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The
Disadvantages of Probate
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Probate
is expensive
The
MINIMUM costs of probate, set by the California
Legislature, are determined by the size of your gross
estate (mortgages on your property are NOT subtracted)
and are as follows:
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Estate |
Probate
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$100,000
$200,000
$300,000
$750,000
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$
6,700
$10,300
$14,300
$32,300 |
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Probate
is open to the public
The entire probate process is open to the public so that
anyone and everyone is allowed to know every asset you
owned on your date of death, every debt you owed and to
whom you owed said debt, exactly how you distributed
your property between family members and friends, and to
comment on whether or not they feel your distribution
was “fair” to all concerned.
Furthermore, where a family business is concerned, rival
businesses are entitled to know who your company was
doing business with, who your creditors were, the asset
structure of your company, and to make a judgment as to
whether your company is ripe for takeover or increased
competition from rival companies.
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Probate
is a lengthy process and ties up assets
The entire probate process will take anywhere from ten
months to two years to probate a small estate of between
$100,000 and $200,000. John Wayne’s estate, which was
quite large, took six and one-half years to probate in
Orange County Superior Court.
During the entire time of probate, all of the assets are
frozen, i.e., no one is allowed to sell any of the
assets until the probate process is complete.
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Wills
are easy to contest
Remember that Wills go to probate. A Will does NOT avoid
probate, as many people believe. Wills are easy to
contest because anyone is allowed to contest the
validity of a Will WITHOUT HIRING AN ATTORNEY.
Therefore, it is easy and inexpensive to contest the
validity of a Will.
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Out-of-state
probate
To
the extent that you, as a California resident, own real
estate or raw land located outside of the State of
California, you will have to go through probate in
California as well as in each and every state of the
union where you own real property. Of course, you will
have to pay the cost of probate in each and every state
where you own real property. This is because California
Courts only have the power to transfer title to
California land. California Courts have no power to
transfer title to Arizona land, for example.
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Probate Can
Occur During Your Lifetime
In
the event you are ever unconscious, incapacitated, or a child to
whom assets are willed, your relatives must apply to the court
for probate guardianship in order to sell ANY of your stocks,
bonds, or real property if money is needed to pay, for example,
your medical bills. A probate guardianship is expensive and
time-consuming. Furthermore, the Court may deny permission to
sell the asset if the court believes that the expenditure is
frivolous.
For example, suppose you request money to pay for art lessons
for a niece you are raising. If the Court does NOT agree with
the expenditure, it will deny you the money necessary to pay for
the art lessons. With a probate guardianship for minors, you may
raise the child, but the Court will control the child’s money.
You as the guardian must submit a proposed budget, which will be
approved by the Court, either in whole or in part, as the Court
sees fit. You must also seek permission to sell assets, for
which permission may or may NOT be approved.
The process, which must be followed for a probate
conservatorship, is as follows:
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Petition
the Court (usually done by an attorney) seeking the
appointment of a conservator.
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The
competency proceeding is advertised in the local papers
to allow creditors to present their claims.
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A
hearing is held to determine if you are able to handle
your own affairs. If the judge determines you are NOT
“competent,” you then become a “Ward of the
Court.”
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A
conservator is appointed. The Court usually appoints a
relative, but is free to appoint anyone the Court deems
qualified and best suited for the job. The
Court-appointed Conservator may or may NOT be the person
you would have chosen. The Court will usually appoint an
attorney to handle the necessary paperwork.
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The
Conservator will next submit a list of your assets and
debts to the Court and a proposed budget for your living
expenses. The Court must approve the budget and order
the necessary assets sold to cover expenses and pay
debts. From this point on, ALL EXPENDITURES, SALES OR ASSETS,
ETC., MUST BE APPROVED BY THE COURT, which is a very
slow, cumbersome, and expensive process.
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Upon
regaining consciousness or becoming competent, you must
then go through another hearing to prove you are now
competent to handle your own affairs.
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Upon
death, your family must again go through probate if
there are any assets left.
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Minor Children
in Probate
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Because
minor children cannot transfer title to property in
their own names, a Court must become involved if the
asset in the child’s name is sold. This would be the
case where a child is named as joint tenant on a piece
of property, or where the child has been willed assets
by a parent or grandparent. In such cases, even though
the child’s parents maintain control over the physical
body of the child, it is the Court, NOT the guardian,
who controls the child’s inheritance.
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Many
people have a Minor’s Trust in their Will to prevent
the Court from taking control over the child’s
inheritance. Such a Trust in a Will, called a
Testamentary Trust, can work, but it is expensive to
establish and you once again face the probate process,
because it is ONLY through the probate process that the
Will and its mandates are carried out and, AFTER PROBATE
that the Testamentary Trust is established. The probate
guardianship for a minor is essentially the same as the
probate process outlined above.
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The
same disadvantages also apply as set forth above. After
the probate process is complete and the Trust
established, the child’s guardian must hire an
attorney, post a bond, and submit a report to the Court
each year. All of these costs are paid from the
child’s expected inheritance.
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Why Not Joint
Ownership to Avoid Probate?
