Does a Trust Reduce Probate Costs?
Yes, but in order to understand the benefits of avoiding probate, let’s review what probate is.
What is Probate?
Probate is a court-supervised proceeding that authenticates your Will (if you have one) and approves your named Executor so they can distribute your property and belongings. During the probate process, all your assets must be located and assessed for total value. Once that is done, taxes and debts are paid and the remaining value of the estate is distributed to your beneficiaries.
In cases where there is no Will (meaning your estate is intestate), this process obviously becomes more complicated. Because there is no documentation stating your final wishes, you give up your right to decide who will administer your estate and how your assets will be distributed.
What is the Purpose of Probate?
Reasons for the probate process include prevention of fraud and protection of creditors and rightful beneficiaries of estates. Beneficiaries are entitled to notice of the estate administration and an accounting of all estate transactions. They also have access to all documents filed by the estate. If beneficiaries have any objections to how the estate is administered, the court is available to address those concerns. The probate process in Pennsylvania is a way to protect beneficiaries and creditors and to assure proper distribution of estate assets.
Do All Assets Go Through Probate?
No. Some people assume that if the deceased person had a will, it means they don’t have to go through probate. The assets would go directly to the people mentioned in the will. While this sounds nice in theory, it’s not the case.
Whether a person does or does not have a will has no impact on whether their assets/estate must go through probate. The manner in which the assets are titled determines whether probate is necessary. If the assets must be probated, they will need to go through the probate process regardless of whether the person had a will.
Assets held in joint ownership between spouses or with others with right of survivorship pass automatically to the survivor and are not subject to probate. Bank accounts held in joint ownership or in trust for another are also not subject to probate. Assets with designated beneficiaries such as life insurance policies, annuities, IRAs and various retirement plans pass to named beneficiaries and are usually not subject to probate. It is important to note that assets controlled by the decedent at death, even if not subject to probate, are still subject to all of the same death taxes as probate assets.
What are the Costs of Probate?
In Pennsylvania, the costs of probate include filing fees for opening the estate, advertising the estate, filing an inventory of estate assets and other papers to complete the administration process. These costs can range from $500 for a small estate to $1,500 for an estate of $500,000. In addition, legal fees are paid to the attorney handling the estate work, which may include preparation of various death and income tax returns. Attorneys fees range from 3-5% of the value of the decedent’s assets. The personal representative may charge a commission roughly the same as the attorney fee. For a $500,000 probate estate, all of these costs combined will exceed $30,000. Obtaining appropriate legal advice about the administration of the estate can help keep down costs as well as taxes. Legal counsel is also advisable in dealing with assets which pass outside of probate, such as when a living trust is involved.
How Long Does Probate Take?
The length of time depends on many factors including the type of assets in an estate, diligence of the personal representative and whether an experienced estate administration attorney is involved. Typically probate takes anywhere from 6 months to two years. If an Executor has experienced assistance, they can accomplish the administration of estates expeditiously. They are empowered to handle most details (liquidating assets, paying debts and expenses, etc.) without seeking court approval for each and every transaction. Personal representatives are required to file only an inventory of estate assets and periodic short status reports stating whether the estate administration has been completed. Accounting of estate transactions to beneficiaries and heirs may be accomplished informally (not involving the court) or formally (filed with the court).
Practical Problems with Probate
Problems can arise at many points of the probate proceeding and they can involve many different issues raised by a death. For example, some of the problems which may occur include:
Probate requires fees to be paid to the court. A variety of fees must be paid, typically based upon the value of the assets in the estate. These are in addition to any death taxes payable on the transfer of assets.
Excessive costs of administration. Because probate is a structured process involving the courts, attorneys fees and commissions to the personal representatives are typically somewhat high – usually not less than 5% of the value of the assets in the estate.
Delayed access to the assets. Until the probate process is completed, the assets in the estate remain titled to and under the exclusive control of the personal representative. The beneficiaries have no access and cannot control, secure, enjoy, sell or rent out the assets. Real estate values can fall, houses become in a state of disrepair, stocks lose value. Delay can be costly.
A person named as executor is unavailable or is not up to the job. While most people named as executors opt to carry out their role, some do not want this responsibility. The named executor may have already passed away. If an individual who is named as executor opts out, the court may appoint someone to administer the probate proceedings.
A challenge to the validity of the will. Sometimes, heirs (or potential heirs) believe that a will isn’t valid because it was made while the deceased was under undue influence or because it was made on the basis of fraud. These disputes can lead to lengthy and expensive litigation.
Lack of information for beneficiaries. One of the most common complaints among beneficiaries is a lack of information and disclosure by the personal representative of the estate. This leads to mistrust and disputes.
Allegations that an executor is not fulfilling his fiduciary duty. No executor has prior training to do their job. It’s not uncommon for executors to delay administration of an estate due to lack of diligence, incompetence or outright malfeasance. If an executor fails to appropriately manage assets, is caught taking the deceased’s assets, or otherwise fails to live up to his obligations, victims harmed by the breach of duty may be able to make a damage claim.
How Does a Trust Avoid Probate?
When a person establishes a living trust, they can place all their property and assets into that living trust. The revocable living trust, rather than the person, becomes the owner of everything held within the trust. The person who formed the trust maintains control over the assets and property in the name of the trust by virtue of being designated as the trustee.
When the person who formed the trust passes away, a successor trustee takes over for the deceased trust-maker and that individual or legal firm assumes the responsibilities of administering the trust. When the trust is written, it designates beneficiaries, who generally are the children or other loved ones of the person who formed the trust. All the assets held within the trust would transfer to the beneficiaries or be held and administered according to the trust’s provisions.
The main difference between a living trust and a will is that the living trust creates its own legal entity in which all of the property and assets are contained. A will merely designates the intent of the asset owner regarding to how they wish their property and assets to be distributed after their death. This process usually requires the involvement of the court because the property must be legally transferred from one person to another. The living trust avoids this because it is already established as legal owner of the property and the beneficiary is already established as a legal recipient of those assets.
Deciding on a trust
Choosing and creating a trust can be a complex process; the guidance of an attorney with estate planning expertise is highly recommended. For more information about trusts, join us for our monthly webinar “Trusts 101” where we discuss trusts in more depth.
If you are interested in speaking with one of our experienced estate planning and elder law attorneys, contact us today to schedule an appointment.