A guide to help you understand the pitfalls of probate.
Preface:
If you’ve lived in California for any length of time, and if you’ve lost a loved one, friend or family member living in California, you’ve probably heard the word “probate” thrown around. There’s also a great chance that the context in which you heard “probate” used was negative.
It seems as though most conversations related to probate are discussions about a worst-case legal situation, something out of a nightmare.
That’s exactly why we wrote this blog—to provide context for those conversations. Consider this your primer on probate, complete with definitions and explanations that will provide you with newfound clarity and understanding of this area of law.
So, what exactly does ‘probate’ mean?
Julie Andrews once said, “let’s start at the very beginning, it’s a very good place to start.” I agree with her.
Probate is the legal process by which a deceased person’s assets and debts are administered. In California, if anyone dies
(1) without a Trust and
(2) with a ‘probate estate’ worth more than $166,500,
then the management of those assets, payment of debts, and eventual distribution, post-death will require a probate.
Caution: It is important to be careful when you are reading about probate or researching any legal topic, that you make sure you are reading information specific to your state. Probate in some states, like Georgia and Texas, are not the same as in California. Further, some information will state that probate is about proving up the validity of a Will, and while that is an accurate statement, it also isn’t the whole truth — as you saw above, a Probate may be required even without the presence of a Will.
Discussions of legal topics are fraught with nuance and exceptions to rules; this is one reason why people joke that a lawyer’s favorite line is “it depends.” This article is meant to be an overview of the process for when someone passes away without a will and a probate is required. We do not want to bog you down with details that may cause confusion or risk sending you down a rabbit hole of scenarios that do not apply to your specific circumstances.
Probate vs Non-Probate?
As stated above, if someone passes owning more than $166,500 in assets, they will need a probate. However, there are ‘non-probate’ assets. So how do you know what type of assets you or your loved one own, and what will be included with calculating the $166,500 amount?
A Non-Probate asset is an asset that by its very nature will avoid the necessity of a probate if someone passes without a will. A non-probate asset is an asset that has a beneficiary designation. Good examples to think about life insurance, pay on death accounts, or retirement accounts. Generally speaking, if you have a named individual listed on these accounts as a designated beneficiary, then there is no necessity for court involvement.
Other types of non-probate assets are assets that are held as “joint tenants” or “community property”, where the title of the property passes automatically to another named individual. There are always exceptions to the rule, so we cannot guarantee that this will hold true 100% of the time; but in the vast majority of cases, assets with completed beneficiary designations, or held as joint tenants with rights of survivorship will avoid probate.
Probate assets are those assets that will require court involvement to administer after the passing of an individual without a Trust or with a Will. As you may have gathered from the definition of “non-probate asset” this is a big category and involves assets that do not have beneficiary designations or co-owners with rights of survivorship. These are often financial investment accounts, bank accounts, or real estate.
Key takeaway: when looking at an asset, ask yourself, “does this asset have a beneficiary designated or a co-owner?” If ownership passes automatically to another person upon the asset owner’s death, then generally speaking, this asset will not be included in determining if the $166,500 limit is met.
Why is there much hate for probate?
Now that we’ve touched on:
- What probate is
- When probate happens
- What assets are subject to probate
Let’s take a deeper look at why probate gets so much hate.
It really comes down to three things:
1) Lack of control
2) Time
3) Cost
What do we mean by “lack of control”?
One major reason people undertake estate planning is so that they can ensure their property passes according to their wishes. In essence: we all have an estate plan completed for us by California law and the IRS. If we die without completing any estate planning, then the state’s default rules will apply to how our assets are divided.
You might ask yourself, “why would I want to change the default rules?” Let’s look at a few scenarios:
Scenario 1: You are in a blended family. You were previously married. You entered this new marriage with extensive separate property assets and one child from your prior marriage. Your new spouse also has one child from a prior marriage, and you have had one child together.
If you pass without an estate plan, and your assets go through probate, the law will require your assets to be divided as follows:
- New Spouse: 100% of community property; ⅓ of your separate property
- Children: your biological children will receive the other 2/3rd of your separate property.
Scenario 2: You have chosen to stay single without children; however, you are in a long-term committed relationship.
