So what the heck is this thing
called probate?
Probate is a proving process that guarantees the authenticity and legality of your Last Will and Testament in a court of law. Without a Living Trust the process is compulsary and unavoidable.
At your death the probate process permits your financial custodians (banks, credit unions, stockbrokers, registrar of deeds, etc.) to safely release your savings accounts, stocks, real estate, etc. into the possession of your legal heirs, free from the fear of possible lawsuits by disinherited or disgruntled heirs.
This process of validating your will necessitates 12 to 24 months, depending on the state in which you live, and consumes 5 to 15 percent off the top of the estate in attorney fees and court costs. Until the probate process is completed, your bank and other financial custodians will simply refuse to release your assets to your heirs.
During the course of the procedure the assets are usually frozen and left to twist and turn in the ups and downs of fluctuating markets. Most family financial needs must be put on hold (often for months) while the court is sifting through potential heirs, creditors, debtors, and possible legal challenges to the will.
Consequently, families of the recently deceased have for centuries been held hostage to probate attorneys who can take as long as they want and charge what they please to jump the estates of decedents through all of probate’s legal hoops. This locked-in, monopolistic financial bonanza for attorneys produces up to 20 percent of the general practice attorney’s annual income and for decades has been facetiously referred to as The Attorney’s Private Retirement Fund.
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Hiring a fox to guard your hen house
The Wall Street Journal estimates that the cost of the probate procedure averages about 8 percent off the top of the estate. The average time to accomplish it? About 18 months. The cost generally breaks down to 65-75 percent of the total extraction going for attorney fees while 25-35 percent goes for court costs.
Because the lion's share of probate costs (65-75 percent) goes to the attorney, estate planning is as much about avoiding attorneys at death as it is about avoiding probate. To keep the cash cow delivering the cream, most attorney-written Living Trusts are drawn intentionally and unnecessarily complex to force the heirs back to the lawyer to unscramble the trust and settle the estate. Hence, when the cost of settling the trust is added to the attorney's exorbitant fee for drawing the trust documents, it becomes obvious that the attorney intends to get his, regardless of whether the estate avoids probate or not.
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The three biggest mistakes of
home remedy-style estate planning
The three most widely held bogus beliefs concerning probate are:
1. A Last Will and Testament avoids probate
Untrue. In fact, a will is the very reason for probate. As I will explain shortly, a will must be guaranteed or "proven" in Probate Court. If you have a will, your estate is automatically headed for probate.
2. Joint ownership of assets with a spouse avoids probate
This is a half-truth fueled by the attorneys themselves. Joint ownership of assets with a spouse simply delays probate until the death of the surviving spouse. Probate occurs after both spouses are dead when there is no one left alive to accuse the attorney of blatant deception as he/she goes about his/her chores of probating the entire estate.
3. Giving the assets to the children, jointly or wholly, before death avoids Probate
True! However, the practice exposes the children to exorbitant capital gains taxes that usually far surpass what it would have cost to probate the estate! It also exposes the parent's assets to their children's creditors - assets they could easily lose to settle a judgement against one of their children! Joint ownership of assets with your children is almost always the most expensive way of all to pass your assets to your children.
The many rumors that circulate regarding the probate procedure are actually perpetuated by the legal profession's reluctance to set the record straight. The propagation of many worthless home remedies for avoiding probate, which could easily be dispelled with some professionalism by the attorneys, serves to lull the public into a state of false security.
At death, however, reality sets in. The heirs are unceremoniously jerked back into the world of reality to find themselves sitting by helplessly for 12 to 24 months and watching 5 to 15 percent of their inheritances detoured into the pockets of an attorney and the cash box of an archaic court system.
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Which assets avoid probate
- and which assets don't
In estate planning we deal basically with tangible assets such as cash, investments, real estate, home furnishings, automobiles, etc. Thus, it is important to understand that for estate planning purposes you own two different types of tangible assets:
1. Assets in your physical possession:
Often referred to as Personal Property, they would include your household furnishings and equipment, garden and lawn tools, jewelry, heirlooms, inventories of supplies and food, cash either in your pocket or under the mattress, stamp collections, gun collections, grandma's silverware, etc.
