Just What is Probate? & Why Do You Want to Avoid It?
Probate is the court-supervised process required to distribute the assets of a deceased person. It is a long, drawn out public process that is now taking well over one year to complete in Southern California. The court closures due to Covid-19 have added even more time to the court process.
Probate administration begins when a person dies with assets in their name and no other method is available to transfer the assets to the names of the deceased person’s beneficiaries per their Will or to their heirs-at-law (which applies when the decedent did not have a Will and died intestate).
As an example, I will explain what happened when Ms. Smith suddenly died last year. At the time of her death, Ms. Smith had a great job, a home and a large amount of money in savings and retirement. She was a single woman, without children, but she because not done any estate planning, not even have a will, all of her property was in her own name at the time of her untimely death. By the way, even if Ms. Smith had prepared a will, her estate would require probate administration because all of her assets were in her own name.
Ms. Smith left behind a brother and her elderly parents, so they were the ones who ultimately would need to wrap up Ms. Smith’s affairs. After searching for an estate plan or a will, the family realized that they were going to need an attorney to help sort this all out.
Ms. Smith’s brother, John, with the help of an attorney, had to file a Petition for Probate in the county court where Ms. Smith was living at the time of her death. John Smith asked the court to appoint him the personal representative of the estate. Fortunately for Ms. Smith’s family, the attorney cannot charge for legal fees until the estate is closed, so the costs are fairly low at the beginning of the case.
While preparing the Petition for Probate, an initial inventory of the assets needs to be prepared so that an estimation of the value of the assets can be made. The estimation needs to be based on fair market value and on the gross value of the property (so no deductions for mortgages and liens allowed). As mentioned, Ms. Smith left behind a house, bank accounts, and retirement funds. She also had a car, household furnishings, and many other pieces of personal property. Given that the average home in Orange County is worth about $730,000 in 2020, it is easy to imagine that Ms. Smith’s assets exceeded $1,000,000.
The Petition for Probate, after having been filed, was assigned a case number by the probate court and a court date was provided. The court’s filing fee for this Petition is currently $435 plus there are approximately another $100 in costs to get the papers filed. The estimated value of the assets is included in the Petition, as is the contact information for John Smith, the proposed personal representative. Ms. Smith’s heirs, her elderly parents, are also named in this public document. Tons of companies buy this public information and start soliciting John Smith as well as her parents. Sadly, some of these companies can be unscrupulous and predatory.
Next, California law requires that the information in the probate petition be published for three weeks in a local newspaper to, essentially, announce to the world that John Smith has started a probate for Ms. Smith (more unsavory people get to read this). The costs for publication, processing & filing will be about $550.
In addition to the publication in the newspaper, all heirs, beneficiaries, and other interested persons need to be given notice by mail of the Petition and the hearing date. The court’s Probate Examiner will scrutinize the filing and other details before recommending the Petition for approval. If all of the details are in order, the Personal Representative will not have to show up for the hearing.
If John Smith’s Petition for Probate is approved by the court as the personal representative (aka as an estate administrator or an executor when there’s a will), then John will also need to be bonded by an insurance company. The cost of the bond is based upon the value of the estate assets and John’s personal credit rating. With good credit and a $1,000,000 estate value, its possible that the bond will cost around $3,000. If John was unable to get approved by the bond company, then someone else would need to Petition to be the personal representative.
Because the bond is not processed until the Petition for Probate has been approved and an Order for Probate along with the Letters of Administration (the “Letters”) have been signed by the court, John will be able to pay for the bond from funds in Ms. Smith’s bank account. That’s probably a relief because John has already paid out $1,085 from his own pocket. Of course, he can get reimbursed by the estate eventually.
With the Letters, John will need to open a checking account for the estate so that he can pay for the bond and beginning paying for the costs involved in administration from the decedent’s estate.
I should also mention that John Smith will be able to charge a fee for his work as the Personal Representative of the Estate of Ms. Smith. After all, it’s a lot of work. The maximum fee a Personal Representative (the “PR”) can charge is limited by law and cannot be paid out until the end of the case, after court approval. It just so happens that the fee that can be earned by PRs is the same as for attorneys.
After John Smith’s petition is officially approved he becomes the PR and an accurate inventory of all of the assets of the estate need to taken. Not only does the PR need to inventory the assets, he needs to make sure that they are safeguarded to preserve their value. This inventory will be sent to a Probate Referee who will appraise the non-cash assets as of the date of death. The Probate Referee will also charge a fee based on the value of the assets that he or she appraised.