If you pass without an estate plan, your long term committed partner is entitled to no inheritance under the default rules, everything will go to your parents. If your parents are not alive it will follow your family tree, but ultimately, a blood relative will inherit. If there are no relatives to inherit, all assets will pass to the State of California.
Scenario 3: You have broken ties with your immediate family and have created a close chosen family, but have no children and no spouse.
If you pass without an estate plan, you will end up with the same result as in scenario 2: everything will pass to your blood relatives, regardless of the quality of your relationship or familial bonds. There is no possibility of any of your assets going to the chosen family you have created for yourself, but that the law does not recognize as familial relationships.
Scenario 4: You have a child who has special needs and due to disabilities, will not be able to be self-sufficient through employment as an adult.
If you pass without an estate plan, any inheritance this child will receive will require a guardianship (if they are under the age of 18) or a conservatorship (if they are over the age of 18). Importantly, if the person is receiving government benefits or might need them in the future, there is a high degree of probability that such an inheritance will cause them to be disqualified from receiving those benefits & someone will need to petition the court to have a Special Needs Trust created in order to preserve that individual’s government benefits; however, even if a Special Needs Trust is created, there may still be a prolonged lapse of the social benefits your child is receiving.
Scenario 5: You are married. You and your spouse do not have any children. Your parents are alive.
In this scenario, if you pass without a trust, your spouse will inherit 100% of your community property and only ½ of your separate property. The remaining half of your separate property will pass to your parents.
So, what’s the problem:
In all of these scenarios, we witness the consequences of the person who has passed failing to exercise control over the ultimate distribution of their assets.
Some reasons you might want to exercise this control include (but are not limited to) the following possible scenarios:
- You want your new spouse to inherit none of your separate property and your children to inherit 100% of your separate property. Under the default rules they would inherit only a 2/3rds share.
- You have developed a very close relationship with your step-children and want them to inherit from you; under the default rules, unless there is an adoption, they would not inherit.
- Your children are under the age of 18 when you pass. Under these default rules, your children would require a guardianship to manage their portion of their inheritance until they turn age 18. This will require legal expenses to set up the guardianship and legal expenses with court oversight and accountings.
- You have a beneficiary with special needs and they will lose their government benefits due to disqualification after receiving their inheritance.
- You’ve had a falling out with your biological parents or immediate family and have created a chosen family that you want to provide for upon your death, but that the law does not recognize as family relationships.
- You’ve had a falling out with your family and instead of your assets passing to any of your family, you’d rather leave it entirely to a favorite charity or cause.
How long does a probate take?
Another reason Probate in California is looked down upon is because of the length of time the process can take. In a perfect world, if everything goes according to plan — the probate begins on time, you have no issue scheduling any needed court hearings (backlogs with the court can be unexpected, outside of your control, and have a real impact upon timing), and if all deadlines are strictly complied with — you are still looking at a process that takes between 9 to 18 months. Again, that is if everything goes right. If things do not go smoothly, or if you have a very complicated estate, the probate can end up taking multiple years.
With a trust administration, the process is much more streamlined. Unless there is a conflict or a conflict is anticipated, there is no need for court involvement. Trust administrators generally give the trustee a wide and broad range of authority to make sure that the beneficiaries have what they need or are entitled to, even if the ultimate distribution is prolonged.
Please compare that to a probate where the court must first issue an order granting someone the power to serve as executor, and then the executor can begin taking the necessary administrative steps.
What does probate cost?
It is quite common for us to hear that the cost of estate planning is one reason people delay or avoid completing this important step. One Important reason to set up a consultation with an estate planner is to learn what options best suit your specific and unique circumstances. There is a common misconception that estate planning is only for the wealthy, and this simply isn’t true. There are a wide variety of tools estate planners can utilize in order to create the right plan for your specific needs. Not everyone will require an intricate estate plan, but there is a level of planning that will fit everyone’s needs.
In relation to cost, the other thing to consider is: who pays it and when is that cost paid?
You may personally feel as though you do not want to pay for an estate plan, but consider, what will the cost be to your beneficiaries if you do not create an estate plan?
In relation to cost, the other thing to consider is: who pays it and when is that cost paid?
You may personally feel as though you do not want to pay for an estate plan, but consider, what will the cost be to your beneficiaries if you do not create an estate plan?
