The Red Tape Estate: The Probate Process ExplainedNov 28, 2022
Ever since my grandfather passed on and my grandmother had to deal with a year and a half of uncertainty, convoluted procedures, and legal bills, I made it my mission to find ways for my clients to avoid the red tape of probate. But not only did I want to help my clients, but I also wanted to spread the word about planning techniques to any who would hear it. This excerpt from my book Estate Planning Basics is just one way of spreading that information by discussing what probate is and how it works. Hopefully, by the end you will want to make things much easier on your loved ones by leaving behind an estate that avoids the red tape of probate.
The children sat around the conference table, extremely upset at what they were being told. Months of court proceedings ahead, thousands upon thousands of dollars in legal fees, and all of his private financial information exposed to the public. Three middle-aged heirs of their father’s estate were looking around for someone to blame, and it was becoming increasingly clear their father and real estate attorney were at fault.
“Your father met with us, and we outlined a plan to do things the right way,” the attorney calmly said. “You obviously found the papers from the seminar we held, and that is how we met your father. I recommended a revocable living trust to handle his estate wishes, stressed the proper titling of accounts and beneficiary designations, and your father even attended a specific seminar on the complexities of the probate process.”
“Here is the letter he wrote me declining my services,” the attorney said, passing the hand-written letter across the table to the oldest son. “He decided to go with a Last Will and Testament through the attorney that handled his house closing. Apparently, his attorney told him probate was no big deal and that he, the other attorney, could do a plan that addressed all of your father’s issues for a few hundred dollars.”
“I don’t understand this,” the daughter said, the frustration of the whole situation getting to her. “My father was told by his attorney that he didn’t need a trust and that probate was not expensive nor was it a big deal. Then we go to him after our father dies and he asks for $20,000 just to start!”
She took a breath, the attorney nodding his head in understanding. “Everything but the IRA is going through probate, two attorneys are telling us it will take about a year, and it’s probably going to cost about $70,000 to administer this thing, and my father, who was a very private person, is going to have all of his finances open to the world,” the daughter said. “Why? Wasn’t a Will supposed to take care of this?”
“Your father fell into one of the biggest traps out there,” the attorney said. “By listening to an attorney who had his own best interests at heart in collecting legal fees later, your father paid less to have a Will and now his estate is paying the price. I’m sorry, but that’s the way it is.”
The younger brother got up from the table and walked out, too frustrated to stay quiet and unwilling to hear any more.
The older brother sat back into the chair, tapping his pen on the table for a moment, holding back tears and trying to ask the next questions. “If he had done the planning you suggested, would he have avoided the court process?”
“Yes,” the attorney said without hesitation.
“How… how much would the planning have cost?” the brother asked next, his sister starting to cry into her hands.
“A little less than $6,000,” the attorney said
“How much would it have cost to settle the trust?”
“Maybe a few hundred dollars.”
Probate is evil. Fire, brimstone, from the pits of hell, evil.
At least that’s how many people feel when a loved one’s estate is going through the process. Especially when they start writing checks to attorneys for legal fees… or each time the date of death hits a six-month anniversary and the estate is still not settled… or they get yet another round of papers to sign. In all, people see the process as expensive, time-consuming, intrusive, frustrating, and completely worthless.
As an attorney, I can not agree more, and I wish more of my fellow attorneys felt the same way. Unfortunately, many of my colleagues either do not handle much estate planning and so stick to writing Wills, guaranteeing probate for their clients; or worse, they understand what will happen to their clients and they are hoping for large legal fees to handle the paperwork for the probate estate. I discussed the downsides of probate in the Introduction, so there is no need to repeat it here, but…
In the end for the family, probate is still evil.
But the probate process did not start out with that in mind. What it did was provide a framework to make sure that people did not steal from the estate and that the correct beneficiaries received their inheritance. Simple enough. But what it devolved into was a huge labyrinth of paperwork wrapped in an enigma and sealed over with bureaucracy, and it now takes the “expert” in the form of an attorney to decipher the probate code and give the court pieces of paper before it gives up money to the rightful beneficiaries. But, again, what exactly is probate?
In short, probate is the legal court process governed by a State that oversees the transfer of title from a deceased person the appropriate beneficiary or beneficiaries. Despite the inventories, despite the appraisals, and despite the huge administrative expenses, it is nothing more than an elaborate retitling process. A gigantic, burdensome, pain in the behind, retitling process.
The probate court process varies widely and greatly from state to state, so there is no single correct answer to the procedures of probate. However, many of the different states have a few similar characteristics in their procedures. Whatever you do, do not take what is written here as fact for your state or jurisdiction. While there are other components of this book that are fairly universal across 50 states, such as the concepts of revocable living trusts and powers of attorney, you should find books or talk to an attorney about the process in your particular state.