Creditors of the decedent also need to be sent notice. They will have four months to submit claims or lose their chance to get paid. Notice also needs to be sent to California’s Department of Health Care Services and the Franchise Tax Board. In probate, the PR is not personally liable for the debts of the estate. The PR can pay the creditors from cash already in the estate. If there isn’t any cash in the estate, the PR will need to sell assets (often through an estate sale) to get cash to pay off the creditors and also to maintain the house, utilities, and insurance during the home sale.
In the case of Ms. Smith, her parents are her heirs and they will inherit her estate. They may want to keep her house or they can have the PR sell it. Generally, the PR can get permission from the court via the Petition to sell the house without a hearing.
Once all of the assets have been inventoried, appraised, and otherwise taken care of, then a formal accounting of income and expenses is filed with the court. However, four months after the Letters have been issued is the soonest the final accounting can be filed. It’s best to wait until the creditor’s four month window to file a claim has also passed (which is often only a few days later).
Included with the final accounting is a petition for payment of attorney’s fees and fees for the personal representative plus a request for a final decree from the court that allows the assets to be distributed. If it is approved, the PR can begin to wrap up the final parts of probate.
The attorney’s fees and the PR fee can finally be paid. Both the attorney and the PR can each charge the Estate of Ms. Smith (valued at $1,000,000) as follows:
4% of the first $100,000 = $4,000
3% of the second $100,000 = $3,000
2% of the next $800,000 = $16,000
1% of the next $9,000,000
a “reasonable fee” for amounts over $10 million
Fee for each: $23,000
As you can see, the probate fees for Ms. Smith’s estate are $46,000. The attorney and the PR can also petition the court for extraordinary fees in case of litigation and performing tasks outside the typical probate. Those fees are generally charged on an hourly basis, ranging from $300 - $500 an hour for attorneys (depending on who you have hired). As you may have noticed the costs and fees for other expenses are separate and not included in these fees.
If Ms. Smith’s parents decided to keep the house, it would be at this time the house’s title would be put in their name. The funds in the estate’s checking account would also be paid out to her parents. Next, each person who received an inheritance will need to sign a receipt, which gets filed with the court. Once all of the receipts have been filed, then the PR will ask the court to be discharged from his duties. Once the judge signs the order discharging the personal representative, the bond company will release the bond, and finally, about a year or so later, probate is closed.
Why Do You Want to Avoid Probate?
If you have made it this far in my blog, thank you! I believe that what you have just read would be the first and main reason why you would want to have your loved ones avoid probate. It is a lot of work to go through the probate administration process, the fees are steep, there are plenty of extra costs that would otherwise be avoided, there are many headaches, and the court process takes a long time. While a trust has to be paid for up front and there are some costs involved in the trust administration process after your death, it is still much less expensive when compared with the costs of probate.
Besides the privacy plus saving time and money, having your home in a trust can prevent a claim from the California Department of Healthcare Services if you end up needing Medi-Cal prior to your passing away. This is a real concern for many older Americans on Medicare because even though Medicare is great for many things, it is less so when you need extensive nursing home care and expensive medications.
If my hypothetical Ms. Smith had minor children, the children would inherit what’s remaining of their mother’s money at the tender age of 18. That’s a lot of money for an 18 year old. If she had made an estate plan, she could have provided for her children and decided when they may inherit and under what circumstances. She could also include incentives for attending college or making other smart choices.
A trust could also provide for a beloved pet, a favorite charity, or for other persons that you may want to share your legacy with. Absent a trust or even a will, the state of California will divide your estate amongst your heirs at law.
There are many other benefits to having an estate plan in place. For example, the Revocable Living Trust is harder to challenge in court than a will, so your estate is less likely to become trapped in litigation. Trusts offer more privacy than probate estates. There are no public inventories during the trust administration. No one will find out want you own or who your beneficiaries are. Plus, their contact information will not be published so they are safer from predators and scam artists.
Best of all, your loved ones will have a much easier time grieving for you and then picking up the pieces when they do not have to deal with a probate court case. This should give you the peace of mind that preparing an estate plan is a very wise choice.
If you want to chat with me further about probate and/or estate planning, please send me a text or give me a call at 949-416-3575.
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