Probate court is a specialized type of court that deals with the property and debts of a person who has died. The basic role of the probate court judge is to assure that the deceased person’s creditors are paid, and that any remaining assets are distributed to the proper beneficiaries.
Many states have a specialized probate court. In some states it is called by other names, such as Surrogate’s Court, Orphan’s Court or Chancery Court. The court appoints someone to take control of the deceased person’s assets, ensure that all debts are paid and all the distributions are properly paid to the proper beneficiaries.
Why Probate Court?
When a person dies without a will or revocable living trust, the property is distributed to the deceased person’s next of kin, as determined by the state’s probate law. This part of the probate law is known as the law of intestate succession. It outlines the order in which the next of kin inherit.
A surviving spouse gets a share of the decedent’s property. The law further breaks down the order in which grandchildren, siblings, parents, and aunts and uncles inherit. The details vary from state to state.
You might think of the law of intestate succession as a defacto will, if you will. Much like how there is common law in some states for those who are not legally married.
Tip: It is highly recommended everybody write a will and/or get a revocable living trust before they die for clarity of directive and desires, tax reduction potential, and lower costs.
Probate Court With A Will
When a person dies with a will (most often titled a last will and testament), the property is distributed to the people or organizations (such as charities) the will designates to receive it.
To probate a will, the court must also make a determination that the will is valid. If someone contests the validity of the will, the court will decide the matter. In all states, even if there is a will, a surviving spouse is entitled to a certain share of the property. This is called the surviving spouse’s elective share and the amount of the share varies by state.
In community property states, barring a separate agreement between spouses, one half of the property earned by the couple during marriage belongs to the surviving spouse, and the will dictates how the decedent’s share of the community property and the decedent’s separate property are distributed.
Tip: Create an audio recording with specific date and time of recording to clarify your wishes in the will. The goal is to leave your will as unambiguous as possible. Regularly update your audio will recording and e-mail them to your loved ones and/or lawyer.
The Probate Process Is Cumbersome
The probate process begins with someone filing a petition for probate with the probate court. This is usually done by a relative or someone designated in a will. If there is a will, a copy of the will must also be filed (unless it has already been filed in one of the states allowing filing prior to death). Some states provide official probate court forms.
The court will then issue an order appointing someone to represent the estate. Generally, this person is called a personal representative or executor, but may also be called an administrator if there is no will, and an executor if there is a will. Most, if not all, wills designate someone to fill that role.
The personal representative is responsible for handling the administration of the estate. This involves such things as opening an estate bank account, arranging for publication of legal notices in a newspaper, determining the validity of claims by creditors and paying them (especially the funeral costs and final medical bills), sending notices to beneficiaries, selling assets if necessary, filing court documents, filing a final tax return for the deceased person, and eventually transferring assets to the beneficiaries. Often, the personal representative hires a probate lawyer to assist in some of these tasks.
How Long Does Probate Court Take?
A probate can take months, or even years, to complete. For an average modest estate, it can take from six months to two years. The longer it takes, the more it costs. If any heirs contest a will, things get more time-consuming and expensive.
Probate makes the deceased person’s financial situation a matter of public record. This includes the nature and extent of the assets, the person’s debts, and who will get the assets.
If you don’t have an estate plan or have failed to fund your Revocable Living Trust completely, then your loved ones will be faced with probating some or all of your assets.
The overall cost of the probate will vary depending on the type and value of the property that’s being probated. In general, the greater the value of the probate property, the more probate will cost.
Tip: Create a revocable living trust in order to keep the desires of the deceased private. It is already difficult enough that a loved one dies. You don’t want to have the public judge who gets what and how much.
Probate Court Fees Add Up
Because probate court must assign various strangers to unearth the deceased assets and disseminate properly, it costs much more money than if there is a clear directive from a revocable living trust. Here are the following fees:
1) Personal Representative Fees. These fees are also dictated by state law. Some states simply provide for what is referred to as a “reasonable fee,” while others deem a reasonable fee to be one that’s equal to the value of a certain percentage of the property being probated. Even then, the Personal Representative can ask for “extraordinary fees” for services rendered above and beyond services that are deemed to be basic probate services.
2) Attorney’s Fees. These fees are also dictated by state law and are calculated in the same manner as the Personal Representative’s fee. As with the Personal Representative’s fee, an attorney can ask for “extraordinary fees” for services rendered above and beyond services that are deemed to be basic probate services.
3) Accounting Fees. These fees will vary depending upon the overall value of the estate and the type of assets owned. For instance, a small estate that nonetheless owns 80 different stocks and bonds may generate more accounting fees than a larger estate that owns a primary residence, a bank account, and a CD. If the estate has private investments that are hard to calculate or unwind, there are additional fees here. Accounting fees include the preparation and filing of state and/or federal taxes if the attorney does not do so.
4) Appraisal and Business Valuation Fees. These fees will be necessary to determine the date of death values of real estate, personal property—including jewelry, antiques, artwork, boats, cars and the like—and business interests. A valuation of a private business might take more work or be more controversial and difficult to appraise than others. The goal is to have the business be valued as low as possible during distribution for tax purposes, especially if the estate is over the estate tax exemption amount.
5) Bond Fees. If you don’t have a Last Will and Testament that waives the posting of a bond by your Personal Representative before they can be appointed, they will need to pay for and post a bond in an amount determined by the probate judge. Sometimes, the probate judge has required a bond to be posted even though the Last Will and Testament waived the posting of a bond simply because minor beneficiaries were involved.
6) Miscellaneous Fees. These fees can range anywhere from the cost of postage to a notary. There’s always some type of random fees that pop up to get things done.
Total cost of all probate court fees: generally between 3 percent to 8 percent of your assets. The higher percentage is for smaller estates, given there are certain fixed costs that must be met. A $1,000,000 estate may cost $80,000 to execute, but it would be unreasonable for a $100,000,000 estimate to cost $8,000,000 to execute.
Further, if your estate is greater than the estate tax exemption amount for the year, then inheritors must pay estate and income taxes as well. For 2019, the individual estate tax exemption amount is $11,400,000 and the tax rate is 40%.
Create A Revocable Living Trust
Now that you understand how complicated and costly it is to go through probate court, not to mention the anxiety and stress created by your inheritors, it is highly recommended to create a revocable living trust while living.
A revocable living trust is private, makes clear how your assets will get distributed when you die, and costs between 1 percent to 5 percent of your assets instead of 3 percent to 8 percent of your assets in probate.
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About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income, partly thanks to his investments in real estate crowdfunding. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.