WHAT IS PROBATE?
Simply speaking, probate is the process you follow in court to transfer the assets of someone, who has died, to their living heirs.
There are two basic types of probate: testate (the deceased had a will) and intestate (no will). As discussed more fully in other topics, there can be a substantial difference in the cost of probate when there is no will.
The most common type of probate occurs when some dies testate. In that case, the original will is filed with the court with an Application For Letters Testamentary. Notice of the filing of the probate is filed at the courthouse for ten days. After that period, a hearing can be held to appoint the executor (male) or executrix (female) of the estate. The will designates who that person will be.
At the hearing, the court hears evidence to satisfy it that the will is genuine and was executed with the necessary safeguards. This hearing usually takes less than 15 minutes. The court then has the executor sign an oath and a Proof of Death and Other Facts. The Proof of Death and Other Facts is just a pre-drafted summary of the evidence necessary to admit the will to probate.
After this hearing, the executor receives the letters testamentary. This is the executor's proof that he can act on behalf of the deceased. This can be taken to banks, title offices, stockbrokers, etc. and they will follow your directions and transfer the assets accordingly.
Notice is published in a newspaper of general circulation in the area where the deceased lives. It is designed to inform the general population in that area of the death so that creditors and heirs can make a claim to anything they are due.
Within 90 days of the appointment of the executor, an Inventory, Appraisement and List of Claims should be filed. This tells the court, creditors, and anyone who's interested, what the major assets of the estate are and their approximate value. Except for mortgages against real or personal property, the debts owed by the estate are not listed. The "claims" referred to are debts, if any, owed to the estate.
After the inventory is filed and all property is transferred according to the will (or the Texas Probate Code, if there is no will), then the probate is complete. Some counties have you close the estate when there is a will. All counties require that you close the estate when there is no will.
When there is no will there are far more requirements to probate the estate. This is called a "Dependant" Administration. With only a few exceptions, a bond must be posted. An insurance company will agree to pay up to a certain amount (set by the court) if the executor harms the estate. Unless this bond is posted, the court will not allow anyone to be appointed "Administrator" or "Administratrix" of the estate. The court can also require that appraisers be appointed to determine the value of the deceased's property. These, and many other requirements, are designed to assure that no one has an opportunity to steal estate assets and cheat the heirs.
In addition to the work required in an "Independent" Administration (i.e. with a will), a yearly accounting must be filed each year that the estate is open, and a Final Accounting must be filed when the estate is closed. Most major actions by the Administrator can be performed only after court approval is requested and granted.
In both the dependant and independent probates, care must be taken to assure the proper tax steps are taken. There are usually two taxes that must be considered. First, any income earned in the last year of the deceased's life must have the taxes paid. Second, if the estate is over $600,000 (for all assets including life insurance) then estate taxes (inheritance taxes) must be paid.
In a nutshell, the process I've just described is what is commonly known as "probate".
SHOULD I AVOID PROBATE WITH A LIVING TRUST?
Unless you have an estate tax problem, a living trust is rarely justified. As discussed elsewhere, a person who has over $600,000 can be subjected to estate tax (inheritance tax). There are many tax planning devices (all legal) that can be used to address this problem. Several of the devices are preferable to living trusts. Most Texans will never need, and should never have, a living trust.
I know...I know...what about all those commercials pitching living trusts? They say "avoid probate", "avoid probate costs", "avoid the delay of probate", "avoid the world knowing what's in your estate". These all seem like good points, what about these?
As they say, the devil is in the details. Let's take them one by one.
That is true, but you replace it with something far worse. Probate usually only takes a few months. A living trust must be maintained the rest of your life. All your assets must be put in the trust name. If you forget, and put it in your own name, then you'll have to go through probate anyway.
It's one thing to talk about what you're avoiding, quite another to consider what you're replacing it with.
Remember, the trust is a separate entity and must be treated as such. Frequently, I find that people will follow the trust requirements for awhile, then get frustrated and cease to do so. Now they've paid all this money and some of their assets are in the trust and some in their own. In essence, they've got the worst of both worlds.
When the trust is sold to you, it sounds simple. I've yet to find an individual under one of these "packaged" trusts who truly understood the terms of the trust. The booklet they receive takes a lot of study to understand, people rarely do the necessary work. Even if they did--I thought the idea of the trust was to make your life simpler? It is always dangerous, some would say crazy, to structure your life around a document you don't fully understand.
Avoid Probate Costs
No one explains to you that the cost of the trust, especially if you maintain it the rest of your life, will equal or exceed the cost of probate. The luster starts to fade when you realize that your going to pay as much, or more, than you're trying to save, and you'll have to work with it for years (as opposed to months), and, if you screw it up, you'll end up paying the probate costs anyway.
The cost of probate is generally determined by the type of assets you have. Some assets require more work than others. In general though, an "average" estate, with no problems, that includes a house, car, and bank accounts (remember life insurance and pensions don't usually need probate); only costs about $1,500 to $2.500 to probate. This is hardly a sum of money worth changing your life over.
Hide Your Estate
True, the assets in a trust stay hidden, but is all the work you'll do worth it. If you mess up, and you probably will, your assets will be disclosed anyway. To avoid messing up, you'll have to hire an attorney to stay on top of it, that will cost far more than probate.
I really think that this "hiding your assets from prying eyes" thing is over-rated. Hundreds of probates are filed every day and I don't know what assets are in them, do you? In short, though they are public record--Who cares? Rarely is anyone going to be checking the records, and if they do, there is not much that can be done with the information (remember, your lawyer will only give a broad description of the assets).
If all I say is true, who wins with these trusts that are being sold like soap over the radio and television? Only the guy that sold it to you.
Texas, and most states, have really tried to minimize the work necessary to probate the estate so that most of the assets can go to the heirs. The legislature has done a pretty good job. A lot of the horror stories you hear at these living trust seminars is just hype to scare you into buying their product.
I'm not saying all these guys are crooks, but some of them are not far from it. Just be careful. Before you buy, go get a lawyer (not one referred by them) to look over their pitch. Hey, you may be one of those few people who actually need a trust.
One Last Point
I almost forgot. Recently, I've been hearing that some of these people that pitch these trusts are including a different scam (or at least it seems like one). They get people to cash in their investments, life insurance, etc and sell them annuities.
This can have several problems. First, the investments cashed in can be good ones. There are costs to get out of the investment (penalties, brokerage commissions, etc.) and costs to get in the new one (guess who gets the commission). Frequently these annuities are not good for the client (I know a 70 year old who was locked into a twenty year investment at low interest).
If this kind of thing is recommended to you, check it out with a financial planner or broker you know and trust.