What is probate and how does it work?
For many, the mere mention of the word probate creates deep feelings of anxiety and fear. Many have heard horror stories of great delays, expense, and family conflict accompanying the death of a loved one. Others have experienced these things first-hand. Still others have attended seminars or read promotional materials which encourage them to avoid probate at all costs.
Yet after all this, most people don’t have a very clear understanding of what probate is and what it does. Reduced to its basics, “probate” refers to the court proceeding under which the assets of a decedent’s estate are brought together, creditors are notified and paid, applicable taxes are paid, and the decedent’s estate is distributed to those persons entitled to receive the decedent’s assets. This is done either under the decedent’s will, if there is one, or, if the decedent had no will, under the state laws of descent and distribution (also referred to as the laws of “intestate succession”).
If the decedent left a will, the court must first declare or “establish” that document to be the decedent’s will. The court relies upon the testimony of the persons who witnessed the signing of that will. If there was no will, the court will declare that the decedent died without a will, or “intestate.” Once the court has determined whether or not the decedent had a will, there is a 4-month period during which the will can be challenged or a subsequently signed will can be presented to the court. As a result, the court’s determination concerning the decedent’s will is not really final and conclusive until that 4-month period has expired.
At the same time as the court’s initial determination as to whether or not the decedent had a will, the court will appoint a “personal representative” to take charge of the administration of the decedent’s estate. The court will almost always appoint the person named in the decedent’s will to do so. This person is referred to as an “executor.” However, one exception to this rule is that the decedent’s surviving spouse has the right to administer the couple’s community property, even if the decedent named someone other than the surviving spouse as personal representative. Of course, this right to administer the community property estate was extended to registered domestic partners and to surviving spouses in same-sex marriages within the last few years. If there is no will, or if the person named by the decedent cannot serve, the court appoints an “administrator.” State law also establishes a list of those persons who have priority to serve as administrator of a decedent’s estate.
Once appointed, the personal representative has a duty to bring together and preserve the assets of the decedent’s estate, ascertain the identity of the decedent’s creditors, publish a notice to creditors to provide notice to potential unknown creditors, and give actual notice to known creditors. Creditors who fail to file their claim with the personal representative and the court within the 4-month period provided for that purpose will lose the right to assert their claim against the decedent’s estate, unless they did not receive adequate notice. The personal representative is required to prepare an inventory of the estate and collect information concerning the value of the decedent’s property.
When the assets of a decedent’s estate exceed the decedent’s debts (meaning the estate is “solvent”), the personal representative is generally able to obtain “nonintervention powers” from the court. These powers streamline the probate process by giving the personal representative authority to conclude many transactions without court approval. As a result, the costs of probate administration are significantly reduced.
Once the personal representative has dealt with creditors’ claims and tax claims, he or she may proceed to make sure that the assets of the estate are properly distributed to the beneficiaries and the estate closed.
It is important to keep in mind that laws differ fairly significantly from state to state. Here in Washington, probate laws are quite progressive and streamlined. As a result, the cost and inconvenience of probate proceedings may be significantly less here than elsewhere. However, whether individuals choose to use living trusts, or community property survivorship agreements to totally avoid probate, or wills which do not, their decisions need to be based on reliable information.
Common Concerns Regarding Probate
Concern #1: It takes too long.
The statutory procedure essentially requires that probate proceedings continue for at least 4 months. It is not uncommon for probate proceedings to last for more than a year. Some estates may be open for several years. However, this doesn’t mean the beneficiaries can’t receive the benefit of the assets in the meantime. Beneficiaries may have access to bank accounts which were not subject to the probate process, and the personal representative can make substantial interim distributions from the estate to those beneficiaries. In appropriate circumstances, it is possible that a beneficiary may have received almost all of his or her entire share long before the estate is technically “closed.” There are also provisions made in the probate statutes for specific family support payments and awards to be made throughout the probate process which have special priority over creditors’ claims and other beneficiaries. These payments can help protect family wealth from competing claims.
Sometimes, delays in completing an estate administration are caused from factors which would be present whether or not the decedent’s estate were probated. For example, income and estate tax returns may need to be prepared for the decedent and the estate, and this has a similar effect on settling a decedent’s affairs with or without probate.
There are some cases where probate actually makes the process easier and quicker. For example, it is often easier for a court appointed personal representative to transfer a decedent’s stocks, bonds, and other securities than if the decedent’s successor trustee of his living trust tries to complete the same transaction.
Concern #2: I don’t want probate to cause my family to fight with one another.
Family conflict is not inherent to the probate process. Though family conflicts sometime occur after the death of a loved one, these conflicts can arise whether the estate is administered through the probate process of through some other means. Sometimes it arises from conflict which is already present. Sometimes it is a result of failing to adequately plan while the decedent was alive, or failing to keep the estate plan current when circumstances change. Careful planning can actually minimize or reduce the destructiveness of family conflict whether or not a decedent’s estate is probated.
Concern #3: Probate costs too much.
When a decedent owns real estate in more than one state, the cost of having to have a separate probate action in each state can greatly increase the costs of estate administration. Some states allow personal representatives and attorneys to charge based upon a percentage of the estate. This, too, may cause probate costs to be much higher than necessary. In Washington, the fees of attorneys and personal representatives must be “reasonable.” This usually means that any substantial fees should be supported by a precise statement of the attorney’s time and a justification for the hourly fee. Though no system is foolproof, this helps to keep such costs in line.
