From the Estate Planning, Probate & Trusts Practice.
Most people encounter probate for the first time after a close family member dies. Probate is simply the legal name for wrapping up the affairs of the deceased so that title to his or her wealth is validly changed over to the beneficiaries of the estate. Perhaps since Charles Dickens published his account of the fictional case of Jarndyce vs. Jarndyce in his mid-19th Century novel “Bleak House”, probate has been viewed as being an expensive and oppressively drawn out process to be endured by the family of the deceased. The advent of modern probate codes in the United States has made probate much more efficient. Moreover, the perfection of the “living revocable trust” as a substitute for a will has provided an alternative to probate. Such trusts invoke the traditional law of trusts to transfer wealth placed in trust during the trust creator’s life for the eventual distribution to beneficiaries after the creator dies.
Probate has no special tax penalty. Whether you choose to transfer your wealth through probate, or through one or more of the alternative ways to pass assets to intended beneficiaries, the same amount of taxes will be deducted from the value of the assets passed on to your beneficiaries.
This brief list of questions and answers is an effort to provide a perspective on the probate process for those who would like to decide whether probate is as bad as Mr. Dickens implies.
What Is Probate?
Probate is a wealth transfer process which conveys the property of someone who has died, called a “decedent’s estate”, to the persons who are entitled to the assets. It is the only way to transfer title to assets owned by a deceased person solely, that is, assets which are not jointly owned or owned in trust. It has evolved from the earliest days of the English common law into a modern procedure by which a decedent’s will is authenticated, his or her property is identified and located, his or her debts (including taxes) are paid, and the remaining property is distributed according to the decedent’s wishes, or according the state’s default distribution rules, under court supervision. If a person dies without a will, that is, dies “intestate”, his or her estate must still be probated, but the remaining property is distributed according to his state’s “statutes of descent and distribution”. Whether a person dies with a will or not, an “executor”, sometimes called a “Personal Representative”, is appointed either by a special purpose Probate Court or an administrative official working for the Probate Court. The executor is answerable to the Probate Court for the administration of the estate. He is usually bonded.
Whether or not you have probate assets, you should also have a will. Having a will allows you to name your executor, to waive or minimize the surety bond your estate is required to provide for your executor, and most importantly, to designate how your property will be distributed. You may also accomplish a number of other estate objectives by executing a will, such as naming guardians for minor children.
You can lay out a plan for dealing with any estate and inheritance taxes in either a will or a trust.
Is Probate Expensive And Time-Consuming?
Probate normally takes about a year to complete, in part because creditors are given six months in which to file any claims against an estate. It usually costs between 1% – 4% of the estate, mostly in executor’s commissions and attorneys fees. During that time, property is valued and inventoried, the decedent’s bills are paid, tax returns are prepared and filed (and perhaps audited), property may be sold to pay taxes or debts or in order to distribute bequests to the beneficiaries, and accounting reports are prepared and filed with the court for review and eventual approval.
Can I Avoid Probate?
Some types of assets avoid probate automatically, simply because the asset transfer occurs without the legal necessity of court involvement. For example, insurance proceeds and retirement plan benefits are paid to beneficiaries specified in the policy or plan and are not subject to probate. Property that is titled “joint tenants with right of survivorship” with a surviving co-owner passes “by operation of law” to the co-owner and is not included in the decedent’s probate estate.
Similarly, property held in a trust is usually not subject to probate. The legal owner of trust property is the trustee, and if a trustee ever dies, a new trustee simply takes over. The death of the trust-maker need not have any effect upon the continuity of the trust, even if the trust-maker were also the trustee. For these reasons, revocable trusts are frequently used to avoid probate and to serve as will substitutes.
Should I Avoid Probate?
Avoiding probate is advantageous, but does not necessarily eliminate all of the problems associated with distributing a decedent’s property. For example, avoiding probate does not mean avoiding estate taxes or the professional fees associated with the creation and administration of a trust. Avoiding probate doesn’t necessarily speed up the distribution of assets either, since tax returns must be prepared and filed, and income and estate taxes must be paid and settled, before the remaining assets are distributed.
Probate also affords certain advantages that should not be overlooked. Probate tends to protect estate assets from tardy creditors’ claims. Most creditors must file a claim against a decedent’s probate assets withing six months after the date of death or else they run the risk of losing it. Claims against other assets are not so time limited. Also, choosing probate in Maryland assures that a court will supervise the administration of the estate since the personal representative must file formal inventories and regular accounts for the court to approve. Sometimes that procedure is a comfort to the beneficiaries.
Why Does Avoiding Probate Not Avoid Taxes?
Probate and estate taxes each serve very different policy purposes. Probate is a state law process, controlled by the courts, for the transmission of wealth. The process is intended to ensure that the decedent’s will is valid, that the decedent’s debts are paid, and that the estate assets are properly distributed. While certain costs and fees do vary according to the size of the probate estate (such as court probate fees and the Personal Representative’s commission), these tend to be minimal in most estates.
Estate and inheritance taxes are imposed by federal and state laws to produce government revenue and for social purposes. To discourage tax avoidance, these taxes are imposed on a very broad range of assets owned or controlled by the decedent, not just the probate assets. In fact, the Maryland inheritance tax even applies to major gifts made within the last two years of the decedent’s life. Taxing authorities have very strong interests in making sure that tax avoidance is not quite as easy as probate avoidance. For that reason, property that is subject to inheritance and estate taxes must be reported to the taxing authorities regardless of whether it is being administered through the probate process.