UNDERSTANDING PROBATE AND HOW TO AVOID IT
Here's what you need to do now and
avoid costly fees when a life event happens
Preparation
The most common mistake is a lack of preparation. This may be due to lack of knowledge or motivation to get things in place before something happens. Once something happens and things are not in order, you could lose tens or hundreds of thousands of dollars.
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THE PROBATE PROCESS Probate is the court's involvement to deal with assets of someone that has passed away.
There are 9 exclusions to probate and you should be in one of them. Otherwise you have left your loved ones unprotected when the time comes.
Here are some facts about probate.
Fees for probate are paid to the probate attorney, the special representative, the special referee, and court costs. These fees are based on gross value of the assets not the net value. This does not include holding costs like mortgage payments and the cost of sale of any assets. |
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WILLS
A will contains the instructions to deal with assets after a loved one passes away. The named executor is responsible to carry out those instructions. As a result there are fees involved. A will does not exclude you from probate. It just lets the court know an executor is already assiged. A will can be placed inside the trust. The executor of the will may be the trustee in the trust as well. Not everything named in the trust may be in the will. They would both avoid probate however, with a pour over will in place. |
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TRUSTS
This is the most reccomended way of holding your assets to protect yourself from probate. There are four main types of trusts depending on your particular circumstances. A specialized attorney or financial consultant can analyze your current situation and reccommend what type of trust and or will to put in place. There are tax differences if assets are not in a trust at the time of death. It makes a difference now and down the road, even years after the time of death.
ADVANTAGES OF A TRUST
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Having a trust in place avoids a lot of uneccessary costs and delays when someone passes away. Most people put it off or don't even consider it becuase the biggest asset, ( the house) is in joint tenancy. Joint tenancy has rights of survivorship and avoids probate.
Let's think it through. If that did happen, then at some point the surviving owner would have to think about getting it done if they are the only survivor on title. The same with beneficiaries on life insurance or retirements.
What would happen if both passed away at the same time?
Or, if one person on title is not of sound mind or incapacitated? What if you're in the middle of a divorce?
Preparation is most important way to avoid huge probate costs.
Often overlooked is, if assets were obtained before the marriage or heirs of the marriage are not their own. This is where things can get complicated, messy and expensive when someone passes away.
As we mentioned before preparation is the key. Even if you are young and invinceable or your parents are still in good health, you should have these in place for the unexpected as well as the anticipated life events.
The tax implications still make a difference here. The stepped up tax basis upon death is only calculated for the deceased person's half, not the survivor. Assets in a trust are treated differently
Let's take a look at the costs of probate vs a trust.
For our example, we'll keep the value of the estate below 9 million and use 2 million dollars.
Costs are base on the value, not the net or equity value.
Home or homes valued at $1,000,000.00 dollars
Bank accounts $300,000 dollars
Personal assets $200,000 dollars
Investment funds $500,000 Dollars
$2,000,000.00 total
As of 2023, the statutory attorney and (executor or administrator) probate fees in California are as follows:
- 4% on the first $100,000
- 3% on the next $100,000
- 2% on the next $800,000
- 1% on the next $9,000,000
1st $100,000. @ 4% = $4,000
2nd $100,000. @ 3% = $3,000
3rd $800,000. @ 2% = $16,000
4th $1,000,000. @ 1%= $10,000
$33,000.00 dollars x 2 ( executor or administrator duplicate fee )
$66,000.00 dollars .
$ 2,500.00 dollars court costs and special referee fee
$ 20,000,00 dollars of holding costs if there is a mortgage and utilities and maintenance to be paid during the probate. Costs are even more if full authority is not given and the court requires confirmation in order to sell the home.
As you can see, these costs add up to $75,000 to $100,000 or more in probate costs!
Now lets look at the cost of setting up a trust
I reccomend having a trust done professionally. This makes sure all the details are discussed and identified properly in the trust. This may also include having a will put inside the trust.
Another ovelooked fact is, certain medical benefits received may need to be repaid if there is no trust. And lastly, most on line or cheap trusts do not include "Funding The Trust".
The typical costs for putting a trust in place is about $1,800.00 to $3,000.00 dollars depending on complexity and a will.
We reccommend you use someone that specializes in probates, wills, and trust, including tax advice from a CPA or a financial professioanal.
Remember, there are different kinds of trusts meant for specific situations. It's not a one size fits all approach.
Trust fees vs probate fees
When distributing assets in a trust you'll see there's a huge difference.
In a trust, the trustee can charge their own fee, and it is not set by law like probate fees, but should be spelled out in the trust.
A simpler trust fee would normally be from 1% to 2 % of the value of the assets in the trust. More complicated Trusts with businesses, or complicated heirs distribution over time may be a little more.
In either case it should be indentified in the trust. It is not mandatory that the trustee charge a fee.
If the trustee is a family member or heir, they may waive the fee as it is taxable income vs they will get some or all of that in distribution and avoid the tax.
Here is the same example in a trust as the probate used earlier.
$2,000,000.00 dollars in assets subject to probate.
$ 30,000.00 1.5% Trustee administration fee upon death.
$ 0.00 If the family member waives the fee.
So anywhere from $0 dollars to $30,000.00. plust the cost of setting up the trust. It's still far below probate and does not include avoiding tens of thousands of dollars of holding costs if mortgages, credit cards or other obligations that continue during a probate.
WARNING!
IF THERE IS A REVERSE MORTGAGE ON THE HOME AND PROBATE IS INVOLVED, THE NOTE COULD BE CALLED IMMEDIATELY AND THE EXTENDED PROBATE PROCESS WOULD BE A FINANCIAL DISASTER!
IF YOU HAVE A REVERSE MORTGAGE POSITION IT TO AVOID PROBATE NOW!
I can tell you from personal experience that selling a home in a trust vs probate makes a big difference. Both in the affect it has on the survivors and the amount the home will sell for.
That's right, it does make a difference. More buyers will pay a higher price if they can close escrow and move in rather than wait months for a probate to complete. This alone can more than pay for the small cost of protecting your assets in a trust.
This is a win-win for everyone.
* It's easier
* It's quicker
* Better offers
* Less time
* Less stress
WATCH THE VIDEO BELOW TO LEARN MORE