Why Probate Is a Legal and Financial Headache You Can Avoid
The passing of a loved one is always a difficult and heartbreaking situation to endure. In addition to grieving the loss of a dear family member or friend, you must also begin to handle funeral arrangements, life insurance claims, and other financial affairs. Many times we all have questions and concerns regarding those matters and might feel lost or confused.
What Is Probate and Why Does It Matter?
Whenever a person passes away, their assets will typically pass through probate, a court-supervised process of collecting and appraising the decedent’s assets, paying creditors, and distributing the remaining assets to the decedent’s heirs or beneficiaries. In theory, the probate process is simple. However, the reality of dealing with the courts can be stressful, complicated, and confusing.
California’s Probate Threshold: Are You at Risk?
California law states that if the decedent died with a probate estate of $184,500 or more, then a probate must be completed to transfer the property to their heirs or beneficiaries. Basically, anyone who owns a home (paid for or not) needs to protect their family from probate. Probate is slow and tedious, and can take anywhere from approximately eight months to several years to complete.
Besides being slow, probate is expensive – making probate a real, legal nightmare. In most states, lawyers charge by the hour or collect a flat fee for probate work. Not so in California. It’s one of only a few states that let lawyers charge a “statutory fee”—an amount that is a percentage of the value of the assets that go through probate, i.e., 4%,3%,2%,1%, .5% based on the gross value of the probate estate.
The Shocking Cost of Probate in California
So, let’s say your probate estate contains a $600,000 house you own in your name alone, plus some bank and brokerage accounts and a car. The total value is $900,000. The attorney’s statutory fee would be $21,000—for very little paperwork. You might say, “But wait, there’s still $200,000 on the mortgage, reducing your equity to $400,000? Doesn’t matter, the attorney’s fee would still be $21,000 because it’s based on the gross amount of the probate assets, not what you actually own.
Wills Don’t Avoid Probate—Here’s Why That’s a Common Misconception
There is a common misconception that a will avoids probate. That’s simply not true. In fact, if there is a will, it must be submitted with the petition for probate. Another common mistake some families make trying to avoid probate is transferring title into your child’s name.
Ever hear of the expression, “Penny wise and pound foolish?” Do not put your child’s name on your home because you will lose the “step-up” in basis, possibly costing your child hundreds of thousands of dollars in capital gain taxes.
Why Putting Your Child’s Name on Your Home Could Backfire
Perhaps even worse, what if you put your home in your child’s name and your child gets sued or divorced? Your home could be subject to a judgment creditor or messy divorce proceeding. Even worse – what if you put your home in your child’s name and your child dies before you? Guess what, your son-in-law or daughter-in-law might own your home. That’s why any estate planning attorney would advise you to use a living trust.
The Smarter Solution: Use a Living Trust to Avoid Probate
A living trust is just like a will, i.e., has “will power.” You give instructions on who inherits your estate. It is the easiest way to avoid probate, preserve your “step-up in basis” and give your heirs quick, easy access to their inheritance. Once signed, your attorney will transfer ownership of your home and other assets into the trust. The best part is you remain in complete control of your property because you appoint yourself the “Trustee” of your living trust.
Next Steps: Protect Your Family from the Probate Nightmare
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