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Avoiding Probate: Myths and Realities

Many clients I work with have done a little bit of research about estate administration before we meet.  Often, they are surprisingly focused on “avoiding probate.”

This is such a common part of the client mind map that I think it’s worth examining myths and realities of avoiding probate in Kentucky.

Myth: Probate is expensive, so avoiding probate saves money.

Reality: In Jefferson County, the filing fee to probate a Will and appoint an executor or administrator is $193. If $193 is not expensive for you, then probate’s not necessarily expensive.

Myth: Avoiding probate saves taxes.

Reality: Federal estate tax laws are agnostic about whether assets are included in the probate or non-probate estate.

Myth: My heirs will fight over my estate in probate, so if my estate isn’t probated, there won’t be a fight.

Reality: Non-probate assets such as transfer-on-death accounts cause some of the most bitter inheritance disputes.

Probate provides an organized process for wealth transfer, and the transparency and structure it offers sometimes prevents sibling discord from boiling over into litigation.

Myth: My privacy will be compromised when my estate is probated, so I should avoid probate.

Reality: The extent to which probate discloses your wealth and the way you transfer it to your beneficiaries is up to you. If you use a “pour-over” Will and a Revocable Trust, your distributions to beneficiaries can remain private.

If you fund your revocable trust (at least in part) while you’re living, the inventory filed for your probate estate won’t disclose the complete extent of your wealth.

In addition, non-probate assets also include life insurance and retirement accounts that are designated to beneficiaries other than your estate.

For most of the upper middle and lower upper class, these non-probate assets (even without any lifetime funding of a revocable trust) constitute the majority of wealth.

Even without any extraordinary efforts to avoid probate, this wealth will be “off the grid” for privacy purposes.

Myth: My estate will be tied up for years in probate, but if I avoid probate, my heirs will receive my wealth right away.

Reality: When an estate doesn’t involve Federal estate tax or Kentucky inheritance tax issues, and there aren’t disputes between heirs or over large creditor claims, probating an estate in Kentucky needn’t take much longer than six months.

In many instances, an estate’s executor can make interim distributions to beneficiaries, accelerating their receipt of most of their inheritance.

In contrast, when there are Federal estate tax or Kentucky inheritance tax issues, or there are disputes between heirs or over large creditor claims, the overall probate and non-probate administration process will likely take the same amount of time, whether or not a probate estate is opened.

Myth: Avoiding probate provides asset protection.

Reality: Whether an asset can be transferred without exposure to creditor claims turns on the type of asset in question, not whether or not a probate occurs.

For non-probate assets like life insurance and retirement accounts, beneficiary designation to a trust can provide asset protection.

Assets owned in a revocable trust at death (rather than by a decedent outright) may avoid probate, but are still exposed to claims of the decedent’s creditors to the same degree as if the decedent had owned the assets outright.

In fact, the appointment of an executor or administrator for a probate estate begins a six month limitation period for creditor claims.  Without probate, these claims enjoy a longer two year limitation period.

This means that for many decedents (such as professionals or business owners), conducting a probate administration may actually reduce overall creditor exposure — and certainly doesn’t increase it from what it already is, whether or not probate occurs.

Myth: Probating a larger estate costs more than probating a smaller estate.

Reality: In my experience, the time and costs of probating an estate turn on how messy the decedent’s life was, not on whether or not the decedent was rich.

A rich person in a first marriage with no stepchildren who kept extremely organized records and was not a hyperkinetic entrepreneur will tend to have a very inexpensive estate administration.

In contrast, a person with modest means in a second (or third) marriage with stepchildren or children who are not full siblings, who was a “bring the CPA receipts in a shoebox on April 14” kind of person and ran several financially stressed business ventures will have an estate administration that is potentially very expensive.

Myth: It’s easy to avoid probate.

Reality: It’s easy to move a particular asset out of your probate estate (for instance, by transferring it to a revocable trust).  What’s not easy to do is avoid probate altogether.

Probate has to be run if a decedent dies with a probate estate exceeding $15,000 (plus funeral and certain other expenses).  (Below this threshold, a petition can be filed to dispense with probate administration.)

Pause and consider how hard it is for most of the upper middle class (and those wealthier than that) to divest themselves of all assets to the point where probate wouldn’t be necessary.

Did you try to avoid probate by beneficiary designations and funding a revocable trust, but forget a car and two watches?  A boat? A boat slip? An old group term life insurance policy that you absent-mindedly designated to pass to your “estate”? A time share? Your furniture?

You get the idea. Completely avoiding probate is actually pretty hard, because to successfully avoid probate, you have to fully complete a scope of work that’s almost identical to administering your estate in advance.

That scope of work tends to be detail-driven and non-glamorous, and in my experience, most people don’t have the bandwidth to do it successfully.

Those who try to avoid probate often still end up with small probate estates that require substantially the same investment of time and cost to administer as if no efforts had been made to avoid probate.

A particularly nefarious issue I see sometimes in probate avoidance is that wealth isn’t static.

Bank and brokerage accounts are opened and closed and real estate and personal property is bought and sold all the time.

The result is that an estate that may have been probate “avoidant” at one time (through strenuous and successful effort) grows in unexpected ways over the following years, making probate necessary once again.

So, when should you pay attention to avoiding probate?

I tend to see two main areas in which avoiding probate makes sense.

The first is avoiding the need to run ancillary probate for real estate located outside a decedent’s home state.

For instance, a Florida snowbird with a condo in Kentucky that they use when they visit grandchildren should probably transfer the condo to an LLC or to a revocable trust during his or her lifetime, so that probate can be run only in Florida, and not also in Kentucky.

The real estate is a specific, identifiable asset, and once you transfer it, you know you’re done with the task at hand, and the current cost to prepare a deed is almost always substantially less than the future cost of an ancillary probate administration.

The second area is when emotional reasons come into play within a family.

I have worked with certain executors who felt that administering the estate of a loved one (no matter how simple) interfered with resolving their grieving process.

I’m not trained as a psychologist, so I’m not saying that it’s rational or irrational to view the probate process as an emotional obstacle — I’m just saying that it is an obstacle for some surviving spouses or adult children.

If a person thinks probate might have this effect on his or her loved ones, undertaking the necessary efforts to avoid probate may make sense.

Nonetheless, I think that in many instances, the energy and worry directed toward probate avoidance is better invested in thoughtfully forecasting and mitigating sources of discord and triggers for litigation in estate administration — issues we’ll discuss in future posts.

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