Does a Will help avoid probate?

Under California law, probate is triggered when a deceased person dies without any Will or if such person wrote a valid Will but the value of the deceased person’s gross estate equals or exceeds the prevailing probate threshold. As of the date of this post, the current California probate threshold is $166,250. In other words, if a California resident dies leaving behind a gross estate valued at or above $166,250, such estate will go through probate regardless of whether or not the deceased person had a valid Will.
What is probate?
‘Probate’ is a court process where a judge supervises the distribution of a deceased person’s estate. The probate threshold applies to the deceased person’s ‘gross’ estate and not the ‘net’ estate, which means that such person’s debts, liabilities, taxes and expenses do not count towards reducing the value of the estate for purposes of determining whether or not probate applies. Also, the limit is based on the summation of all assets of the deceased and is not a ‘per asset’ limit.

Why should probate be avoided?

• First, it is very expensive. Probate fees are statutorily determined and are calculated as a percentage of the deceased person’s gross estate. It starts at 4% of the gross estate for the first $100,000; 3% of the next $100,000; 2% of the next $800,000; 1% of the next $9M; and 0.5% of the next $15M. Estates above $25M are assessed a reasonable probate cost. As an example, on a $1M estate, the total probate cost would be about $45,000. This is money your estate would pay as legal costs to distribute your wealth to your family only because you did not engage an estate planning attorney to establish an appropriate estate plan for you before your death!
• Second, probate is time-consuming. On an average, it takes between 6 months – 2 years for probate to be completed during which time your assets would be locked up in the court process and your family would have to depend on the probate judge for receiving their share of your assets.
• Third, probate is a complex, stressful and formal process. Before your family can receive your assets, your estate will be subject to payment of court fees, applicable taxes, settle debtor claims, and the probate judge will have to resolve any other competing estate claims from third parties for a share of your estate.
• Fourth, court proceedings typically are a matter of public record, which would mean that the public at large could know who you were, what assets you owned, who got what, what their identities are, etc.
• And fifth, a probate judge will distribute assets, based on the default rules of California Probate Code, rather than using the emotional, subjective factors that come into play when individuals distribute their assets to their family members and other beneficiaries in a private way.

​PRACTICE POINTERS

• Engage an experienced estate planning attorney to set up a living trust for your family. For many individuals and families, a revocable living trust may be the correct approach.
• Ensure that all of your existing assets are ‘funded’ in the trust, i.e. either their ownership is transferred to the trust or they are made payable to your trust after death. All valuable assets, including real estate, bank accounts, brokerage accounts, stocks, investments, business interests, life insurance proceeds, retirement account funds, and tangible assets should end up in the trust in one way or another.
• Not all assets can be directly held by your trust but your estate planning attorney can help structure the right strategy for funding your trust assets. At IndUS Counsel, we give our clients detailed written funding instructions and a funding checklist with practical pointers to streamline the trust funding process.
• Funding a trust is not a one-time activity. It should be an ongoing process. As you add new assets to your estate, you should ensure that they are also funded to your trust. Otherwise, such new non-trust assets could end up being ‘probate’ assets depending on their total gross value at your death.
• While there is no prescribed time limit to complete trust funding, it is important to adopt a ‘sooner the better’ approach to avoid inadvertently risking probate occurrence in the event of untimely death or incapacity, which could defeat the purpose of setting up a living trust. As a general rule, we suggest that you fund new real estate acquisitions on a ‘real time’ basis at closing of the purchase, and all other asset acquisitions (including, new bank accounts, brokerage accounts, private investments, etc.) should be funded on at least an annual basis, if not sooner.

Funding of assets is typically a two-step process. First, you must inform the institution dealing with the asset that you want it to be placed in a trust. This would involve, for instance, in the case of real estate, recording a new title deed (typically, a ‘trust transfer deed’) with the county where the property is located, or in the case of a bank account or a brokerage account, informing the financial institution providing such account that you would like the account to be a ‘trust account’ instead of a ‘personal account’. Secondly, update your trust documents (i.e., the ‘Schedule of Trust Assets’) and specifically add the new assets in that document and execute it before a notary. The updated trust document should then be placed in your estate planning binder instead of the old document. Your attorney can help you maintain the estate planning binder.