Probate is a legal procedure in which a specialized probate court oversees the distribution of property according to the will of the deceased. The court will ensure that all debts are paid and that the property of the deceased will be passed on to the correct beneficiaries. If a person dies without a will, the court will see that their assets are passed to members of their family, depending on the state's probate law. Wills are required to go through probate, but there are others ways of avoiding this time-consuming process.
Disadvantages of Probate
There are several drawbacks to probate. The probate process can be very expensive. First, a filing fee must be paid to the court that varies by state. In California, the fee is determined by the gross value of the probate estate. The current probate rate is 4% of the first $100,000.00 value of assets, 3% of the next $100,000.00, 2% of the next $800,000.00 and so on. If a probate attorney is hired, there are also additional attorney fees determined either by a percentage of the estate, at an hourly rate, or a combination of both. There are also additional fees for a hiring other professional such as a personal representative or an accountant to assist in the process.
A straightforward way to avoid the probate process is to simply transfer property before you die. You can give your property away as gifts to a recipient. However, a drawback of gift giving is that cannot transfer all your property as you still have use for it when you are living. Also, if the gift is not clearly outlined in writing, the recipient may end up claiming more than what was intended. If the transfer of property exceeds a certain amount, a federal gift tax may also be applied.
If you have a large estate or many beneficiaries, a living trust may be the best choice for avoiding probate. Most people create a revocable living trust, allowing them to revoke the trust at any time. In order to create a revocable living trust, you must execute a living trust document that makes the living trust a separate entity from you. The property will then be transferred to the living trust and you will become the trustee. Managing the property will be the same as if it was it was in your name, and you may acquire more property to put on your living trust at any time. Upon death, a person you had appointed as your trustee will then ensure that all your property is transfer to all the appropriate beneficiaries. The legal fees for setting up a trust is less than the fees associated with probate.
Joint ownership is another way to avoid the probate process. Property that is jointly owned with survivorship rights will pass directly to the living owner. Assets such as real estate, motor vehicles, and financial accounts may be held jointly. However, there are some forms of joint ownerships that do not avoid probate. If it is unclear that survivorship rights were intended, the property is required to go through probate.
There are also limitations to joint ownership. Not all forms of property can be jointly owned, Furthermore, when an owner dies, half of the asset may be considered the deceased person's estate and become eligible for estate tax.
For financial accounts of the deceased, it is possible to designate the account to a beneficiary upon death. This designation, called Pay-On-Death (POD), is often preferred over joint ownership because the POD beneficiary has no access to the assets until after the death of the account holder. When the account holder passes away, the beneficiary will receive the funds from the bank account and the account itself will be closed. A designation for property other than financial assets is referred to as Transfer-On-Death (TOD). However, laws regarding TODs are much stricter and vary by state. In California, designations for stocks and transferring a vehicle can be done through a TOD.
In addition to the expensive cost of a probate, it also is time consuming. For an average estate, the process will take from six months to two years to complete. Probate also makes the deceased's estate related matters - such as assets, debts, and the beneficiaries of the assets - into public record. The use of one of these methods, or a combination of them can potentially save your beneficiaries an abundance of stress.