An Overview of Living Trusts

B. Probate and Why You Want to Avoid It

Given that you're reading this book, you probably already know that you want to avoid probate. If you still need any persuasion that avoiding probate is desirable, here's a brief look at how the process actually works.

Probate is the legal process that includes:

• filing the deceased person's will with the local probate court (called "surrogate" or "chancery" court in some places)
• taking inventory of the deceased person's property
• having that property appraised
• paying legal debts, including death taxes
• proving the will valid in court, and
• eventually distributing what's left as the will directs.

If the deceased person didn't leave a will, or a will isn't valid, the estate must still undergo probate. The process is called an "intestacy" proceeding, and the property is distributed to the closest relatives as state law dictates.

People who defend the probate system (mostly lawyers, which is surely no surprise) assert that probate prevents fraud in transferring a deceased person's property. In addition, they claim it protects inheritors by promptly resolving claims creditors have against a deceased person's property. In truth, however, most property is transferred within a close circle of family and friends, and very few estates have problems with creditors' claims. In short, most people have no need of these so-called benefits, so probate usually amounts to a lot of time-wasting, expensive mumbo-jumbo of aid to no one but the lawyers involved.

The actual probate functions are essentially clerical and administrative. In the vast majority of probate cases, there's no conflict, no contesting parties -- none of the normal reasons for court proceedings or lawyers' adversarial skills. Likewise, probate doesn't usually call for legal research or lawyers' drafting abilities. Instead, in the normal, uneventful probate proceeding, the family or other heirs of the deceased person provide a copy of the will and other financial information. the attorney's secretary then fills in a small mound of forms and keeps track of filing deadlines and other procedural technicalities. Some lawyers hire probate form preparation companies to do all the real work. In most instances, the existence of these freelance paralegal companies is not disclosed to clients, who assume that lawyers' offices at least do the routine paperwork they are paid so well for. In some states, the attorney makes a couple of routine court appearances; in others, normally the whole procedure is handled by mail.

Because of the complicated paperwork and waiting periods imposed by law, a typical probate takes up to a year or more, often much more. (I once worked in a law office that was profitably entering its seventh year of handling a probate estate -- and a very wealthy estate it was.) During probate, the beneficiaries generally get nothing unless the judge allows the decedent's immediate family a "family allowance." In some states, this allowance is a pittance -- only a few hundred dollars. In others, it can amount to thousands.

Most states now allow simplified probate for certain types of estates. While simplified probate can speed up the process, and may even result in lower attorney fees, the truth is that probate -- simplified or not -- is simply a waste for most people.

Probate usually requires both an "executor" (called a "personal representative" in some states) and someone familiar with probate procedures, normally a probate attorney. The executor is a person appointed in the will who is responsible for supervising the estate, which means making sure that the will is followed. If the person died without a will, the court appoints an "administrator" (whose main qualification may sometimes be that he or she is a crony of the judge) to serve the same function. The executor, who is usually the spouse or a friend of the deceased, hires a probate lawyer to do the paperwork. The executor often hires the decedent's lawyer (who may even have possession of the will), but this is not required. Then the executor does little more than sign where the lawyer directs, wondering why the whole business is taking so long. For these services, the lawyer and the executor are each entitled to a hefty fee from the probate estate. Some lawyers even persuade (or dupe) clients into naming them as executors, enabling the lawyers to hire themselves as probate attorneys and collect two fees -- one as executor, one as probate attorney. By contrast, most relatives and friends who serve as executors do not take the fee, especially if the person who serves is a substantial inheritor.

Probate can evoke images of greedy lawyers consuming most of an estate in fees, while churning out reams of gobbledygook-filled paper as slowly as possible. While there can be some truth in these images, lawyer fees rarely actually devour the entire estate. In many states, the fees are what a court approves as "reasonable." In a few states, the fees are based on a percentage of the estate subject to probate. Either way, probate attorney fees for a routine estate with a gross value of $500,000 (these days, in many urban areas, this may be little more than a modest home, some savings, and a car) can amount to $10,000, $15,000, or more. Fees based on the "gross" probate estate means that debts on property are not deducted to determine value. For example, if a house has a market value of $300,000 with a mortgage balance of $260,000 (net equity of $40,000), the gross value of the house is $300,000.

In addition, there are court costs, appraiser's fees, and other possible expenses. Moreover, if the basic fee is set by statute and there are any "extraordinary" services performed for the estate, the attorney or executor can ask the court for additional fees.

Even England -- the source of our antiquated probate laws -- abolished its elaborate probate system years ago. It survives in this country because it is so lucrative for lawyers.

Next: C. Avoiding Probate

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