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Joint
Ownership Increases Taxes Paid to IRS
Many people believe that if they merely place their
child’s name on their stocks, bonds, home, and bank
accounts, that this is sufficient to avoid probate. Such
joint ownership may delay, but will NOT avoid probate
(see paragraph F), AND it will increase taxes paid to
the IRS because joint tenants receive only a partial
step-up in basis in their property. For example, suppose
you own a home or stocks or bonds and purchased them
years ago for $10,000. Today’s market value is
$210,000. If you sell any of these assets during your
life, you will have to pay capital gains tax on the
difference between what you bought it for and what you
sold it for. (Note that you may have a
once-in-a-lifetime exemption of $125,000 on the home you
live in).
Suppose that you place your only child’s name on one
of the above-listed assets, thinking that when you die,
the child would automatically receive this asset. Upon
your death, the child, if he or she were still alive,
would receive this asset, but the new basis is not full
market value. Only your half interest in this asset
(decedent’s portion) steps up to market value of
$105,000. The child’s basis for the half interest in
the property remains at the original cost basis of
$5,000. Therefore, the child’s new overall basis would
be $105,000 + $5,000 = $110,000. Now if the child sells
that asset, he or she must still pay capital gains tax
on the difference between the market value of $210,000
and $110,000. Today, the capital gains rate is 28%
federal and 11% State, for an overall 39% capital gains
tax rate paid on $100,000. thus, the child upon sale of
the asset, would have to pay approximately $39,000 in
capital gains taxes.
On the other hand, suppose you had the same property IN
TRUST OR had paid the expensive probate fees. The child
would receive ALL property at market value on date of
death of the last surviving parent. In this event, if
the child sold the property at market value on date of
death, zero capital gains tax would be due and owing.
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Unintended
Dispositions
Placing your home in joint tenancy may lead to an
unintended person(s) receiving your home. For example,
suppose that you are the last surviving parent with five
children. You place your eldest son’s name on the deed
to your home, telling him that when you die, you want
him to sell the home and divide the money equally
between all five children. You trust your child to do
this. On your death, he or she becomes the sole owner of
your home. This child fully intends to do as you wish,
but before he sells the home, he dies in an
unanticipated medical operation. His wife of one year,
who has been married before and has children by a prior
marriage, claims ownership of the home by virtue of your
son’s Will, which leaves everything to her. Will she
be successful? Probably yes, and she in turn may leave
the property to her children, which was far removed from
your original intent to leave the home equally to your
children.
Additionally, on your date of death, if your son became
the sole owner of your home and did NOT die, he would
only receive a partial stepped-up basis in the home as
described in Paragraph A, and would therefore have to
pay capital gains tax on sale of the residence before
distribution the proceeds to his brothers and sisters.
Another
type of unintended disposition occurred with the death
of the famous actor James Dean. Mr. Dean’s mother died
when he was young and his father sent him to his
aunt’s home to live. His aunt raised him along with
her own family and he grew to love his aunt and her
family as his own. Mr. Dean had often stated to his
friends that he intended to leave all of his wealth to
his aunt’s family. Nonetheless, Mr. Dean never
prepared a Will or a Trust, and when he died, he was
survived by his father. If a California resident dies
without a Will or a Trust, the State of California
writes a Will for him or her. In Mr. Dean’s case, all
of his wealth was transferred to his father by the Court
because this disposition complied with the laws of the
State of California.
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You
Can End Up with Numerous Owners as a Tenant in Common
Suppose, instead, you held title to your home as tenants
in common with a spouse. Remember, that you can will
your interest in the home as a tenant in common. If you
die without a Will, the State of California writes your
Will for you and your property is disposed of according
to the laws of the State of California.
If you or your spouse had children by a previous
marriage and were holding title as tenants in common,
then on the date of death of the first spouse to die,
the deceased spouse’s share may go to his or her
children, and now you would own the property with five
other people. Decisions regarding the sale or rental of
a home are difficult with only two people, but become
much more difficult with six owners.
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Potential
Lawsuits Where Joint Owners are Concerned
To the extent that you place your assets such as stocks,
bonds, and real property in joint ownership, you expose
that asset to attachment if your joint owner ever has a
judgment rendered against him, fails in his or her
business, or suffers a divorce, and, as a result,
creditors of the joint owner are looking for assets to
attach. Remember, that if your child’s name is on your
bank account or other asset, that asset legally belongs
to the child and can be attached to pay that child’s
debts. Also, if the asset itself, such as a rental
house, becomes the subject of a dispute because of
actions of the joint owner, you will also be involved in
the lawsuit.
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If
the Joint Owner Becomes Incapacitated Probate
If the person with whom you hold title jointly becomes
incapacitated and can no longer handle his or her own
affairs, the joint owner will now become involved in the
probate process as explained above and the Court will
make the final decisions regarding sale of assets. To
the extent that you own assets jointly with the
incapacitated person, you also must become involved with
the Courts. You no longer make a unilateral decision to
sell the asset. You must seek the Court’s permission
and approval.
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Joint
Ownership Merely Delays Probate
When
you place a child’s name as a joint tenant on the face
of a Deed, Stock, or Bond, the child, if alive, will
receive the asset without probate---be
it at the original cost basis. Nonetheless, on the death
of the last joint tenant, the asset will go through
probate. Therefore, no matter how many joint tenants you
name on an asset, you will ALWAYS suffer adverse tax
consequences because of the basis problem, and THE LAST
JOINT TENANT WILL ALWAYS GO THROUGH PROBATE.
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