Should You Worry About Probate?
When I first started practicing it was drilled into my head by other attorneys in this field across the country that probate should be avoided at all costs. But in Pennsylvania, the situation is a little different. Warning: This article is long! The true summary? Every case is different, and avoiding probate won’t necessarily get most people to the promised land.
First things first: Probate is the formal process of administering a person’s estate upon their death. In Pennsylvania, it starts with an informal visit to the Register of Wills in the county seat in which the decedent lived. The Executor brings the original will, a death certificate, their ID and pays a fee usually around several hundred dollars. Normally it’s drama free and easy, and after about a half hour, the Executor is sworn in, gets official paperwork and can begin to administer the estate. Sure, there are snags along the way sometimes, so, as an attorney, I recommend you always have an attorney!
Why do people worry about probate? Common concerns are: 1) it takes forever, 2) the fees are extraordinarily high, 3) their affairs are made public, and 4) they have to pay Inheritance Taxes in Pennsylvania.
Let’s begin in reverse order. #4 — Inheritance Taxes: Whether an asset (a checking account, for example) is in a trust or whether there is a beneficiary designation, the person who receives the money must pay inheritance taxes on it. There are ways to minimize the impact of inheritance tax, however these options are not appropriate for everyone. For example, inheritance tax can be avoided by irrevocably gifting assets while you’re still living. Another option – one I usually do not recommend – is titling assets jointly with children. This could reduce the tax burden by half. The bottom line is, though, avoiding probate generally does not avoid inheritance taxes.
#3 — Affairs Being Made Public: This is a legitimate concern for very few people. If you come into my office and tell me your son is a monster who you are disinheriting but who will challenge your estate at any cost, I would think twice about allowing anything to go through probate. But remember, this isn’t Judge Judy. Real litigation is costly, burdensome and time consuming for both parties. That alone discourages many frivolous challenges. Furthermore, the burden of challenging an estate falls on the challenger, so they must come up with solid evidence or else any court would toss the case. By the way, avoiding probate by using a trust doesn’t mean someone can’t challenge the trust. Unlike a probated will, which could be accessed by the public once probated, a trust isn’t probated and therefore isn’t public. But that’s not to say someone can’t challenge it. The difference is you’re simply making discovery harder by not having the document sitting out there. If you are for some reason legitimately concerned about a will challenge, talk to your attorney so a plan can be crafted to limit the issues that your estate could face. There is no perfect solution, but there are solid ways of mitigating the matter.
#2 – Fees: Probate fees to the county aren’t high, usually a few hundred dollars. A lot of folks confuse the inheritance tax and probate fees. Remember, the inheritance tax is difficult to avoid in PA. So if you’re leaving property to your children, they’re going to pay 4.5% in tax. Of course, if the Executor hires an attorney, there will be attorney fees. Attorney fees vary, depending upon the complexity of the estate administration. For instance, there would be a difference between administering an estate with one beneficiary and two accounts, versus an estate with 20 beneficiaries, 3 pieces of real estate, several accounts, several creditors, and perhaps a conflict or two. Even if you avoid probate and put everything you own into a living trust, know the following: A) creditors in Pennsylvania still have rights to come after property in this type of trust; B) there’s a good chance a piece of property was forgotten and not put into the trust, which would necessitate probate anyway, and C) there are still fees because normally, a Trustee would want to hire an attorney to ensure proper administration and to make sure inheritance taxes are filed properly. The bottom line is, unless you gift everything away while you are alive, which is illogical, fees generally can’t be avoided— it’s just a part of the process. Each estate is different, so when you’re engaging in estate planning (hopefully, again, with an attorney!), talk to your attorney about what will work best for you.
One more tip regarding trusts: A lot of older trusts, like those done in the 90s or early 2000s, have outdated provisions regarding federal estate taxes for clients who no longer have estate tax issues (MOST of us). This could make administering the estate more complex. Also, I’ve seen so many cases where trusts are partially funded. For instance, one house is in trust, but the second home isn’t. Now you’ve got double administration and a whole lot of headaches. So, if you have an old trust, get it reviewed immediately because chances are, it’s not funded completely or properly.
#1 – It Takes Forever: Even if you avoid probate with a living trust, it still takes similar amounts of time before assets can be distributed. Generally speaking, whether you avoid probate or not, you have the following issues:
A) If there is real estate, it won’t sell instantly – it has to be cleaned out, perhaps fixed up, and then you’re at the mercy of the market. I’ve seen houses go in a day, and others sit on the market for months.
B) Inheritance taxes – This takes a while, because you need to get an accurate accounting of the estate assets. If you’re selling real estate, you generally don’t file the tax return until after the real estate is sold. Once the return is filed, PA takes 6 months (CRAZY!) to approve the return (assuming it’s approved). You never want to distribute all of the assets before that.
C) Creditors – Creditors have one year to come forward after a legal notice is published in two local papers. Before that year is up, you never want to make distributions.
D) Income Taxes – You’ll have to file at least one more return for the decedent. For instance, if they die in May, you have to file at least one income tax return the following year.
As you can see, avoiding probate or not doesn’t necessarily shorten the time it takes to administer an estate.
In summary, probate in Pennsylvania may not be worth avoiding for most families. Of course, every state is different. If you have property in another state, such as Florida or California, where probate is more difficult, you would want to avoid probate in those states. Again, the best thing to do is consult with an estate planning attorney. Trying to do this yourself would very likely cause more headaches and problems later. An estate has a lot of moving parts, and each estate is so very different. It pays to get a customized plan done by an experienced attorney so that you have peace of mind.