- What is probate?
Probate is the process by which a court establishes the validity of a will (if there is one) and recognizes the Executor (if there is no will, the court will appoint an “administrator”). Probate also involves certain documents and reports filed in accordance with the law and payment of taxes and debts. Distribution of what is left is supervised by the court. This process takes a MINIMUM of six (6) months after the estate is opened in probate court and usually considerably longer.
- What is the point of probate?
One of the main points of all this is to give your creditors time to seek payment of the money you owe them and give your Executor time to collect money owed to you. Probate also establishes title to real estate.
- To whom does this apply?
Whether a person dies with a will (dying testate) or without a will (dying intestate), the estate will be probated if a certain minimum amount of property is involved. A will virtually guarantees probate.
- Isn’t the whole point of a will to avoid probate?
NO! A will does not avoid probate. However, a will does allow you to make decisions for yourself as to who you want to be your Executor, raise your kids, manage the money for your children, and who you want to receive all of your assets as well as other things, etc. If you don’t have a will (or trust), the court, by applying state law, will decide who does all these things and ultimately gets your assets. A will may also speed up the probate process because everyone involved has your directions to follow!
- What are the disadvantages of probate?
A lot goes on during probate that many people want to avoid. Here’s why:
- Probate takes a long time: The probate process takes a minimum of approximately six months, but usually lasts at least a year. It can take even longer if matters become complicated by a will contest, business problem, or anything else unusual.
- Assets: During the probate process, your beneficiaries cannot sell your assets. The Executor can only sell assets with court permission.
- Probate is a matter of public record: Anyone can have access to your personal financial affairs, plan of distribution, etc. For many people, the thought of their most personal information being made public is a terrible thought. In reality, unless you’re a celebrity of some sort, no one really cares. However, some people actually “work” probate records looking for people who are going to inherit substantial sums of money.
- Notice of your death must be published: The court will require a certain number of publications to let everyone know of your death. The purpose of this is to give your creditors a chance to make a claim against your estate.
- Probate is expensive: Brace yourself…
- Court costs: The probate court is not entirely supported by taxpayers. The amount of money an estate will need to pay for court costs varies by state. Executor/Attorney’s fees: Executor and attorney’s fees vary from state to state. In Kansas, the attorney will charge a reasonable hourly fee that requires court approval. In Missouri, the fee the attorney will receive is dictated by statute and is based on a percentage of the amount of assets distributed from the estate. The attorney receives 5% of the first $5,000 with the scale working its way to 2% of everything over $1,000,000. Costs of publication: Remember the notices that need to be published? Your estate pays for them. Bond premiums: Your Executor may be required to post a bond. The purpose of the bond is to serve as “insurance” in the event the Executor fails in some way to properly carry out his or her duties. The cost of this bond varies based on the size of the estate and is paid out of your estate. In your will, you can state that you do not want your Executor to post a bond. Other costs: There are other costs associated with probate that most people don’t think about. During the probate process, your estate has to pay for insurance, maintenance, etc. of assets tied up in probate. Each state requires a probate court proceeding: Usually, probate takes place where the deceased person was living. If the deceased owned real estate in other states, a separate probate proceeding is usually necessary in each of those states. For example, a Kansas resident with a lake house in Missouri will go through probate proceedings in both Kansas and Missouri, unless he or she has done some form of planning to avoid probate.
- How can I avoid probate?
- Some assets avoid probate: Some assets automatically avoid probate. For example, retirement accounts go directly to the beneficiaries you choose without going through probate (as long as these beneficiaries are adults). It is important to coordinate these types of assets with other assets that may be re-titled as part of an estate plan.
- Name a beneficiary for vehicles: Missouri and Kansas allow you to register your vehicle in beneficiary form. Your beneficiary will inherit it without probate.
- Joint ownership: Joint tenancy allows you to avoid probate on the first death. However, BE CAREFUL!
- Several things to consider are: Thwarts estate tax planning: Joint ownership can nullify estate tax planning! Remember, two of the biggest concerns addressed in estate planning are probate and estate taxes. Joint ownership temporarily solves the probate problem, but interferes with estate tax planning. Probate not eliminated: If both joint owners die at the same time, the asset will be probated. If one dies before the other, probate will be avoided on the first death only. On the second death, the asset will be probated. Liability: A creditor of a joint account can levy against the joint account even if only one of the joint owners owes the creditor. Capital gains tax issues: If an asset passes via a will or a trust, the beneficiary inherits a “step up” in basis. In other words, the beneficiary’s basis in the asset is the value of the asset on the date of the deceased’s death. The beneficiary would only realize a gain on any appreciation created from the date of the deceased’s death until the sale. Joint ownership between non-spouses negates the step up. Instead, the beneficiary would take the tax basis on the date of the gift and would pay capital gains taxes on any appreciation realized from the date of the gift up to the point of the sale of the asset.
- The Revocable Living Trust
A properly funded revocable living trust avoids probate of all assets. The revocable living trust is discussed in more detail in the “Living Trusts” section.