Funding a Trust – What Does It Mean?
September 4, 2016
“We just had a baby! I think we need an estate plan, right?”
September 4, 2016

The Problem with Probate

 

 

“Probate is a lawsuit you file against yourself, using your own money, for the sole benefit of your creditors.”

You may have heard of probate. But for those who have been through it, the very mention of the word usually brings up a string of nightmares all rolled into one.

Probate is the name given to the court process that occurs after someone dies without a trust. What many people forget is that once we die, our “stuff” doesn’t just automatically go to the people we want them to go to. Instead, our assets get seized by the probate court until our loved ones can pay to get them back. The problem with probate though is that it can take an incredibly long time and it’s very expensive, not to mention it can take a toll on the people who are going through it.

In California, if your assets are worth more than $150,000, or if you own more than $50,000 in real property (calculated by fair market value, not your equity), your family will likely need to go through the probate process.

The Cost of Probate

Hiring a probate attorney is step one, and the probate attorney gets paid from the estate itself. The fees are as follows:

  • 4% of the first $100,000 of the gross value of the probate estate;
  • 3% of the next $100,000;
  • 2% of the next $800,000;
  • 1% of the next $9 million;
  • ½% of the next 15 million; and
  • “a reasonable amount” of anything over $25 million

When it’s all said and done, it’s usually between 5-15% at the minimum in fees.

The Length of Probate

The entire probate process can last a minimum of 12 months (more like 18 months) and can last years. During this time, your family member(s) will be stuck in this process the entire time, spending their own money to fund the process in order to get your assets back for your children or loved ones. Often times, it becomes impossible for them to keep making payments from their own accounts, and because your accounts are inaccessible while they are in probate, your property can often be sold by the bank for pennies on the dollar in a competitive fire sale.

Next, probate can last much longer if you have minor children. This is because a probate cannot distribute funds to the children until they turn 18. Until then, a probate stays open and the legal guardian must correspond with the financial guardian (appointed by the probate court) in order to access any funds for the minor.   What is even more troublesome and perplexing is that, by law, a probate is required to disburse all funds to the minor at age 18, without any exceptions! For most parents, this is too much money given to children at too young of an age.

The Public Nature of Probate

Next, probate is very much public. Anyone can walk in and listen to what you owned, what your family is asking for, or what the names of your children are and the bank accounts associated with your assets. In fact, some people have been known to prey on minors who turn 18 with scams and false promises of lofty investments, knowing full well the immaturity of youth. Anyone can open a probate and just claim they are your creditor.

Intestate Succession

When it comes to distribution at the end of a probate, distribution is done according to the laws of intestate succession. Unless you have a will (or trust), the judge will distribute your assets according to the statute. This is governed in California by Probate Court sections 6400-6414, which lists the first in line is your spouse, then your children and grandchildren, then your parents, then your siblings and nieces and nephews, then your grandparents, then to the children of your predeceased spouse, and it continues on and on.

Probate Can Be Avoided

Probate is entirely optional and it represents perhaps the number one reason why people create estate plans. It is estimated that probate courts take in over $2 billion every year, and more than 80% of Americans don’t have an estate plan. This simple math leads to some staggering results. For a $500,000 home that falls into probate, it will cost about $56,000 to get it back out. A comprehensive estate plan is less than 1/10 the cost, can be administered privately, and the assets can be distributed to your loved ones in a matter of a few short days.

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