Leaving it all behind—the right way

Steve Merrell |

I’m sure you have heard the old story about the rich man who died. One friend asked, “How much did he leave?” to which the other friend replied, “All of it.”

This is the ultimate fact of life. No matter how much wealth we accumulate during this mortal journey, we leave it all behind when it is finally our turn to “shuffle off this mortal coil.” Some people respond to this fact with an existential shrug. “Not my problem,” they seem to say. “My kids will deal with it when I’m gone.” Others show more foresight. They understand that how they leave their affairs will have a significant impact on people they love—even if the size of their estate is relatively modest.

When a person dies, the Executor is responsible for settling the estate according to the wishes of the decedent. A wise Executor will consult with an attorney who is experienced in trust and estate administration. The attorney will make sure the proper legal steps are followed, including determining which assets must pass through probate.

Probate is the legal process by which the court makes sure all debts are settled and all remaining assets are distributed according to the deceased person’s wishes. If a person leaves a will, the courts will usually follow the will. If there is no will, the courts distribute the assets according to state law.

Probate is required if the estate’s assets are greater than $150,000. This includes the value of a home, regardless of how much mortgage debt there is. Given property values in Monterey County, most homeowners will be subject to probate unless they take specific measures to avoid it.

Not all assets pass through probate. Probate specifically excludes assets held in living trusts, as well as IRAs, 401(k)s or similar retirement accounts, and transfer-on-death accounts. Life insurance proceeds also pass to beneficiaries outside of probate unless the estate is named as the beneficiary. Community property with right of survivorship owned with a surviving spouse is also not subject to probate.

Probate is not a bad thing; it is just time-consuming, expensive and public. Taking an estate through the probate process can last anywhere from a few months to a couple of years. If you like red-tape, you will love probate. Forms need to be filled out; documents need to be filed. The courts generally want to be involved in everything related to probate assets, so the settlement of the estate gets tied up in judicial bureaucracy.

To make it through the complexities of the judicial bureaucracy, the estate will need to hire a probate attorney. California’s probate fees are set by statute. They are 4% on the first $100,000 of the estate, 3% on the next $100,000, 2% on the next $800,000 and 1% on the next $9 million. To give you a sense of how these fees add up, consider that the average value of a home in Monterey County, according to Zillow, is almost $800,000. This means that taking the average home through probate will cost the estate $19,000, plus whatever court fees and appraisal fees may be required.

Probate is also public. Because all documents related to probate must be filed with the courts, all that information is available for public review. That means your nosey neighbor and anyone else can go to the courthouse and request to see detailed information about the value of your assets and who your intended beneficiaries are.

Fortunately, probate is easy to avoid. For most of us, it is as simple as having an attorney draft a revocable living trust and then transferring the ownership of probate assets—including any real estate—into the trust. Setting up a trust costs money, but only a small fraction of what probate will cost. While you are at it, you might ask your attorney to look at the rest of your estate plan. A little care now will help your loved ones avoid unpleasant surprises later.

 

 

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to: SMerrell@montereypw.com