Sunday, March 31, 2013

Is Probate Really Costly and Lengthy?

A lot of people think that probate is costly and takes a long time, which can be true. There are plenty of horror stories about a probate gone wrong. Indeed, some estates are tied up in probate for years on end, as people fight over who gets what. In these cases, probate can get quite expensive as the fees of the professionals involved (such as accountants, appraisers, lawyers, bankers and so on) add up.

The truth, however, is that this is not the usual way things happen. Probate tends to be quite quick and usually does not cost too much because nearly all estates are simple and small. The delay and cost of probate depends mainly on the size of your estate and what type of assets it contains. Obviously, a large, complicated estate, with many assets, will result in a longer probate.

Nearly all states have a simplified or streamlined procedure if your estate has a fairly low probate value. If your probate assets fall below the state threshold (normally under $20,000) you probably do not need to worry about probate because it is likely to be fast and inexpensive. It could be done in days and cost only a small filing fee.

However, if you have more probate assets - above the simplified threshold (i.e. $20,000) - then your estate will have to go through probate. And, especially for larger estates, probate can be time consuming and expensive.

The most common reason for the delay in living trust or probate is if there are gift tax or estate tax issues. Certain things have to be sorted out before everything can be distributed. Death tax returns are usually due nine months after the death but tricky valuation issues could arise.

The trustee (of a living trust) or the executor (if it is a will) cannot distribute everything properly until he knows how much estate tax or gift tax will have to be paid to the State or Federal government. It can take up to eighteen months after filing the death tax return for the federal and state taxing authorities to review the estate and gift tax returns. If your estate is complicated, it could take several years to complete the probate.

So, the first thing to figure out is the value of your "probate assets."

Everything that is in your name when you die is potentially a probate asset. However, some assets, that are in your name, upon your death, are not considered probate assets. Common examples include bank accounts with 'payable on death' (POD) designations. If you designate someone as the POD for your bank account, they will automatically get the account when you die, rather than putting it through the probate. This also applies to life insurance proceeds if you have designated a life insurance beneficiary.

However, most assets, in your name, will have to go through probate. One way to avoid that is to put the assets into a living trust. Any assets you have in a living trust are in the trust's name, rather than in your name, and therefore do not go through probate.

It is important to realize that a living trust will not eliminate delays caused by asset collection or tax issues but it will usually speed up the distribution process because the probate court does not have to approve everything done by the trustee. This is one impediment removed.

Living trusts are very flexible and offer many other benefits as well. If you are thinking about getting a living trust, you should think about both the pros and cons before making any decision.

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