“What is probate?” That’s a question I hear often.
In fact I was recently creating a financial plan for a client and this issue arose. The client, Betty, asked me about a family trust during our meeting. In explaining the advantages and disadvantages, the issue of probate came up. After about five minutes, Betty stopped and asked me to define probate.
I realized my answer to her might be helpful to you, so I’ll take a moment to explain. Just remember that I’m not an attorney and you should seek professional legal counsel with specific questions about your own situation. On to probate.
Probate is one way your assets are redistributed after you die. If you have a will, the court reviews it after you die. Then they determine who will get what. This is the process of probate, and in this case, it’s called “testate” because you died with a valid will. If you don’t have a will, the court will look at the law and listen to testimony and decide what happens to your money. This is still probate, but it’s called “intestate” because you were too lazy to create a will or trust.
Generally speaking, you can save 85% of the cost of an attorney by using LegalZoom.com. Either way, this process takes time, involves lawyers and costs a lot of money. Probate is expensive and is not a good way to protect your assets.
For example, when Elvis Presley died, he was worth $10 million. After probate, his heirs received $3 million. Where did the other $7 million go? It got gobbled up by lawyers and court costs because of probate. (And all Elvis worried about were his blue suede shoes!) Losing 70% of your estate or more to probate is not uncommon. Many of these costs are fixed regardless of how large or small your assets are. And the higher the costs, the less money there will be for your heirs. If you are a business owner, think about what your small business is worth. Now think about only passing a third of it on. Hurts…right?
What are some of the typical costs?
If you don’t choose carefully, a court appointed executor will be put in place. They might charge 2 to 4% of the estate.
2. Tax Preparation
To be fair, even if you don’t need probate, you’ll have to file an estate tax return if your estate is large enough. The same thing goes with property appraisals.
3. Attorney Fees
This is the biggest cost of probate and it can be (almost) completely avoided. Attorney’s fees are often set by state law, and they are high. On top of these problems, probate is public record. That means anyone can find out how much money you had and where it went. They can read your will too. That stinks, if you ask me.
How do you avoid the horror of probate?
Again, I’m no lawyer, but I am huge proponent of having a living trust. The law varies from state to state so be sure to check where you live. But in California, the trust solves many problems. (I’ve been told that in a few states, you are better off without a trust, but I still don’t understand why.)
Using a living trust, it’s possible to redistribute your assets after you die. This is done quickly, cheaply and privately. In some cases, you can prepare your own living trust using a service such as Legal Zoom. Other situations are more complicated and you would really be better off using a qualified attorney to prepare your trust.
What probate horror stories can you share? What have you done about it?