By Marla Brill
People try to avoid it. It can be a divisive, unpleasant, and expensive nightmare. Like quicksand, its grip can be strong and hard to loosen.
This isn’t an ugly monster from the deep we’re talking about here. It’s “probate,” the dreaded legal process that’s often required before heirs can receive assets from an estate.
For some inheritors, probate can tie up assets in the court system for several months, or more. Fees imposed by courts, attorneys, appraisers, accountants, and probate’s other cast of characters could easily climb to 3 percent of the estate’s value, or more.
Fortunately, it’s possible to avoid this legal tangle altogether, or at least make it as painless as possible, through some careful planning.
What is probate?
Probate is a process that fulfills certain legal obligations before assets can go to heirs, including filing the will in probate court, notifying inheritors, settling any debt or tax obligations, and cataloging the deceased party’s property. The person named as executor in a will, or someone appointed by a court if there is no will, is responsible for carrying out these and other functions.
Probate costs depend on a number of factors including state laws regarding fees, the complexity and size of the estate, whether or not relatives or outside parties are contesting provisions, and creditor claims. Some states limit probate fees to a percentage of the state subject to probate. Others set fees based on what courts consider “reasonable.” Many have a streamlined process designed to avoid probate, but only for very small estates.
Costs tend to rise if the estate is particularly complicated, heirs are slugging it out amongst themselves about who gets the what, inheritance issues have not been clearly addressed in the will, or someone challenges the provisions or validity of the will. The larger the size of the probate estate, the higher costs are likely to be.
Ways to Avoid It
The best way to handle probate is not to have to handle it at all. Fortunately, there are a number of ways for an estate to bypass probate and have assets go directly to heirs. These include:
Designating one or more persons as the beneficiary of retirement accounts such as IRA or a 401(k) plan.
Using “pay on death” (POD) designations on bank accounts. With these designations, the inheritor has no rights to the assets until the account owner dies.
Owning property jointly. Depending on the state, this can take several forms, including joint tenancy with right of survivorship, community property with right of survivorship, or tenancy by the entirety.
Putting property in a revocable living trust. The trust document specifies who gets a home and other property in the trust when the account owner dies.
Gifting property. Because gifting money or property to someone else reduces the size of the estate, it can also reduce potential probate costs.
Some of these methods, such as naming a beneficiary of an IRA or 401(k) or using a payable on death designation, are easy to do and cost nothing. Most of the time all that’s needed is to go online or stop by a local bank branch to fill out a simple form. Putting property in a living trust requires more paperwork to create trust documents and transfer assets to the trust. Still, the inconvenience and cost of doing so almost certainly beats the alternative of having assets in limbo for several months, or more.
Smoothing the Process
What if you’ve already inherited property that’s subject to probate? In that case, it’s important for the executor or estate administrator to do everything possible to speed up the process by performing necessary duties such as taking an inventory of assets, submitting life insurance claims, getting necessary appraisals for a house and other properties, and paying taxes and creditors. Although slugging through probate without help from an attorney can save money, the complexity of the process makes it impractical for most people to go it alone.
Regardless of the size of the estate, the process will proceed more smoothly if family members iron out disagreements amongst themselves, without contentious legal battles. Since attorneys usually charge by the hour, the most expensive and lengthy probate cases are often those in which disagreements about inheritance issues drag things out.
If you think you may be inheriting at some point in the future from a family member or friend, try to open up a conversation about possible ways to have assets pass directly to you rather than go through probate. Yes, it will likely be an awkward conversation, and perhaps one that sounds a little self-serving. But taking action now can head off a lot of estate-related headaches and expenses down the road.
About the Author
Marla Brill has been a personal finance journalist for over 30 years. A former editor at Kiplinger’s Personal Finance, she has written about money topics for Reuters, The Boston Globe, Financial Advisor Magazine, MarketWatch, PBS’s NextAvenue, and other publications.