Probate

What is probate?
The word "probate" itself comes from the Latin "probare" meaning "to prove" (or, more completely "to test and find good"). The old English concept of "probate," which we inherited in the United States, originally began as a proceeding to determine the validity of a decedent's will. Today the term is used to describe the entire court process -- not just determining the validity of a will, but also determining who would inherit when there is no will, locating the decedent's creditors, satisfying final tax obligations and almost everything else arising from a death.

Is it important to avoid the probate process?
The primary objections to the probate process in recent decades have been the cost, length of time required, and need to disclose family information associated with probate. All three of those areas have been addressed in many states, including Arizona, since the "avoid probate" movement first began in the mid-1960s. You may still reasonably think probate avoidance is important, but it is no longer as imperative as it once was, at least in Arizona and the other states that have adopted the Uniform Probate Code (or its concepts).

What are the costs associated with probate?
In addition to filing fees, copy costs and recording fees (usually totaling about $250), the cost of probate mostly consists of legal fees. The personal representative may also charge a fee, but if he or she is also a beneficiary of the estate it is not uncommon for the personal representative to waive any fee

It is very difficult to predict the cost of legal representation without having information about the individual probate proceeding. A very rough rule to apply in Arizona might be to approximate the legal fees in an uncomplicated proceeding as about 1% of the assets subject to probate, but the actual costs in a given probate  may be slightly less or considerably more, depending on circumstances. One reform introduced by the Uniform Probate Code was to require that lawyers charge "reasonable" fees, rather than relying on fee schedules set in statute or adopted by local bar associations; in those states which still have statutory fee schedules, the costs of probate will almost always be several times higher than in states with the Uniform Probate Code approach.

Are there additional costs, or tax increases, associated with probate?
One of the most persistent misunderstandings is the notion that the government gets more money from the probate proceeding than from estates where probate has been avoided. Other than court filing fees, there is no government payment associated with the probate process in Arizona (some other states, notably California, have attempted to set court filing fees as a function of estate size, but those fees have been struck down as nothing more than a backdoor attempt to impose an estate tax prohibited by California's state Constitution).

Is it important to try to avoid probate?
Although the difficulty and costs associated with probate are almost always overstated, you may still wish to arrange your estate to avoid the probate process altogether. Even if the cost is much smaller than you thought, it may seem to you like an unnecessary drain on your estate to force your beneficiaries to go through that process. But you should recognize that most of the probate avoidance techniques available to you will require you to spend some money and/or incur some additional work now -- so the decision to avoid probate becomes essentially a cost-benefit analysis. Is it worth you spending the extra money and effort today to save your beneficiaries additional cost and effort on your death? Your answer should be based on complete information about the cost and effort in each case.

How can you avoid probate?
There are at least four ways to avoid the probate process (speaking very broadly):

  1. Give away everything while you are still alive. We don't particularly recommend this approach, but include it in the interest of completeness.
  2. Put all your assets in "joint tenancy with right of survivorship." The nature of joint tenancy is that the surviving joint tenant acquires everything without the necessity of probate or other administration. Although this sounds like an easy answer to the problem of probate, there are significant difficulties associated with this approach (see below).
  3. Make sure everything you own has a beneficiary named to receive the asset on your death. This is easy to do for life insurance, annuities, and similar assets, and only somewhat more difficult with bank accounts, stocks, bonds and other assets. In Arizona and a few other states, you can even use a "beneficiary deed" to avoid probate as to real property (see below for more detail on beneficiary designations).
  4. Create a living trust and transfer all (or nearly all) of your assets to the trust.

What is wrong with joint tenancy as a probate avoidance technique?

As between a husband and wife, joint tenancy is usually comfortable and effective. Naming your child as joint tenant, however, is usually not advisable. He or she may get divorced, go bankrupt, get sued or have other financial setbacks -- and expose your assets to his or her troubles. You and your child may come to disagree about how your money should be spent, or whether your home should be sold. If you name one of your children as joint tenant, relying on him or her to share with siblings, you are completely trusting the named child to do "the right thing" after your death -- without giving him or her any direction about what "the right thing" is. You may also complicate your own long-term care by creating a joint tenancy, leading to the possibility that you might not qualify for Medicaid assistance but still not be able to liquidate your assets to pay for your care.

