Why does probate cost so much?

Earlier this week I wrote about how probate costs run into the tens of thousands even for homeowners that only have a condo.   The family I met last week was understandably angry at the idea of probate.  Why do you have to pay the government tens of thousands of dollars when you die just to give your house to your children?  The answer is you don’t, but only with proper planning, and a will is usually not enough.

Why do I need to go through probate if I already have a will?

Because your will is just the start of the probate process.

First, the court has to examine your will to ensure that it is a valid will.  Then, once it has determined it is valid, the court must appoint a personal representative to distribute the deceased’s assets.  Someone, usually the executor or an attorney, has to:

  • publish notices and notify creditors
  • deduct costs of administration before distribution
  • transfer assets to beneficiaries
  • handle any pending lawsuits and claims against the estate
  • deal with any contests to the will

These all take time and money.  The estate must cover the cost of Judges, clerks, lawyers, administrators, and all of the time and overhead associated with these people.  These procedures are in place to ensure that the wishes of the deceased are carried out to the fullest.

For the majority of cases where the heirs aren’t arguing about, or even thinking about, who will get what, these costs can seem like an unfair burden.  Still, it is the price we pay to ensure that even the least among us has his or her wishes carried out.

Often, these costs are avoidable through proper estate planning. Rather than pay the tens of thousands later, and go through the lengthy probate process, you can increase the speed of distribution and decrease the costs by making plans well in advance.

 

Last week I participated in a clinic to provide simple wills for seniors.  One senior attended because her doctor recommended that she have a will prepared.  She had a simple estate with only a condo and a few small bank accounts and wanted to ensure that her condo passed to her children.

We advised against doing the will even though her estate was worth only about $500,000.  Why?  Because in California, an estate worth over $150,000 in probateable assets MUST go through the probate process, so a simple will would actually cost a lot more than going to see an attorney.

The probate process is expensive.  The government sets the cost of probate, and this year, probate costs 4% of the first $100,000 of the gross value of the probate estate. 3% of the next $100,000. 2% of the next $800,000. 1% of the next $9 million.  

That means that for a $500,000 estate, probate fees are $13,000.  That is just the state fee.  The attorney and potentially the executor also need to get paid.

The estimated attorney and executor fees, in this case, are roughly equal to the probate fees, so passing the estate via simple will ends up costing well over $30,000.

For typical California homeowners with homes worth over a million, these fees can be over $60,000 easily, and even more expensive depending on the complexity of the assets involved.

Both the woman and her adult children didn’t understand why it would cost so much to pass on something she already owns.  The answer is that there are much cheaper and faster ways to ensure your property gets to the those you love, but none of them are free.  There are various ways to set up the transfer via deed and trust, all of which cost less than $5,000.

I’ll explain why probate is so expensive later this week, but for now, just know that a little preparation, even in the simplest of cases, can save a lot on the back end.

To sum up, even with just a small condo, failure to have an estate plan will cost your estate tens of thousands of dollars, where for a few hundred or thousand up front, you can be sure your property goes to your heirs quickly and efficiently.

Will you be an estate tax paying “moron?”

Whether or not you believe Chief Economic Advisor Gary Cohn said “Only Morons Pay the Estate Tax,” estate tax is a real problem for many Californians, especially home and business owners.  It is something to prepare for ahead of time.

Imagine your parent has a family farm or a successful restaurant or small business and a home, together valued at $10 million.   The estate tax would take $1.8 million of that, as this year the individual estate tax is 40% for estates worth over 5.49 million.   With almost $2 million going to the state, many families are forced to choose.  Do you sell the business?  The family home?  For many households, it is like having a leg knocked out from under them, and now all competing companies have to do is lean on them.

There are ways to avoid state tax, but many require years of careful planning.  Most people who pay the estate tax aren’t morons; they were just caught unprepared.  Don’t get caught.

Why everybody needs an advance directive

You are 26, or 34, or 45.   You are with your friends, or your significant other, or your children, enjoying yourself.  A car hits you, or you only fall down, and you can no longer talk or speak or move. You may or may not be conscious. Even if you open your eyes, you aren’t there, yet you are still alive.

For years your relatives come into the room where you lay, a tube stuffed down your throat, blinking away the seconds, day after day.  Finally, they remove the tube but don’t give you pain medication.  They are sure that you can’t feel what is happening.  You sit there and blink and starve until you are gone.

This living hell is regularly reported on and fought over in courtrooms and Congress, and you can avoid it all with a simple piece of paper. The famous example of this is Terri Schiavo, a vibrant 26-year-old who collapsed at home, suffering massive brain damage:

An advance directive is a document that tells the doctors what you want when you can’t tell them yourself.

It is simple enough to fill out an advance directive without guidance, but making sure it is effective and followed is another matter entirely.  Here in the East Bay it is possible to file them with many major hospitals like Kaiser in advance, but a large number of doctors and nurses ignore advance directives because nobody filed them correctly.  Many doctors, absent an advanced directive, will do anything to keep you alive. I for one want them to stop short of anything.