It’s certainly not uncommon to put off thinking about unpleasantries. Perhaps this explains why 60% of Americans have no will or estate plan, according to a recent survey. The sober truth of passing and leaving your loved ones behind creates unsettling feelings. Most people avoid the subject at all costs.
But whether you like it or not, if you’re planning to leave your loved ones an inheritance you’ll need to understand probate. In simple terms, probate is the legal process through which a deceased person’s estate is distributed to heirs and designated beneficiaries, and any debt owed is paid off. Generally, probate property is distributed according to last will and testament of the decedent’s, or person who has passed.
If no will or estate plan exists, probate property is doled out according to state law. As you can imagine, leaving it to the state to decide how to distribute assets is not only time-consuming and headache-inducing but can be very painful for loved ones left behind.
When it comes to California and some other states, there are good reasons to avoid probate altogether.
Because probate is a court-administered process, an attorney typically needs to be involved. Additionally, an executor must be appointed to direct the procedure on behalf of the deceased person’s heirs.
Both the attorney and executor are entitled to receive fees payable from the deceased person’s assets (aka the “estate”). While these fees are set by the state, they can be significant—and often unnecessary.
For example, for a simple estate with $400,000 of assets (for simplicity’s sake, let’s not include any debt on the property), the required fee to the attorney and executor would be $11,000 each, or $22,000 total. That’s less money that will pass on to your surviving loved ones.
If the heirs are serving as executors, those fees can be waived. However, attorney fees are likely unavoidable. What’s more, court fees and expenses typically rack up to several thousand dollars, and appraisal fees can equal as much as 1% of the value of the property.
Delays and loss of control
Because probate is a court-administered procedure, numerous documents and forms need to be filed with the court. Plus, many actions require court supervision. In turn, the process of transferring property to the intended heirs oftentimes is lengthy, lasting anywhere between six months and two years.
During that time, there’s a likelihood the property may not be put up for sale. And in the case it is able to be sold, the heirs may only have limited access to the sale proceeds.
In addition to the potential for long delays, much of the probate process occurs outside of your family’s control. Here’s a scary thought: A judge who doesn’t know you or your family will be ultimately making decisions on how your assets would be distributed.
Since all documents related to the transfer of property must be filed with the court, such information is publicly disclosed. Therefore, in most circumstances, not only how much the deceased person’s assets are worth is available for the public to review, but so are the deceased person’s intended beneficiaries and any conditions on their receipt of the assets. This can make a difficult situation even more uncomfortable for the loved ones left behind.
Ways to avoid probate
The simplest way to avoid these problems altogether is to bypass probate. There are many legal mechanisms available for transferring ownership of an asset outside of probate. These approaches vary by state, but when it comes to real estate, here is a list of some of the most common ways to get around the probate process.
Assets held in trust have universally escaped the probate process. For example, in California, you can make a living trust to avoid probate for essentially any asset you own—real estate, bank accounts, vehicles, and so on.
Here’s how it works: You can create a trust document, naming yourself as trustee. You can also appoint what’s called a successor trustee to take over as trustee after your death. Then, and this is crucial, you must transfer ownership of your property to yourself as the trustee of the trust. Real estate requires a deed that conveys the real property from the owner to the trustee(s) of the trust.
Once that’s done, the property will be controlled by the terms of the trust. At your death, your successor trustee will be able to transfer it to the trust beneficiaries sans probate court proceedings.
The trustee is then considered the legal owner of the property. Since the trustor or beneficiary isn’t the legal owner, the death of the trustor or a beneficiary doesn’t affect the ability of the trustee to hold or transfer legal title. In turn, no probate is required.
Real property by right of survivorship
Most state laws allow real property owners to designate who will inherit their property on death through the manner in which title to the asset is taken. Specifically, two individuals can hold title to an asset in joint tenancy, which by definition includes the term “right of survivorship.”
In the case that one joint tenant passes, the asset is then owned entirely by the surviving joint tenant. Typically the title is transferred through the recording of a death certificate and affidavit concerning the death. This needs to be done with the county recorder’s office in the county where the property is located.
Spouses and community property with right of survivorship
Spouses or domestic partners may avoid probate by holding title to real property as “community property with right of survivorship.” Unlike joint tenancy, which by definition always includes the right of survivorship, community property without the specific designation “by right of survivorship” doesn’t pass by survivorship. In that case, at the death of one spouse, only his or her half of the community property goes to the surviving spouse. An exception is if the spouse who has passed leaves a will that directs otherwise.
If there’s no will, community property given to a spouse can avoid probate if a spousal property petition is used. After the death of a spouse, a spousal property petition will transfer assets from the deceased spouse to the surviving spouse or domestic partner.
While many of these situations seem complicated, an expert would know the ins-and-outs and how you can best avoid probate. By and large the first step is to make a will or put your house in trust. Here at Sundae, we care about helping you plan for the future and can work with you to find a qualified professional.
Further reading: The Sundae Guide to Inheriting a House
Andrew is an experienced executive with expertise in finance and marketplaces. Prior to founding Sundae, Andrew was CFO at LendingHome, an online mortgage bank and prior to that, Andrew served as CFO at Airbnb. He also held leadership roles at Intuit and The Boston Consulting Group. Andrew holds an MBA from Harvard Business School.