The fees for probate are statutory, meaning that they are strict and only authorized as by and in the Probate Code. The fees for probate are on three levels: court fees, attorney fees, executor fees. The court fees are related to the initial filing of the probate as well as the costs associated with the appraisals a probate requires. As with all legal things, it is possible to proceed with a probate without an attorney; however, given the strict timelines and procedures, it is highly advisable to hire an attorney. The statutory and executor fees are calculated based upon the value of the estate, and it is a critically important detail that debt does not matter in determining estate value.
The probate compensation breakdown is:
4% of the first 100,000
3% of the second 100,000
2% of the next 800,000
1% of the next $9 million
.5% of the next $15 million
Above $25 million is reasonable and left to the court’s discretion
So, what does this mean? Let’s look at this probate example:
If you pass with an estate of 1.5 million what will your fees be?
1st: 100,000 = $4,000
2nd: 100,000 = $3,000
3rd: 800,000 = $16,000
4th: 500,000 = $5,000
Total Attorney Fees: $28,000
Total Executory Fees: $28,000
Total fees (excluding court costs) = $56,000
Note: The attorney fees are $28,000 and the executor fees are $28,000. Excluding the court fees, the cost of probate is already $56,000. Before proceeding to other financial considerations, at this moment, please compare that to the cost of an estate plan that may range between $2,500 and $7,000 compared to fees of $56,000.
Now, $56,000 is undoubtedly a large amount of money that is going to professionals instead of your beneficiaries; however, to make this clearer, please imagine that the only asset is a home which is valued at $1.5 million. There are nominal cash assets valued at less than $10,000 which will be used for funeral and burial costs, in addition to the small access to cash, the home has a mortgage of $500,000 remaining.
The value of the probate estate does not decrease due to the presence of the mortgage, the fees continue to be based upon the full value of $1.5 million.
This probate example shows how a lack of cash assets impacts beneficiaries.
Due to the lack of access to cash, the only way to pay these fees will be if a beneficiary voluntarily pays the fees, or if the home is sold, the proceeds first pay off the mortgage, then the attorney and executor fees are paid, and lastly what remains is divided between the beneficiaries as described above.
It is unfortunate, but in scenarios like this one, probate is a major hindrance to creating generational wealth. The beneficiaries here have been deprived of a potentially income-producing asset, or an asset with growth possibility, or one with sentimental value, strictly in order to pay the statutory fees.
Now let’s compare the cost of probate to the estate post-death, and the cost to the beneficiaries to the cost of creating an estate plan. The fees for an estate plan do vary. You can create low-cost Estate Planning documents on LegalZoom. We do not and will never encourage you to do that as your beneficiaries may run into other issues that necessitate incurring extensive legal fees. An estate plan created by a licensed attorney focused on estate planning will cost anywhere from $2,000 to $10,000 depending upon the complexity of your needs and goals. In any case, $10,000 for an estate plan is significantly more affordable than $56,000 in fees and the potential loss of assets when you pass without an estate plan. While during your life you have spared yourself the expense of these legal fees, you have only kicked the can down the road, and later your beneficiaries will bear the greater cost of loss of assets and cash though the probate process.
Other Considerations
“Death leaves a heartache no one can heal, love leaves a memory no one can steal.”
From a headstone in Ireland
The loss of a loved one due to their death is a grief none of us will be spared. Grieving this loss is a path that we all navigate differently. Our experience is that going through the probate process can detract from those we leave behind processing and moving through their grief. While grief still exists during a trust administration, there is figurative mental and emotional space that lessens the pressure on the administrator to proceed immediately. Your successor trustee can step in immediately to manage your assets. With a probate, a court order is required before anyone can take control of your property. This may seem insignificant compared to the other factors discussed in this article, but we believe that it is worth noting this. We care a great deal about the mental health of our clients and are aware that the probate process can have a negative impact upon the representative responsible for moving the estate through probate.
Conclusion
We wrote this blog to explain why probate is often considered a nightmare process and something to be avoided at all costs. We hope that you have found it to be helpful. However, please remember that this information is only intended to be a cursory and high overview of the risks of probate. There is a mountain of additional information that goes into fully explaining the process and nuances of probate. If you have any questions about your own assets and what estate planning options might be right for your unique circumstances, we welcome the opportunity to speak with you.
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