Handbook
• MORE PROBATE (cont'd)
Note: There’s another perhaps obvious way to avoid probate (and possibly estate
taxes too), though not as “simple” as it may seem. If you give away all your
property during your lifetime, you will have only a minimal amount of property that
will need to be distributed through your Will. However, unlike most of the other
probate avoidance methods we’ve discussed, once you’ve given it away it is
legally gone. You cannot control it and no longer have any rights to it. (Too many
of us have heard horror stories about how some elderly individuals have given
their life savings to their “loved ones” thinking that they could rely on them if they
ever needed assistance, only to be sadly mistaken.) As Americans are living
longer and longer, you will have to consider how you will survive without your
resources. In addition, even if you do give away some or all of your property,
there are still gift tax and other matters you need to consider before you do that.
When John and Mary passed away, they did not have a Revocable Living Trust.
They had heard about the benefits of Revocable Living Trusts but had always
assumed that "Trusts" were for rich people. They never realized that Revocable
Living Trusts were being commonly used by those wanting to avoid the expense
and delay of probate.
John and Mary's biggest asset was their home. When they passed away, their
home was valued at $400,000. ($100,000 they had already paid for and
$300,000 they still owed to the bank.)
Assuming John and Mary had a Will, when Mary passed away, she would have
been able to avoid probate for their home. That is because, like many couples,
John and Mary owned their home as Joint Tenants with the right of survivorship.
This meant that when Mary passed away, John (the “survivor”) automatically
inherited the property. (Recall that John survived for a year before he too passed
away.) Initially then, the distribution of their home did not have to be administered
through a Will and thus avoided probate.
However, when John passed away, there were no other Joint Tenants to take by
“right of survivorship”. Since the Joint Tenancy was no longer effective in
distributing his home, it was distributed through their Will. I.e., it went through
probate and it incurred probate delays and expenses.
Although John and Mary only really owned $100,000 of their home (they hadn't
paid off the $300,000 loan to the bank yet), the probate costs were calculated
based on the total market value of $400,000. In addition to their home, they also
had about $100,000 of other probate assets, which made their total probate
assets about $500,000.
The filing fee to file the Will for probate was $1,000. (It would have been $35 if
the probate estate was valued at less than $10,000.)
Also based on the size of the probate estate, the Executor (administrator) of the
Will was legally entitled to commissions of about $19,000. (I.e., 5% of the first
$100,000 of probate assets, 4% on the next $200,000 and 3% on the remaining
$200,000. And similarly so on if the probate estate were larger.)
And, although Attorney’s fees are not awarded on a percentage basis, a rule of
thumb for an estimate is that the Attorney’s fees were approximately the same
amount as the Executor’s commissions, about another $19,000 in this case.
Not counting any other miscellaneous and professional costs (including
accountants), John’s estate had to pay about $39,000 in probate costs.
Because John’s estate did not have that much cash or liquid assets on hand, their
home had to be sold to pay the probate costs. Because it had to be sold relatively
quickly, they had to sell for a lower price than what they would have wanted.
Note: In certain situations an Executor may refuse their commission. A situation
where this might happen is if the Executor is also the sole Beneficiary. Here, the
Executor will be getting the entire estate as the Beneficiary in any case and
whatever he gets paid as the Executor just reduces the estate he gets as a
Beneficiary. In fact, there may be good tax reasons for this particular Executor to
refuse the commission.
In general, however, don’t expect that your Executor will refuse his commission.
They are spending a lot of time and effort on your behalf (depending on a variety
of factors, probate may take up to a year or more) and it’s only fair that they get
paid for it. The better plan would be to reduce the size of your probate estate (i.
e., avoid probate) as much as you can to make the probate process simpler,
easier, faster and less costly.
