was “done with estate planning” because she and her spouse had their Wills prepared many years ago. She felt confident that a Will would take care of everything because they simply wanted their assets to go the surviving spouse and then get passed to their surviving children.
Well, I told my aunt that she was going to have to rethink the plan that she and her spouse had put in place because, first and foremost, having a will as her only plan is going to send her estate to the probate court. Probate in California was going to cost her kids a sizable chunk of their inheritance. And, aside from the hefty probate fees, her “estate plan” left a lot of important issues unaddressed.
First off, I let my aunt know that probate fees in California are set by law, in that, attorneys cannot charge more than the maximum amount in the probate code. I also informed her that the probate fees are based upon the value of the estate. (per CA Probate Code §10810). In my aunt's case, she owns a home and if, at the time of her death, it is worth $1,800,000, her children would be required to open a probate case in order to change the title into their names. Assuming that her house was the only asset that she had to probate, $1,800,000 would also be the value of her estate. This is the case even though her house might have an $800,000 mortgage. The value of the estate is determined by the market value of the asset(s), not the net value (i.e., not the amount of equity).
How Probate Fees are Calculated
Then I broke down the attorney fees and executor commission for my aunt. The fees are not calculated on a flat percentage, so I wrote it down. I reminded my aunt that the probate fees are based on the value of the estate.
Per CA Probate Code §10810, the maximum fees allowed are 4% of the first $100,000; 3% of the next $100,000; 2% of the next $800,000; 1% of the next $9,000,000; and 0.5% of the next $15,000,000.
Please note that the cost of the executor's commission is same as the attorney's fees – so the dollar amount calculated must be multiplied by two. So, in the case of my aunt's $1,800,000 home value, the probate fees will total $62,000.
$ 4,000 (4% of the 1st $100k)
$ 3,000 (3% of the next $100k)
$16,000 (2% of the next $800k)
$ 8,000 (1% of the next $9 mill)
$31,000 for Attorney's fees
$31,000 for Executor's commission
grand total of $62,000
My aunt wanted to know why the executor's commission is so high. I told it is because the executor is taking on a great responsibility by becoming a fiduciary of the estate. The executor risks being held financially liable by the beneficiaries and/or heirs of the deceased person if funds are misplaced or misused – so hopefully she named an honest person in her Will.
Costs Not Included
But, I digress. I explained to my aunt that the above fees do not include any of the costs associated with probating an estate. Costs include, but are not limited to court filing fees, bond fee(s), real estate broker fees (for selling the house, when applicable), probate referee fees, appraisal fees, the costs of publication of the notice to probate, and the costs to serve all the heirs and beneficiaries. Fortunately for her, the court will scrutinize the costs during the accounting, but these costs will still add up.
Why Does The House Have to be Sold?
My aunt wanted to know why on earth does the house have to be sold? I told my dear aunt that if her Will states that her entire estate is to be divided equally among her children, they could technically co-own the house. However, the probate fees and executor's commission need to be paid before the probate assets get distributed to the heirs and if that is her only asset, the house will need to be sold to pay for probate. I also mentioned that many children do not want to co-own a property with their sibling(s). I also let her know that there are alternatives that could allow one child to buy out the others.
Probate Cases are Taken on Contingency
As we continued to chat, I let my aunt know that attorneys must take probate cases on contingency, so her kids would not have to cough up $62,000 in cash to probate her Will. She wanted to know if the above fees are what all attorneys charge. I had to admit that there are probably lawyers out there that will charge less than the maximum currently allowed by law. Then I warned her that her executor gets to decide who represents him or her. Still, I said, the above fees are what the great majority of attorneys will charge since the attorney is bankrolling the case until it closes – just like a personal injury lawyer does (except those folks take 33% of the judgment!).
Probate Takes Time – a Lot of Time
I informed my aunt that, if everything goes smoothly, probating her Will can take approximately nine to twelve months. But, I warned, if there are problems, such finding all of the heirs or if the house takes a long time to sell, the delay can cause the probate to take over a year.
TRUSTS AVOID PROBATE
By now, my aunt was quite worried that her children were going to be giving away so much of their inheritance. So, I consoled my aunt with this important fact – a Revocable Living Trust will allow her children to avoid probate fees.
I explained to her that in the case of a piece of real estate, probate can be avoided because the now deceased person's real estate was re-titled and “funded” into the Trust during the decedent's lifetime. Thus, a person who has a Trust does not die with their real estate titled in their name alone and the Trust controls who gets the property next – so no need to go to the probate court.
Lastly, I told my aunt that when all the decedent had was a Will, the deed to the property was never changed. So, when a homeowner dies with real estate in their name, the probate court must oversee the transferring of title from the deceased person's name to the beneficiaries named in the Will (or the heirs at law if there is no Will). This same concept applies to other types of property – if the title needs to be changed, the probate court is where that occurs.
A Few More Reasons to Have a Trust & Avoid a Will-Only Plan
The cost of administering a Trust is significantly less than the cost of probate.
Good estate plans allow you to control who inherits your assets, how they inherit and when they inherit. For example, do you really want your 18 or 21-year-old kid to inherit even a few hundred thousand dollars? Did someone say “par-tay”? A revocable living trust can keep your funds in the trust until your children reach a responsible age.
A Trust allows you to arrange for what happens if you ever become incapacitated. Without a Trust, a Conservatorship – another court proceeding – may need to be filed if you are unable to take care of your own finances or healthcare. With thorough estate planning, powers of attorney and healthcare directives can provide you with protection and keep your relations from filing a conservatorship in court.
With a Trust, you can also protect your assets from predators or even new spouses. You can preserve your share of your estate for your children and prevent the surviving spouse from disinheriting your children and giving everything to a predator.
This is not an exclusive list of the benefits of a well-thought-out estate plan so I would be happy to discuss estate planning with you directly. If you have any questions at all about why you should have a properly prepared estate plan – one that can provide all of the above benefits and save money, let's start a conversation. Send me a message or schedule an appointment.