How many times have we seen advertisements of various young estate planning lawyers, who predominantly emphasize Living Trusts, refer to “the evils of probate”. I was one of those attorneys 30 years ago. Now, in my 33rd year of practice, 28 exclusively in estate planning, I often see some benefits and virtues of probate. Over my career, I have done literally hundreds of seminars. I often take a brief poll of attendees’ experience when settling the affairs of a loved one. The result is usually the same with half stating that probate “wasn’t a big deal”, where the other half says “it was a nightmare”. So, for a few minutes, let’s learn what probate really is. What factors would cause it to be a “nightmare” and what factors may also lead to a very simplified process?
So, what exactly is probate? Here is my legal definition: “It is a legal procedure whereby the assets of a decedent are passed to loved ones thru a probate court that ensures the validity of the Will, the payment of all debts, taxes, and liabilities of the decedent and settles any disputes of the beneficiaries.” Generally, it lasts about 6 months to a year and the major cost is the legal fee paid to the attorney or attorneys involved in representing the executor or beneficiaries. The actual filing fee with the probate court is minimal. In laymen’s terms, the probate court wants to make sure the Will is valid, debts and taxes are paid and settled, and disputes are resolved before the assets pass from the decedent to the heirs. Only assets that have a title are subject to probate, although non-titled assets such as personal belongings can be settled thru probate. The probate court has exclusive jurisdiction over trusts and estates. Assets passing under a Will are referred to as the “Probate Estate” (or simply just “the estate”) where assets passing under a Trust are referred to as the “Trust Estate”.
Usually, the executor is represented by legal counsel. Each beneficiary has the right to hire their own independent counsel to make sure their interests and property rights are protected. My rule is that if I were a beneficiary and my share of the inheritance was going to exceed $500,000, I would certainly recommend that the beneficiary hire their own counsel. And, I wouldn’t hire any lawyer. I would want to hire only a “Probate Lawyer”, someone who limits his practice to handling trusts and estates. There are too many complicated issues dealing with the provisions in the Will or the Trust, the income tax issues involved, the capital gains tax issues, “stepped up cost basis”, what about the federal estate tax, etc. etc. And having your own lawyer represent your interests can serve as a check and balance on the fees charged by the executor and his or her attorney.
Legal fees in probate are also a mystery, with the sole requirement that they must be “reasonable”. In Arizona percentage fees are unethical. However, in California, percentage fees dictated by state law are mandated. So, the first factor to consider in the “angel or devil debate” is the state or states that will be involved. Arizona only has jurisdiction over Arizona property. If the decedent also has property in California then guess what, you need two probates. One in Arizona and one in California, and yes usually two attorneys. So, out of the gate, if you have property in California or any other state outside of Arizona, I would suggest you try to avoid probate. It is the ultimate devil to have to employ multiple attorneys. Get your checkbook out. Arizona laws have made probates relatively inexpensive compared to other states because we have adopted portions of the uniform probate code followed by multiple estates.
The make up the estate, and the different types of assets will also make a difference. If the assets are in bank accounts, stock brokerage accounts, IRAs, Annuities, Life Insurance, etc., then probate will not be a big deal. Anything that has a beneficiary designation such as IRAs, Life Insurance, etc. are not subject to probate at all. And assets like bank accounts, brokerage accounts, etc. are easier to probate. But, assets like real estate, closely held business interests’ mineral rights are much more expensive to probate. These types of assets tend to be more difficult to value, more difficult to divide among the heirs and have certainly more complex tax issues. Plus, there may be issues over control of these assets and disputes whether or not the assets or business interests should be sold or kept. If your assets are simple, then probate will be an angel. If your assets are any of the more complicated assets referred to above then watch out for the devil. These more complicated assets will do better in a trust and certainly easier to deal with if there were other legal documents in play like a Buy/Sell Agreement or Stock Purchase Agreement.
And in probate, size does matter. The bigger the estate the more complicated the tax issues. Under the current federal law, the death tax kicks in at about $5.5 million. So, not a factor for most. However, capital gains tax and tax rules governing cost basis will kick in on any appreciated assets. At death, most assets receive a “stepped up” cost basis equal to the fair market value of these assets at death which eliminates all capital gains to the heirs if the assets are sold. But, some assets don’t receive a new basis, such as IRAs, Annuities, Pension Assets, etc. So, being a CPA as well as an Attorney has served me well in my career as a probate attorney. Also, generally the heirs or beneficiaries don’t have to pay any income taxes on what they inherit. But, once again there are plenty of exceptions to this rule. Assets sold during life but payments are still being received after death do not receive a new cost basis and the heirs will still pay some income tax and capital gains tax on the payments as they are received. Plus, the beneficiary will have to pay income tax on the IRA or Pension benefits received after the decedent’s death. So, the size of the estate and the type of assets will dictate whether you have a devil or an angel.
Some people are of the misbelief that probate is easier to challenge than a trust is. This is completely untrue. So, if you have beneficiaries that are likely to bring some sort of contest against the estate, it really doesn’t matter if it is a will subject to probate or a trust not subject to probate.
Some people have the misbelief that probate is “public” but a trust is “private”. There is some truth to this, but there are ways to keep the assets and some issues private even in a probate setting. But, as far as information that must be shared with beneficiaries, there may be more things that can remain private with a trust rather than inside of a will.
So, in conclusion, if your assets are relatively simple, located solely in Arizona, and your estate doesn’t have some of the complicated tax issues described above, then I promise you that probate in Arizona will be an Angel, not a big deal. And I have some clients that simply don’t want the hassle to retitle assets into a trust while they are alive. They would be happier to let the heirs throw the estate into probate and transfer the assets in probate court. On the other hand, if you have property in more than one state or your assets are complicated like real estate or a closely held business, or if your estate has those tax problems discussed above, I can also promise you that probate will be a devil and an evil thing. You are much better off to have these issues controlled by a trust and other legal documents and arrangements. And, if you are unsure what is best for you, go see an experienced probate lawyer who can be objective with you and help you analyze what structure is best for you and your families. And, if you are going to err, err on the side of avoiding probate and create a trust. So, a tie goes to a trust. To state it another way, I can’t ever a see a situation where having a trust, even if not needed, could hurt you. On the other hand, I can see lots of situations where not having a trust can be the devil.