Are beneficiary designations a good probate avoidance approach?
Generally, yes. There are at least two difficulties with using the beneficiary designation approach, and they may not be important in your individual situation:

  1. It can be difficult to get each asset set up properly, and to maintain control and awareness. Similarly, it can be difficult to make any changes. Suppose, for example, that you decide that one of your intended beneficiaries no longer needs a share of your estate (for whatever reason). You will have to change the beneficiary on each insurance account, bank account, stock holding and real estate. Plus you will have to remember to add the list of beneficiaries to each new account you set up for the rest of your life.
  2. Beneficiary designations may not deal very well with the possibility that a beneficiary dies before you. Your life insurance policy might provide, for example, that a deceased beneficiary's share goes to his or her estate, while the bank account goes to only the surviving named beneficiaries and the brokerage account goes to the children of a deceased beneficiary.

Is the best choice to establish a living trust?
In most cases, yes. But the cost of a living trust may not be justified in individual cases, if the anticipated cost of probate is not large and the alternatives relatively simple.

Are there any good things about probate?
Yes, though you may not think they are important in your facts. First, the probate process provides an opportunity to publish notice to potential creditors and shorten the time they would have to pursue claims. This is ordinarily most valuable to professionals (doctors, lawyers, architects) who might have unknown professional liability claims outstanding, and a similar mechanism can be used with trusts.

The second benefit of probate is that it provides a formal oversight process. Most people will insist that their families can be trusted to handle administration of their estates without having to report to a judge, but of course some trusted family members do misbehave. Lawyers may tend to overemphasize that possibility because, well, we see clients who think other family members have misbehaved far more often than we see clients who just want to tell us how well their brothers or sisters handled their parents' estates.

Now that I've signed my will my estate won't be subject to probate, right?
Absolutely wrong. This is another common misunderstanding among clients. A will does not avoid probate at all. In fact, recall that the very word "probate" is about "proving" the will. Your will is simply your instructions to the probate court about who is to be in charge and how your estate is to be avoided. Before we (the larger society) know for sure that your will is in fact your last will, we have to wait for the probate court to say so.

Does that mean I shouldn't sign a will?
No, it does not. Even if you create a living trust, you should also sign a will -- it will probably be what is often called a "pourover" will, and it will probably leave your entire estate to your trust. We do not anticipate that we will have to probate that pourover will, but in case we do it simplifies the administration of your estate.

If you don't sign a trust or will, and don't have probate avoidance mechanisms in place, the probate court will apply the law of "intestate succession" to your estate. That simply means that the legislature of your state has written a default will for you -- and they probably got it about right. The intestate succession principles in Arizona, for example, say that you meant to leave everything to your spouse or, if you don't have a surviving spouse, to your children, in equal shares. Even if you do not have a spouse or children, the legislature thinks it knows who you want to leave your estate to -- your parents, siblings, nephews and nieces, grandparents, uncles and aunts, cousins and descendants (in about that order). The one wrinkle in all that: Arizona assumes that if you have children who are not the children of your surviving spouse, you intended to leave half your separate property to your spouse and the other half (along with your half of community property) to your children. The legislature is probably wrong about that one. (Note: this paragraph describes the law of intestate succession in Arizona -- if the law of another state applies to you, the result may be different.)

If I don't write a will, does more of my estate go to the government?
No.

When is probate required?
Assets in the decedent's name alone, with no joint tenancy and no beneficiary designation, must go through the probate process to determine who is entitled to receive them. If some assets must be probated, that does not mean that every asset the decedent owned is subject to the probate process -- only those assets in the decedent's name alone need to be probated.

Is there a mechanism to avoid probate for small estates?
Yes. In Arizona (other states have different limits and arrangements) an estate of less than $50,000 can be collected through use of a simple affidavit. Real estate worth less than $75,000 (net of liens and encumbrances) can be collected by a simplified probate proceeding. Note that these limits are for the total value of assets that would otherwise be subject to the probate process. In other words, if you are trying to collect a $30,000 CD from one bank and a $40,000 CD from another, you will not be able to use the affidavit process -- you would have to swear that the total value of all assets subject to probate are less than the $50,000 limit. You would, however, be able to collect a $40,000 CD and a $60,000 piece of real estate, as those two sections of the law are independent of one another.

What about estate taxes and probate?
Estate taxes are calculated on all assets (oversimplifying here) which were subject to the decedent's control just before death. In other words, your taxable estate is different from, and almost certainly larger than, your probate estate. That's the bad news. The good news: unless everything you had control over before your death is worth more than $2,000,000 (if you die in 2008), you are not subject to federal estate tax anyway. Arizona does not impose a separate estate tax.

Does that mean my children will have to pay income taxes on what they receive from my probate estate or trust?
No. Inheritances and gifts are not income to the recipient. Two important qualifications to this broad principle: (1) IRAs and qualified retirement funds will be income to the recipient when withdrawn, whether that is you or your heirs, and (2) inheritances may include some portion of income earned between the date of death and the date of distribution -- and that income is subject to income taxation to the recipient.

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