Probate is the legal process for winding down an estate and distributing its assets that goes into effect after the decedent dies. There are several steps to the probate process: 1) the validity of the decedent’s will is assessed; 2) the decedent’s estate property is identified; 3) the estate property is valued and appraised; 4) the estate’s debts and taxes are paid according to priority; and, finally 5) the estate property is distributed according to the will. If there is no existing will, the property will be distributed according to California’s statutory distribution rules (otherwise known as intestate succession).
You may have come across estate planning resources that advocate in favor of probate avoidance. Avoiding probate is often useful. It can save your family money, afford privacy, and may prevent unwanted delays later on. But estate-planning attorneys, especially those offering revocable living trust and other probate avoidance services, often overstate the negatives of probate. In fact, going through probate may actually be a good thing, depending on the circumstances.
Of course, you may not have to actively concern yourself with trusts to avoid probate at all. In many situations, the estate will not have to go through probate even without a specific probate-avoidance scheme in place.
In California, the small estate exemption (California Probate Code section 13100) applies to all estates worth less than $150,000. All the probate assets owned by the decedent are totaled, and if the amount is less than $150,000, then no documents have to be filed with the Superior Court, nor does the successor of the decedent have to procure letters of administration or await probate of the will.
Importantly, many assets are not counted toward the small estate exemption amount of $150,000. While the small estates exemption includes all real and personal property, and all life insurance/retirement benefits that will be paid to the estate directly, it does not include a huge swathe of assets, such as joint tenancy assets, IRAs, 401ks, and other pension accounts, life insurance payable directly to the beneficiaries, death benefits, registered vehicles, payable-on-death accounts, and other accounts with a named beneficiary.
These assets that are not included in the small estate exemption are themselves probate-avoiding. For example, if you set up a very large bank account as a payable on death account (P.O.D.) with your children as equal beneficiaries, then upon your death, your children will receive those assets without the need for probate. Thus, one could setup their estate property such that major assets P.O.D. bank accounts to life insurance (payable directly to the beneficiary) avoid probate, and such that any remaining real and personal property, from stocks, and other investments are covered by the small estate exemption. If done correctly, probate will be successfully avoided, even without having had a revocable living trust set up by an attorney. However, caution should be exercised since people do not always die in the anticipated natural order.
Finally, it is worth noting that California also has a simplified process known as spousal confirmation, wherein the court assigns all assets to the surviving spouse unless any third parties assert their objections. Spousal confirmation avoids probate, but does require that the decedent spouse left everything to their spouse in the will. The spousal confirmation process saves money and time, usually requiring only two to three months for completion.
So, when is going through probate useful?
Full Disclosure and Court Approval Reduces Beneficiary Concerns
Probate requires full disclosure of all information and costs, thereby minimizing the concerns of the beneficiaries. During the probate process, the executor or administrator, i.e., personal representative, must provide the will (if any), disclose all assets, have all non-cash assets appraised by a court appointed appraiser, identify all creditors that will be or have been paid, identify all costs paid by the personal representative, and have the court approve all distributions to the beneficiaries and all fees and expenses payable to the personal representative and attorney. Thus during the probate process the beneficiaries have a certain level of comfort that the personal representative is fully disclosing all information and that the court is approving the personal representative's actions.
The Cost-Benefit Analysis
Though many estate-planning resources may argue that probate is costly compared to setting up a revocable living trust, it is important to consider the total cost of setting up a living trust. First, it may be more difficult a financial burden for you to pay for an expensive living trust rather than for a much less expensive will, and have the beneficiaries later pay the probate fees and costs. Even if probate is somewhat more costly than avoiding probate, the present burden of setting up a living trust may not be justified by those later benefits, especially where the beneficiaries are not your children. Secondly, most estate plans are not final at the moment of their creation. As time passes, your estate plan will likely need to be updated and checked to ensure compliance with the law. Ensuring that your estate plan is up-to-date will likely incur an additional expense, with updating a trust costing more than updating a will. If your financial situation significantly changes, or if you have obtained significant assets that must be accounted for in your original estate plan, then further consultation with an estate-planning attorney may be necessary, which can push the additional costs up further. Put simply, setting up a revocable living trust may help save money and time through the avoidance of probate, but these savings must not be overstated.