The security of such assets is your own responsibility. Unless you can afford your own armed security guard, you are the custodian of your personal property. If any of your personal property is stolen you have nothing to protect you from loss other than an insurance policy or the quick response of the local police department.
Assets in your possession (referred to as personal property) avoid probate. There will be no sentry standing guard at your front door and denying access to the assets inside after you and your spouse die. Such assets have no legal titles and any of your children or relatives can enter your home after you and your spouse are dead and make off with any of these possessions. In fact, that is the way it usually works out; the first guy there gets the best stuff!
Such personal property raids are often the cause of much family animosity and money-wasting lawsuits for years to come. Jack wanted the piano but Jill got there first. If some of the assets in your possession have special meaning and you want them distributed to special people you must make some special arrangements such as leaving behind a signed list as to who gets what.
2. Assets not in your physical possession:
You probably have deposited larger, more valuable assets in the safekeeping of various financial custodians (banks, stockbrokers, credit unions, insurance companies, etc.) who serve as sentries and are responsible for the safekeeping of the assets. You receive a title or receipt from the financial custodian indicating that they are holding the asset for you. Such assets are almost always cash that take the form of savings accounts, certificates of deposit, stocks, mutual funds, bonds, insurance policies, annuities, IRA accounts, etc.
Long-standing fudiciary laws prohibit your financial custodians from releasing those assets to anyone, including yourself, without your authorized, written permission. And of course you cannot give such written permission after you are dead. Thus rises the question: How do your heirs get those assets out of the banks, credit unions, stockbrokers, etc. if you are not around to sign the papers?
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What about Real Estate (your home, your farm, etc)?
Strange as it may seem, homes, farms and other real estate are also considered to be in that group of assets not in your possession.
When in prehistoric times a hunting party went out looking for something to eat for supper, two or three tribesmen were always left behind to prevent marauding neighbors from taking physical possession of the tribal cave. Such thievery was a part of the tradition of the times and tended to produce great social unrest and a fair amount of bloodshed. Wars were not fought over the boundaries of countries; they were fought over the caves of the families next door!
Thankfully in a civilized society the ownership of property has evolved into a system where the former owner of any real estate you purchase gives you a warranty deed that officially transfers the ownership of the property from his/her name to yours. That deed is invaluable to you. It signifies to all society that you are the owner of that real estate. For your protection, the deed is recorded at the register of deeds office in the county or parish in which the property is located. No one can move into your home and claim ownership while you are vacationing in Bermuda or shopping at the mall.
In this way the register of deeds office serves to guarantee the ownership of your real property just as a bank guarantees your ownership of your savings account. The property is registered in your name down at the courthouse just as your money is in the bank in an account with your name on it.
Thus, your estate boils down to 1) assets in your physical possession (personal property) and 2) assets not in your physical possession. Assets in your possession avoid probate while assets not in your possession require probate. Simple, huh?
Well, not quite.
There is one big exception to the rule that you should know about: Any asset not in your possession that names a beneficiary on the title of that asset avoids probate on it own hook. Such assets include life insurance policies, annuities, IRAs, 401K-type investments, pensions, etc.
Also, many states now allow you to add a POD or TOD ("payment on death" or "transfer on death") beneficiary to bank accounts, certificates of deposit, stock certificates, mutual funds and brokerage accounts. The beneficiary listed on the title of an asset need only produce your death certificate and positive identification to take possession of the asset in usually 48-72 hours. No probate is needed.
We live in an age where many people hold much of their estates in IRA's, 401K's, annuities, etc. (assets with beneficiaries listed on the title). Thus, the need for probate is often limited to a surprisingly few number of assets. So why can't you simply leave written instructions authorizing your financial custodians to release such assets (assets that do not list beneficiaries on the deeds and titles) directly to the individuals you want to have them?
Well, that is exactly what most responsible persons attempt to do! The instructions are called a Last Will and Testament. Why then, upon reading the requests of your Last Will and Testament, can't your financial custodians simply release those assets to the heirs named in your will?
Because the banker or other financial custodian has absolutely no idea as to how many wills you wrote before you died!
There very well could be another will out there somewhere that supercedes the one some heir has just handed the financial custodian. The financial custodian will be in some real deep legal weeds if it gives the asset to the wrong heir.
Go to Lesson 3