With that said, some of the similarities are:
- Qualification of the Personal Representative
- Inventory of Assets on Date of Death
- Notification of Creditors and Beneficiaries
- Accounting of Assets Received and Debts Paid
- Disbursement of Assets to the Beneficiaries
Qualification of the Personal Representative
The executor, administrator, personal representative, or whatever else the position held by a person may be called, it all is the same in that a court has to put its official stamp of approval on the person for them to get anything done. The term “executor” (or executrix) usually applies to a person executing the terms of a Last Will and Testament. The term “administrator” usually applies to the person handling an estate where the person didn’t even have a Will. The term “personal representative” applies to either instance, and it is quickly becoming the industry standard term for the person in charge of any kind of estate.
During this initial phase of the probate process, people are named or volunteer to handle the administration of the estate and the court imposes its procedures in choosing the right person for the job. Typically, the court has little in the form of criteria relevant to the job and relies more on how closely the person applying is related to the deceased person to screen them in and then looks at criteria such as felonies or other crimes to screen people out. Regardless, the court has to choose someone, and there is relevant information required to make that determination.
[With a revocable living trust, as long as the person named as successor trustee is not dead, incompetent, or in jail, they take over. No forms, procedures or inventories required to start managing assets.]
Inventory of Assets on Date of Death
Regardless of the state or jurisdiction, the probate court wants to know, at a minimum, about the assets subject to probate. All of those assets still titled in the deceased person’s name after their death must be included in inventories.
In some states or jurisdictions, the court wishes to also know about other assets that bypass the probate system, such as accounts titled as joint property or which have a beneficiary designation on them if for no other reason than to have the information on hand in case the estate is sued. If all of the assets in probate are not sufficient enough to pay debts, then most states allow non-probate assets to be attached to pay those debts.
In my home state of North Carolina, all joint property assets and accounts must be listed on an initial inventory when a person is filing to become the personal representative. Down the road, the court also wants to see the “signature cards” for joint accounts to “prove” that they bypassed the probate system. That’s right. If you are using joint property to bypass the probate court system, the probate court system wants you to file an equivalent amount of paperwork to prove you bypassed the system.
The biggest exception to this rule in North Carolina is a revocable living trust. Since the technical “owner” on the account is the trust and not the deceased person, then it is not subject to probate disclosure in the inventories.
Notification of Creditors and Beneficiaries
In some fashion or another, all creditors and beneficiaries of the deceased person’s estate must be notified of the person’s death and told that they may be a creditor or beneficiary of the estate. The process varies from state to state, but most states require a direct notification of the beneficiaries and some posting of a notice to creditors in a newspaper that the person has died.
This second form of notification often becomes handy for estates since there is only a limited time for the creditors to file claims before they are cut off. But it does cost money, particularly if the person had a lot of creditors. By far the easier and less costly procedure is to pay off all legitimate debts and move on. If there are any debts that are not legitimate, let the person trying to get something for nothing file a claim against the trust and fight it out there. Typically, people who are trying to scam an estate are too lazy to participate in a court action and will refuse to put up their own money to file one in the first place.
Accounting of Assets Received and Debts Paid
So far, the work described for probate has been extensive, but now the red tape will start to strangle all who unwittingly wade into probate thinking it is no big deal. The probate court requires that all money received by the estate is accounted for, that all money spent by the estate is accounted for, and, typically, receipts and cancelled checks have to be submitted to the court for approval. Every single one.
In addition to all of the receipts and cancelled checks being submitted for every expense from the floral arrangements for the funeral down to paying the accountant for preparing income taxes, all of these items have to be compiled into an inventory. It’s sort of like a person giving all of their receipts and cancelled checks to an IRS agent… that’s fine, but they want the tax return filled out with all of the items listed. Every single one.
In the end, when the inventories are being filed to account for all of the money received and disbursed, the court wants to have these transactions clearly noted with balances. Everything has to balance out financially, and every penny must be accounted for. Every single one. (Believe me, it is not as easy as it sounds.)
Disbursement of Assets to the Beneficiaries
In the end, there is a phase where all of the remaining assets are turned over to the beneficiaries. This is typically done at the end of the process, but many states allow some of the assets to be distributed well ahead of closing the estate, but again everything must be balanced, fair, and provide receipts with it.
Many courts insist on their own forms being used to document a beneficiary receiving their inheritance, and sometimes those forms have to be notarized. While not a big deal by itself, one uncooperative beneficiary can hold up the closing of the probate estate. The process itself is complicated enough for the average person to comprehend. But what makes it most complicated is when these individual transactions hold up the entire process.
I once helped a daughter probate her mother’s estate, and the funeral home was not being cooperative. The probate court insisted that a receipt from the funeral home show a zero balance at the bottom of a billing statement. We kept telling the funeral home exactly what we needed, and instead of showing a billing statement with a zero balance they kept showing the final bill with several thousands of dollars owed and a stamp marked “paid in full.” Three times we had to request exactly what we needed, putting the request in writing each time and showing a sample bill, and still they sent the same exact statement. The probate estate was held up four months, and we had to charge at least another $1,000 for our efforts because of the uncooperative funeral home. And that kept us from paying out the final amounts to the family.
The probate process varies greatly from state to state, and complications always seem to pop up. No matter what an individual probate attorney says about the system in their state being different, don’t be fooled. I don’t have to say that probate is evil. The people who have taken a loved one’s estate through the process will tell you so.
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