Probate, or probating an estate, means distributing the assets of a deceased person after paying their debts. To express your desires about how you want your real estate, bank accounts, stocks, bonds and personal property distributed after you die, at a bare minimum you need a written will.

Incidentally, please keep your written will where it can be easily found after your death. Do not put it in your bank safe deposit box! The reason is your relatives and friends might not be able to gain access to your safe deposit box. Personally, I keep my will in my desk drawer, clearly marked, and several people know to look there for it after I die.

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If you don’t leave a will, or if your relatives and friends can’t find your will after your death, the state law where you resided at death will decide who gets your assets! This is called the law of intestate succession. The result might not be what you want, especially if you are involved in a second (or third, etc.) marriage.

Written wills don’t affect some of your assets. Even if you mention some assets in your will, the method of holding title might automatically take those assets out of your will, such as joint tenancy with right of survivorship (or in some states, tenancy by the entireties between husband and wife).

EXAMPLE: Suppose you hold title to a vacation home with your brother in joint tenancy with right of survivorship. You bought it before you got married. In your will, you leave your half of the vacation home to your spouse. But your will has no effect on joint tenancy assets so, when you die, your half of the vacation home automatically goes to your surviving brother without probate. However, if he dies first, then you will receive his half of the vacation home automatically as the surviving joint tenant. His widow and/or children won’t receive that joint-tenancy property, regardless of what his will says. Incidentally, after a joint tenant dies, to clear the deceased’s name from the title the surviving joint tenant(s) usually need record only a certified copy of the death certificate and an affidavit of joint-tenancy survivorship with the county or city recorder of deeds. No probate proceeds are required after a joint tenant dies!

Written wills also usually have no effect on “payable upon death” assets such as bank accounts, stock certificates, IRAs, 401(k)s, insurance policies with named beneficiaries, and other assets that name the successor owner in the ownership document. Except in a very few states, real estate cannot be held with a “payable upon death” clause in the deed.

However, big problems can develop if the person designated as the “payable upon death” beneficiary has died before the asset owner dies or if that individual cannot be located. State laws vary widely as to which assets can have “payable upon death” clauses in their ownership documents.

IS THERE ANY SITUATION WHEN PROBATE PROCEEDINGS ARE GOOD? Yes! If the deceased left large unpaid bills and/or legal disputes, or a complicated estate or business situation, then expensive probate court proceedings will eventually bring a final conclusion. If disputed living-trust assets are distributed according to the terms of the deceased’s living trust, the deceased’s creditors can then sue the living-trust beneficiaries who received those assets without the benefit of probate proceedings to resolve creditor claims. In such a rare situation, it is usually best for the local probate court to distribute the deceased’s living-trust assets and to resolve any creditor claims or other uncertainties.

Even when a deceased left assets in a revocable living trust, there is no guarantee there won’t be probate problems. To illustrate, just recently in David v. Hermann (2005) 129 Cal.App.4th 672; 28 Cal.Rptr.3d 622, the California Court of Appeal invalidated a living trust at the request of a sister who alleged her sister had undue influence and fraudulent control over their mother’s living-trust amendment. But probate controversies involving living trusts are far less frequent than those involving wills, or when a deceased dies without a will.

HOW MUCH DOES PROBATE COST? Most states have maximum probate attorney and estate executor (or administrator) fees set by statute. To illustrate, in California a $150,000 gross value probate estate has maximum attorney fees of $5,500, plus $5,500 maximum executor fees. A $300,000 gross value California estate has a maximum $9,000 probate attorney fee, plus $9,000 maximum to the executor or administrator. But a $1 million gross value estate is a genuine probate bargain (percentagewise) at $23,000 maximum for the probate attorney, plus $23,000 maximum for the executor.

Please notice the statute is based on the estate’s gross asset market value at the time of death. It usually does not take into account debts, such as a mortgage, or other bills to be paid from estate assets. But all this unnecessary expense can be avoided by holding major assets in your revocable living trust.

Several years ago, Kiplinger’s Washington Letter reported statutory probate fees for small estates can be as high as 22 percent of the gross assets, or as little as 6.2 percent for estates over $300,000. These unnecessary expenses deplete estate assets, resulting in fewer assets available for distribution to the deceased’s heirs and charities.

However, probate attorney fees and executor fees are negotiable downward. Many executors and administrators will completely waive their fees if they inherited assets under the deceased’s will or by intestate succession. Incidentally, an executor is named in the deceased’s will to distribute the deceased’s estate according to the terms of the will. But an administrator is appointed by the probate court if no will was found, or if the executor named in the will declines to serve.

Please be aware if the deceased left probate assets in more than one state, probate proceedings will usually be required in each state where the deceased left assets, such as real estate. However, living trusts avoid multistate probate proceedings.

EXAMPLE: I’ve told the story before about my late Minnesota friend, Borgie, who died a few years ago at age 83. She owned real estate in Minnesota, Florida and North Dakota. Her son later told me probate court proceedings were required in all three states, including hiring a probate attorney in each state to distribute her real estate and other assets to her heirs named in her will. That waste of time and money could have been avoided if she held title to her real estate in a living trust. If all the assets had been in a living trust, the distribution costs would have been minimal, almost zero, except for recording fees.

ARE THERE OTHER PROBATE AVOIDANCE METHODS? Yes. Assets titled in joint tenancy with right of survivorship, tenancy by the entireties (between husband and wife, where allowed), and community property with right of survivorship (in some community property states, such as California) pass automatically without probate upon the death of a co-owner. However, the surviving co-owner must remember to clear the title of the deceased co-owner, as explained earlier. A surviving co-owner receives a new “stepped-up basis” on such inherited assets (discussed later).

In addition, most states have probate avoidance methods for small estates (usually below $30,000 to $100,000 net value) and/or for assets passing to a surviving spouse. Consultation with an attorney in your state will clarify if your small estate situation qualifies to avoid probate court costs and delays without a living trust.

SHOULD I GIVE MY PROPERTY TO MY HEIR BEFORE DEATH TO AVOID PROBATE? No. Under current federal gift tax law, an individual can give away up to $11,000 per donee each year without even filing a gift tax return. That means a husband and wife, for example, can give away $22,000 total assets tax-free to any individual per year, such as a son or daughter. In addition, an individual can give away up to $1 million during their lifetime without any gift tax liability. However, a federal gift tax form must be filed for gifts exceeding $11,000 per donor per donee per year (although no gift tax will be due until the $1 million gift tax exemption is exceeded).

But there is a HUGE tax problem for the donee if the asset given away is highly appreciated real estate.The rule for gift property is the donee who receives the gift takes over the donor’s adjusted cost basis for the gift property – the generous “stepped-up basis” rules to market value on the date of death do not apply!

EXAMPLE: Suppose elderly mom on her deathbed deeds her house to her loving daughter who has taken care of her. Mom’s basis for the house is $100,000. But it has appreciated to $450,000 market value at the time of mom’s gift to the daughter. Although no gift tax is due (because mom’s total lifetime gifts are below the $1 million gift tax exemption amount), the donee daughter’s basis for the gift house is only $100,000. If she decides to sell it shortly after mom dies, the daughter will have a $350,000 taxable capital gain ($450,000 minus $100,000 adjusted cost basis, minus any sales costs such as realty sales commission). It would have been much better for the daughter to inherit the house from mom’s living trust, avoid probate, and then get a new stepped-up basis of $450,000 market value on the date of mom’s death. If the daughter then decides to sell the inherited house, she would owe little or no capital gain tax.

(For more information on Bob Bruss publications, visit his
Real Estate Center

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