How Does Probate Work?
By Liza Hanks
Finch Montgomery Wright
Are you dealing with a recent death? Are you dealing with an estate that will require a probate proceeding? Grieving is hard enough. Dealing with the probate process doesn't make it any easier. Here's an outline of the probate process that may be helpful during a tough time.Which Estates Have to Go Through Probate?
Probate was invented to prevent fraud after someone dies. Imagine Old England. Picture this: the Lord dies and everyone just steals the castle and everything inside of it. That's what probate was designed to prevent. Despite its bad reputation, the probate process itself is an orderly, organized, and final way to make certain that a decedent's last wishes are honored, that creditors and taxes are paid, and that, ultimately, the right beneficiaries get their bequests.
In California, anyone who dies with a Will, or without a Will, and owns more than $150,000 worth of property (excluding joint tenancy property and assets that pass by beneficiary designation) cannot have their estate distributed without a court order, which is how a probate proceeding ends.
And while probate is almost always more expensive and more time consuming than a trust administration, it's not the end of the world to settle an estate that way. In fact, for some people, probate is a better forum than a private trust administration. Who might benefit from a probate? Families with credit problems, families with complex business entities that are difficult to value, or families with extremely contentious members may benefit from a probate proceeding. Families with complex problems benefit from probate because it is judicial and therefore provides a forum for each side to state their case and a method for decisions to be made with finality. Probate also requires transparency and notice of all pertinent information to all interested parties. In the end court orders resolve the issues. So, probate's not all bad, though often maligned.How the Process Works
The first step in a probate is to request that a personal representative be appointed. If there's a Will, that Will is submitted to the court, and a petition is filed requesting that the executor named in that Will be appointed to serve. Everyone named in the Will, and all of the decedent's heirs, must be notified of the petition and have an opportunity to contest the appointment. If there's no Will, the Probate Code specifies which family members and others will be considered to serve as the estate's administrator. The court will set a date for the hearing. If no one contests the appointment, which is often the case, the personal representative will be appointed as requested by the petition. The probate process begins at that point and must remain open for at least four months, to give creditors time to file claims against the estate.
During the probate process, creditors must be notified, their claims must be paid or denied, and certain legal notices must be published in a newspaper where the decedent lived. A formal inventory must be filed with court, documenting the value of all estate assets. Creditors must be paid before the executor can distribute assets to the beneficiaries. Estate taxes and income taxes must be paid. The executor must gather and protect the estate's assets. Sometimes, real estate attached to the estate must be sold in order to satisfy debts or taxes.
Once debts are satisfied, the assets have been valued, and taxes have been paid, a final petition for distribution is filed. Another hearing date is set. Notice of the hearing must be sent to all persons named in the Will and the heirs. If no objections are filed, and the court approves the petition, the court issues an order approving the distribution, and the executor can then distribute the remaining assets. The order of final distribution also approves the personal representative's fees and attorney's costs and fees, both of which are set by state law and are a percentage of the value of the probate estate.Is there a Will?
If the decedent had the foresight to at least make and update a Will, the assets are distributed according to the specifications in the Will (after any debts are satisfied). The Will may list specific assets or property to be distributed to a named beneficiary, or may simply call for portions of the estate’s assets to be divided among beneficiaries.
If the decedent has not made a Will, or if the Will isn’t valid, the assets are distributed under California's intestate succession rules. Intestate succession determines how assets are distributed when there is no Will, and divides up community property and separate property depending on who survived the decedent. These default rules don't always divide property up the way a person would want them divided, however. I had a case where a wife died unexpectedly, leaving a husband, no child, and a brother. Much to the surprise of the husband, her separate property (which was the bulk of the estate's assets in fact) was to be divided equally between the wife's brother and her spouse.Downsides of Probate
Although appropriate for some families, for many families probate adds unnecessary cost and delay. In a family where the assets are easy to identify and value and where there's no conflict over how the assets should be distributed, judicial oversight offers no real value. (That's why living trusts are so popular.)
The four main problems with probate are:
- Delays: resolving probate may take anywhere from 4 to 12 months, depending on the complexity of the estate and whether there are any disputes. During this time, judicial oversight and approval may be required for some of the most significant decisions a personal representative needs to make.
- Costs: probate costs tend to average anywhere from 3% to 5% of the total value of the estate. Because real estate is valued based on fair market value, not equity, probating any real property in Silicon Valley is expensive. For example, a house valued at $2 million would cost $33,000 in probate fees alone, and both the attorney and the personal representative are entitled to that fee. These costs eat into the available assets, and dilute the resources that the family has at its disposal.
- Disputes: the probate process leaves assets in the estate, and the estate itself, more vulnerable to being contested in the sense that the process is public and that all interested parties receive notice of hearings and filings. Disputes can adversely affect the disposition of the estate, and can require the sale of property or other assets that the deceased intended to benefit the family.
- Loss of privacy: the probate process involves public notices, and probate matters are accessible by the general public. If a Will is filed for probate, it becomes public record, and anyone can read it. This exposes the estate’s assets and beneficiaries to public scrutiny, and unfortunately, sometimes people use this information to exploit beneficiaries.
Many of my clients use living trusts to avoid probate. This approach works because the assets owned by the trust are not counted towards the $150,000 probate threshold. The living trust directly transfers the ownership of assets from the Grantor - the person who creates the trust - to the beneficiaries. No court order is required. Assets named in the trust don’t go through the probate process, which can save costs and keep the assets and their distribution private. The revocable nature of this type of living trust means that your client can make changes to the trust document while they’re still alive, which makes it a great tool to adapt to life’s changing circumstances. Essentially, a living trust allows your clients to contract out of public oversight, settling their estates privately.
If you have any questions about the probate process or how to avoid it by creating and funding a living trust, please feel free to contact me at email@example.com or call me at 650/327-0088. You can also download my book, The Family's Guide to Wills and Estate Planning, for free.