A critical goal of estate planning is to ease the burdens of administering the client’s estate for her beneficiaries. Clients rightfully wish to streamline the process for settlement of their affairs and seek guidance on how best to achieve that. In the popular press, avoidance of the probate process is often cited as a solution.
Countless articles and books have been written on the subject, painting the process with a broad (and misleading) brush as overly bureaucratic, costly and time-consuming. While there are sound benefits to avoiding probate in certain cases, adherence to the anti-probate doctrine has increasingly supplanted thoughtful estate planning as a goal. The results are too often unintended, expensive and divisive of family harmony.
Technically, the word ‘probate’ refers to the act or process of proving a Will to be the authentic last will and testament of a decedent. However, the term probate has come to encompass the entire process of settling an estate from death to the ultimate distribution of assets. This includes major drivers of time and expense that are unrelated to probate such as tax reporting and resolution of disputes over distribution.
At death, probate assets are transferred by Will and non-probate assets are transferred by some other mechanism, typically, joint ownership or a beneficiary designation. Avoidance of probate causes assets to pass more or less directly to beneficiaries rather than passing through a Will. Often, particularly with married couples, this is the preferred manner of property transfer, the simplest example being a jointly owned home passing automatically to the surviving spouse. Other common non-probate transfers of property include life insurance and annuity proceeds passing to the beneficiary of the contract.
While the specifics of the legal process vary from jurisdiction to jurisdiction, here in Pennsylvania the ‘probate’ aspect of estate administration is quite simple in the vast majority of cases. The executor named in a Will takes the original of that Will to the office of the Register of Wills in the county of the decedent’s residence, along with a death certificate and a petition asking that the Will be admitted to probate and the executor be officially appointed. The executor takes an oath to faithfully administer the estate according to law, the petition is processed, and the executor receives his official appointment (letters) either on site or the next day. Following appointment, the process requires only that the executor notify the estate beneficiaries of his appointment and inventory the assets of the estate for the Register.
The probate fees, so frequently cited as a primary reason to avoid the process, are relatively modest. On an inventory value of $500,000, for instance, the fee is $675.50 in Dauphin County, less than 1/7th of one percent. These fees are almost never worth the cost of probate avoidance itself. Barring any disputes among the executor and the beneficiaries, Pennsylvania requires no other court supervision and administration ends with filing a short status report with the court.
The other aspects of the estate settlement process have chiefly to do with tax reporting and payment. In most cases, a Pennsylvania Inheritance Tax Return is required and in very large estates, a federal Estate Tax Return. Contrary to inferences made by the anti-probate advocates, taxes will not be minimized by avoiding probate; but, perhaps counter-intuitively, serious tax issues can be caused by probate avoidance. This is one reason that we caution clients to avoid falling into the anti-probate trap.
Converting an asset that would otherwise pass by Will may create more problems than it solves. Joint bank accounts are frequently established between parent and child to address a number of perceived issues, but that form of titling can have serious and costly consequences. If the child predeceases the parent, for instance, the parent will have to pay tax on her own funds because joint accounts are generally taxed at the death of either owner regardless of who funded the account. If the parent has more than one child, the asset will pass only to the co-owner, bypassing his or her sibling(s).
Almost always, there are alternate strategies that more effectively address the issues that motivate creation of non-probate assets. For example, a parent who wishes to allow her child to sign checks for her to pay bills is better served by naming the child as Agent under a Power of Attorney. Simply putting the child’s name on the account actually changes the ownership of the account whereas a power of attorney authorizes the child to act for and in the interests of the parent. In addition, a Power of Attorney gives the child authority with respect to other transactions that may be desirable for the child to effect on the parent’s behalf.
In our view, probate is often a reasonable and necessary aspect of a sound estate plan. Executors have specific and enforceable fiduciary responsibilities to the beneficiaries. The fact that the Executor is required to give certain notices to the beneficiaries ensures some level of communication among the parties. A Will can easily direct funds to trusts or custodianships for minor children, whereas designation of a minor child as a beneficiary on an account will necessitate establishment of a court-supervised guardianship, a costly, cumbersome process that, perhaps most troublingly, ends abruptly at age 18 (not an age at which the typical child is fiscally mature). Assets passing through a Will are available to pay the taxes on behalf of multiple beneficiaries rather than the liability and responsibility for filing returns passing directly to each.
Of course, there are reasons to avoid probate in specific cases. For Pennsylvania residents with real property in other states, such as New Jersey or Florida, we often recommend that clients transfer title to such property to a Revocable Trust to allow it to bypass the costs of probate in a remote jurisdiction. Designation of a beneficiary on a qualified retirement plan may ensure preferential tax treatment. And new federal tax rules have made joint spousal ownership of business and investment assets once again a preferable form of ownership for some clients.
Pennsylvania law minimizes many of the perceived costs of probate and in many cases, probate will be a desirable aspect of estate settlement. Before making avoidance of probate the goal, estate planning clients should consult their advisors to come up with effective alternatives.