What's So Bad About Probate, Anyway?

As I've posted previously here, living trusts are very popular these days mainly because they avoid probate. Probate is a court-supervised process where the assets and heirs of a deceased person are determined and distributed. The two most common reasons people want to avoid probate are: (1) its public nature, and (2) its cost. But depending on your estate, these two issues may not be a problem at all, and in fact, court supervision may be just what your estate needs.

Public Nature of Probate

There are two main ways that your estate could be subject to probate: (1) you have distributed your estate using a will, or (2) you don't have a will or estate plan of any kind (known in the legal world as dying intestate.) If you die with a valid will, the person whom you have named as your executor or personal representative will file a petition with the court to begin the probate process. If have no will or estate plan, the petition can be filed a family member. The administrator then goes through the process of filing a list of the estate assets with the court, and notifying creditors. After the creditors are satisfied, the estate is then distributed among the heirs. This often involves selling the estate assets, which takes time.

This all involves filing papers, including the will itself, with the court. When the papers are filed with the court, they become public record. What that means is that anyone can go down to the court house and request to view the file, and get copies of documents. This might be a big issue for you, Or, it might not. You might not care if a stranger finds out what was in your will, or what your assets were. In my post on wills, I identified some very famous and wealthy people who had wills that went through probate and are now public record. Chances are, unless you are rich and/or famous, the likelihood that a stranger is going to come down to the courthouse (if they even knew which court house to go to) to look at your probate file is probably pretty low.

If you have an estate that is subject to probate, you may want to consider whether its public nature is an issue for you. If not, then you may not need to avoid it, assuming the costs aren't too high.

Costs of Probate

Costs of probate can be a big problem if your estate is large enough. I previously posted the fee schedule involved in a probate proceeding:

4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000 (we've probably lost most of you by now)
0.5% of the next $15,000,000 (for the lucky few)
for estates above $25,000,000 (the luckier fewer), the fee is a reasonable amount to be determined by the court.

There is also a statutory attorneys' fees schedule which is the same, and is in addition to the probate court fees. So the total probate fees (not including the initial filing fee), would be the amount from the above schedule times two.

Let's say you have an estate of $1 million. That sounds like a lot of money, but if you bought your house in California 30 years ago, you might be in this category. The probate fees would be $23,000, and the attorneys fees would be another $23,000, for a total of $46,000, or an effective rate of 4.6%. Nothing to sneeze at.

Having a living trust, though, doesn't get you out of the post-death estate administration game. A living trust works like a will in that it gives instructions about what to do with the trust assets when you die. The estate still has to be administered, and the assets have to be ascertained (and probably sold) with the proceeds going to the beneficiaries (the equivalent of heirs in a will). Instead of an executor, this is done by a trustee, who charges a fee for his or her work. Will it cost $46,000? Probably not, but it will cost something. Will it take as long as a probate? Maybe, but administering a trust usually takes less time than going through probate.

The big difference is that there is no court supervision in the administration of a living trust. That is usually touted as a good thing, but it might not necessarily be. In a probate, the court is looking over the shoulder of the executor/personal administrator to make sure the estate is being administered per the terms of the will (or the the laws of intestacy if there is no will). The court doesn't do that where there is a living trust. If a beneficiary of a living trust thinks the trustee is not doing what they're supposed to be doing, they may have to bring a lawsuit, which costs court fees and attorneys fees and takes time. If that happens, the advantages of a living trust over a will start to fade.

Anybody thinking about setting up or updating their estate plan should consider all of the options, and discuss them thoroughly with their estate planning attorney. A good attorney will explain the ins and outs of these tools, and will tailor the plan to your needs and desires.