Under certain circumstances, the future costs of probating a decedent’s estate may be about the same as the charge for preparing and funding a living trust now. This is particularly true for married couples for whom durable powers of attorney and a community property survivorship agreement may significantly cut the costs of estate administration and asset management. In any event, as estates increase in value, the proportion of the overall cost of settling an estate, which is attributable to the actual court proceedings, should become smaller.
How do I avoid probate and should I avoid probate?
Avoiding probate has become a hot topic these days. But while avoiding probate might be right for some individuals, avoiding probate may be as equally wrong for others. Perhaps the best question to ask is not “how do I avoid probate?” then, but, “do I really want to avoid probate entirely?”
There are lots of tools which can be used to avoid or shortcut the probate process. You may be using some of these tools now without realizing it. Most probate avoidance tools deal only with specific assets, so obviously some thought needs to be given to the handling of other assets. Here are some tools for avoiding probate:
Community Property Survivorship Agreement
Community Property Survivorship Agreements are Washington State’s unique statutory contribution to probate avoidance. In Washington, a husband and wife can agree to define some or all of their real and personal property as community property. Of course, recent changes in Washington State law have extended the benefits of Community Property Survivorship Agreements to same-sex married couples. Community Property Survivorship Agreements avoid probate for the first spouse to die by allowing a couple to agree that any community property immediately passes to the survivor of them without probate if one of them dies.
However, having a Community Property Survivorship Agreement does not mean that nothing need be done when the first spouse dies to clear title to the property for the survivor. The agreement will need to be recorded with the county recorder’s (auditor’s) office along with an affidavit of surviving spouse regarding lack of probate.
Community Property Survivorship Agreements are very simple yet powerful tools which can be a tremendous blessing or a tremendous curse, depending upon the circumstances. It is strongly suggested that any married couple considering the use of this kind of agreement seek the advice of a qualified attorney first, recognizing that each spouse has the right to be represented by a separate attorney.
Revocable Living Trusts
Living Trusts have become a very popular probate avoidance tool. Unlike a community property survivorship agreement, a revocable living trust (also called an “inter vivos trust” or “living trust”) can avoid probate for both spouses. Like wills, Living Trusts can provide much flexibility in directing the use, management and control of an individual’s assets for the benefit of family members long after that individual’s death.
A living trust is a separate legal entity that holds title to your property for your benefit during your lifetime, and upon your death that property is either held for the benefit of or distributed to your trust’s remainder beneficiaries. Probate is not necessary to clear title to trust assets because you did not hold title to the assets when you died. This type of estate plan can be costly to set up because it requires a lot of work upfront to set up and fund the trust. Living trusts can, but do not always, reduce the amount of work that needs to be completed upon your death in order to property transfer the assets of your estate to your loved ones.
A word of caution, though—contrary to what you might (logically) think, a revocable living trust does not help you avoid estate taxes as death. Those assets are pulled back into your estate by the IRS for tax purposes. Alternative planning techniques should be considered to achieve tax-saving objectives.
Beneficiary Designations
Beneficiary designations contained in life insurance policies, annuities, IRAs, pension and other contracts can provide for the passing of assets to specific beneficiaries outside of probate. Because these assets pass outside of probate, contrary provisions in a will cannot override an out-of-date beneficiary designation and may result in unintended consequences. Since these beneficiary designations can raise this and a number of other issues (such as spouse’s community property rights, rights under federal laws relating to retirement benefits and income tax issues) individuals need to be careful in how these beneficiary designations are made.
Joint Tenancies with Rights of Survivorship
Joint tenancies with rights of survivorship can be used to vest real or personal property and bank accounts in a surviving joint tenant. Joint tenancies can be very convenient, but they can also have unfortunate and unintended consequences which should be carefully considered, along with how such designations may affect the overall estate plan.
Pay on Death Accounts and Totten Trusts
Bank and brokerage accounts can be held in Pay on Death, Transfer on Death, Totten Trust and other account designations which specifically provide for payment to a named beneficiary upon the account holder’s death, while reserving control over the account in the account holder in the meantime.
Small Estate Affidavits and Adjudication of Testacy Proceedings
There are also two statutory procedures which can sometimes avoid the need for the full probate administration of a decedent’s estate. If the value of the assets is less than $100,000.00 and does not include real property, a “small estates affidavit” may be used to pass decedent’s property to those entitled to receive it. Beyond this, an “Adjudication of Testacy” or “Adjudication of Intestacy” may be helpful to vest title to decedent’s assets in the appropriate recipients if the appointment of a personal representative and the administration of the decedent’s estate are not really necessary. This adjudication procedure does require going to court and cannot be finalized in a period of 4 months, but under the right circumstances, it is a potential cost saver for families.
From these examples, we see that there are lots of tools to pass title to assets in such a way as to avoid or shortcut the probate process. But the death of a loved one may present other issues as well. Whether or not “probate avoidance” is one of the goals, the decedent’s estate plan should also deal with these other issues—issues like estate and income taxes, providing for minor children and payment of the creditor’s claims, to name a few.