Probate Shortens the Time for Creditor's Claims
The personal representative is required to pay the debts of the decedent. Opening a probate shortens the time that creditors have to file their creditor's claim. If they do not do it timely and correctly, then they may not be paid thereby leaving more money distributable to the beneficiaries.
Reduced Risk of Errors
As a general rule, having a probate of the will is useful in situations where there is some confusion concerning the language of the will. Why? Executors as fiduciaries open themselves up to liability after having accepted the responsibility of becoming a fiduciary. Fiduciaries are not only personally liable for unpaid taxes and debts of the decedent to the government, but are also potentially liable for violations of their fiduciary duty to the beneficiaries of the will.
Consider the following non-exhaustive list of fiduciary duties:
- The fiduciary must administer the estate solely in the interest of the beneficiaries.
- The fiduciary must deal impartially with the beneficiaries.
- The fiduciary must take reasonable steps to preserve the estate property.
- Within a reasonable time after becoming fiduciary, the fiduciary must retain or dispose of the estate assets in order to conform to the prudent investment requirements.
- The fiduciary must take reasonable steps to enforce claims that are part of the estate property.
A fiduciary can avoid personal liability to some extent by going through probate. It is therefore prudent to enter the probate process when personal liability is a concern. When is personal liability a concern?
The will is unclear.
Often the will is itself unclear. The will may have been drafted without the aid of an attorney, and even if it was drafted with the aid of an attorney, the language may still be unclear. If the fiduciary attempts to interpret the will on your own, the beneficiaries may disagree and later sue. Going through probate so that the probate judge can determine the correct interpretation will absolve the fiduciary of personal liability.
There are multiple wills.
In some cases, there may exist multiple wills, and it can be difficult to determine which of these multiple wills are valid, and further, how their provisions should be interpreted against one another. Again, going through probate to obtain a judicial interpretation will shield the fiduciary from personal liability.
The estate is insolvent and has to pay creditors.
If the estate does not have enough assets to pay the creditors, then the fiduciary will have to determine the priority and order of payment. Making a mistake can open the fiduciary up to personal liability.
Complicated tax issues.
If the will involves any complicated tax issues, or requires that the beneficiaries pay some taxes, then it may be a good idea to hire an attorney and go through probate. Determining how to pay the taxes (and determining which sources to use to pay those taxes) can be confusing. Having the court determine the correct way forward can prevent liability for any mistakes.
The beneficiaries are uncooperative.
In many situations, the beneficiaries are simply uncooperative and can make life much more difficult for the fiduciary. Remember, the fiduciary has a number of duties he or she owes to the beneficiaries. The fiduciary must be impartial, and must always work solely in the interest of the beneficiaries. If the beneficiaries are uncooperative, argumentative, and even hostile, then they might later attempt to sue the fiduciary for violation of their duties. It is not entirely unlikely, for example, that a fiduciary distributes assets to the beneficiaries and a few months later, an unhappy beneficiary decides to sue the fiduciary for having distributed said assets without "impartiality." Going through probate will, to a certain extent, force cooperation as the probate judge will decide on how the estate assets are distributed (taking into account the language of the will, of course). Doing so will also shield the fiduciary from personal liability.
It is important to note, however, that the benefit of probate is not purely as a liability shield, nor is it useful only to the fiduciary. Family members and other beneficiaries may want to force probate if there is too much hostility between beneficiaries. If beneficiaries cannot get along, then it may be that the estate cannot be properly administered without court supervision. Going through the probate process will ensure that the assets are administered and distributed efficiently, without the hassle of beneficiary-tensions holding up the process. Even if there is not hostility between beneficiaries, disagreements on important provisions of the will may not be properly resolved without judicial interpretation. If the beneficiaries cannot agree on the meaning of certain ambiguous provisions of the will, it may be a good idea to go through probate so that the court can give their interpretation of the provisions-at-issue.
The probate process may be somewhat more costly than avoiding it altogether, but don’t be fooled – there are many reasons why going through probate may actually be beneficial in the long run. Weigh your options and make an informed decision about whether probate is right for you.
For a free consultation with an experienced San Jose estate-planning attorney, call the Wessels Law Firm at (408) 268-8832 to set up an appointment.