The Problem with Probate

Probate is a court-supervised process that is used to transfer ownership of property from a person who has died into the name of the heirs. It is not the only process available. For many reasons, it may be the worst of the options. Nevertheless, it is the default method of changing ownership after death.

A probate is required if someone dies owning more than $184,500 in assets. This dollar amount is based on the value of the assets before deducting for any debts owing against the assets. If someone owns a house, it is very easy to get above that $184,500 figure and trigger the requirement for a probate. For someone who has done no estate planning or who merely has a Will, a probate may be necessary.

There are three primary reasons for avoiding probate.

First, it takes too long. Probate rarely takes less than nine months to complete, and often more than a year.

Second, it is too expensive. Between filing fees, publication fees, and related expenses, there will be $1,500 or more in costs. Attorney’s fees are based on the gross value of the estate and can get very high. For example, if you have a $1 million estate, the attorney’s fees would currently be $23,000.  The attorney can also charge more fees for “extraordinary services.” This allows the attorney to charge extra for anything unusual.

Third, any assets passing through probate will be subject to Medi-Cal recovery. If the person who died spent time in a long-term care facility, it is likely that there will be a Medi-Cal recovery debt. Assets that pass to heirs using any method other than probate will not be subject to a Medi-Cal recovery debt.

There are three common tools for avoiding probate.

The first option is to put property into joint ownership with heirs. This is a bad idea. Whereas it will accomplish the goal of passing property to heirs without the need for probate, it puts assets under the joint control of heirs during your lifetime. It also makes assets vulnerable to their debts. Most significantly, it misses out on significant tax savings opportunities.

The second option is to use “paid on death” designations. This can be done with bank accounts, investment accounts, retirement accounts, life insurance and even many kinds of real estate (with a “transfer-on-death” deed). The advantages of this option are that it avoids probate and Medi-Cal recovery while preserving your control over your assets and taking advantage of tax savings opportunities. The disadvantage is that you cannot assure that the shares for young or disabled beneficiaries are managed appropriately. Also, particularly with a “transfer on death” deed, if one of your chosen heirs dies before you, that share may not go to his or her children.

The third option is to prepare a Revocable Living Trust. This is the best option. It avoids probate and Medi-Cal recovery while preserving your control over your assets and taking advantage of tax savings opportunities. It also lets you plan for contingencies and assure that shares going to young or disabled beneficiaries are properly managed.

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