Probate Explained – What it is and Easy Ways to Avoid It Without a Trust

Probate: A (relatively) Short Explanation

Typically, a probate is a court supervised administration of a decedent’s (dead person’s) estate.

The probate administration of an estate largely consists of:

1)      Determining if the decedent died with a valid will or died without a valid will (known as dying “intestate”);

2)      Determining the “probatable assets” of the estate  (more on this below);

3)      Determining the valid creditors of the estate and paying them if there are sufficient assets to do so; and,

4)      Distributing the remaining assets of the Estate after all creditors and costs of administration are paid (lawyer’s fees, personal representative’s fees, court costs and other related fees).

While the above may seem perfectly reasonable, the downside of a probate is usually the time required to probate an estate (often a year or more) and the significant fees associated with the probate.

The fees are based on the gross value of the probatable estate, not the net value of the probatable estate.  For example, if a decedent owns a home worth $400,000.00 at the time of death but owes $390,000 on the home, the probate fee is calculated based on an estate value of $400,000 and not the net value of $10,000.

The attorney for the personal representative and the personal representative each receive the following minimum fees (unless waived) for an estate below a million:

1)      4% for the first $100,000

2)      3% for the next $100,000

3)      2% for the next $1000,00 up to a million dollar value

Therefore, assuming an estate with a gross value of $400,000, the fees are $11,000 for the attorney and $11,000 for the personal representative:

$100,000              –              $4,000.00

$100,000              –              $3,000.00

$100,000              –              $2,000.00

$100,000              –              $2,000.00

Total                                      $11,000.00

Moreover, these fees are for an “ordinary” probate.  If there are extraordinary services provided (e.g. a lawsuit by or against a creditor, a lawsuit by a beneficiary, etc.), then the attorney and the personal representative may receive “extraordinary” fees in addition to the ordinary fees.

Probatable v. Non-Probatable Assets

Beneficiary Designations and Joint Tenancies

Only “Probatable” assets are included in a probate.  If you can pass all of your assets by way of a non-probatable method, probate is unnecessary.  The most common ways of passing non-probatable assets are by way of a beneficiary designation or a joint tenancy.

Examples of assets that can typically pass by way of a beneficiary designation are bank accounts, IRAs, 401Ks, brokerage accounts, etc.

Joint tenancies are a type of ownership between two or more persons where the interests of a dead owner pass to the surviving owners automatically.

Both beneficiary designations and joint tenancies do not require probate.  For a person to receive the property in his or her own name, it typically requires little more than the completion of a form that is either recorded or submitted to the company who holds the account.

Estates Valued Less than $150,000

Once assets passing by way of beneficiary designation or joint tenancy are removed from the estate and distributed to the rightful owners, a probate may be unnecessary if the remaining assets are valued less than $150,000 (not including vehicles, boats, motorhomes and manufactured homes!). This is referred to as a “Small Estate” and typically can be administered without a full probate, often times by nothing more than a properly prepared affidavit signed by all those who are entitled to the estate by law.

So, by way of example, assume David has:

1)      An IRA worth $1,000,000 with a beneficiary designation;

2)      A home worth $500,000 owned as a joint tenant with another;

3)      2 cars worth  a total 75,000.00 in his Dave’s name alone;

4)      a boat worth $100,000 in Dave’s name alone; and,

5)      Other personal property and cash worth less than $140,000 in Dave’s name alone.

No probate would be necessary on Dave’s death in this case.  The IRA would go to the designated beneficiary and the home would pass to the surviving joint tenant and while the remaining property is greater than $150,000, the cars and the boat are not included in the calculation of a small estate, so they can be obtained and distributed as a small estate as they are below $150,000.

When Beneficiary Designations and Joint Tenancies Can Be a Bad Idea Despite Avoiding Probate

Beneficiary designations can be a bad idea if:

1)      The beneficiary is a young person who is not capable of responsibly handling the money;

2)      The beneficiary is a person who is, or is likely to be, receiving government benefits; or,

3)      The beneficiary is a person who has creditors that may attach this money to satisfy a debt.

Likewise, joint tenancies have their own set of problems.  While joint tenancies might be acceptable between spouses (community property with right of survivorship can be a better option for reasons beyond the scope of this article), it is rarely a good idea between generations. The reasons not to own property with a joint tenant are many but include:

1)      Giving up your financial security;

2)      Giving up your independence;

3)      Giving up your right to refinance or sell your home without the consent of the other owner; and,

4)      A creditor may seek to collect on a judgment by the creditors of another joint tenant.

As always, it is a good idea to speak to an attorney knowledgeable in estate planning. Many attorneys will provide a free initial consultation that can help you understand these issues and ensure your goals will be met.

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