Probate - Is It Really An Expensive Burden?

By David S. DeRose, Esq.

Local newspapers carry weekly advertisements for seminars on how to save time and money by avoiding probate. In fact, probate in Pennsylvania is not as burdensome as it is portrayed.

Upon death, the initial legal inquiry concerns assets in the deceased person's name, such as real estate, stocks, bank accounts, vehicles and pensions. It is also necessary to identify what the deceased person owes, including mortgages, loans, charge accounts and medical expenses.

WHAT IS THE PROBATE PROCESS?

Resources or debts in the deceased person's name become part of probate, the formal process of reporting to the court. Probate includes listing, valuing and distributing property under court supervision. Any debts or charges owed, including all taxes assessed, must be paid prior to distributing the estate to the beneficiaries.

When a family member contacts an attorney to "file the will" with the Court, the person named as the personal representative (or executor) is appointed by the Register of Wills to administer the estate. If the deceased person didn't have a will, a close family member will be appointed.

There is a cost for the Register of Wills' services: a typical estate having less than $200,000 in value would be between $500 and $600. Another cost of probate is the requirement that the executor give notice of the filing of the estate in the newspaper. This fee is generally between $100 and $150.

The executor's job is to safeguard and value the assets owned by the deceased person at the time of death. If the deceased person owned real estate, an appraisal may be needed at an approximate cost of $350. In certain circumstances, attorneys know of alternative procedures that can avoid the cost of appraisals or reduce other probate fees.

Once all of the assets are valued, an inheritance tax return is filed with the Pennsylvania Department of Revenue. The return lists the gross value on all of the probate assets and all of the estate expenses. This results in a computation of the net value of the estate. For example, if the estate property has a gross value of $200,000 and the expenses and costs total $40,000, the net value is $160,000. The net value of the estate is taxed. On assets being transferred to a surviving spouse, there is no inheritance tax. Assets passing to the deceased person's children or grandchildren are taxed at the rate of 4.5%. If assets are passing to the deceased person's siblings, the tax rate is 12%. For all other types of beneficiaries, including friends, neighbors, nieces, nephews, and distant cousins, the tax rate is 15%. There is no tax on assets transferred to qualified charitable organizations.

IS PROBATE TIME-CONSUMING?

If things move smoothly in assembling the financial information and determining the expenses of an estate, an inheritance tax return can be filed within five to nine months of the time of death. Pennsylvania requires that the return be filed and the inheritance tax paid within nine months unless an extension is granted.

Once the return has been approved and the tax has been paid, the estate can be finalized. The executor can distribute the deceased person's property to the beneficiaries by agreement of the parties or by court order. The estate can usually be completed within twelve months.

WHAT ABOUT LEGAL FEES?

We hear frequently that avoiding probate avoids legal fees. Not so. If a family avoids probate through the use of living trusts or jointly owned assets, filing an inheritance tax return cannot be avoided. Issues concerning income tax also need to be addressed. These issues require the services of an attorney. While this is technically not probate, it is an estate administration process and one for which the attorney is compensated. Therefore, by avoiding probate, you may not have avoided attorney's fees or other costs.

Fees for these services differ from firm to firm. Some attorneys charge a flat fee; others bill on an hourly basis with certain minimum charges. Regardless of the method, the fees must be fair and reasonable and must be approved by the Department of Revenue. If not approved, the fee will not be credited on the inheritance tax return.

In the example of the $200,000 estate, the attorney's fees will often not exceed 3-5% of the estate's value. The fees depend upon the attorney's involvement in gathering information, paying bills, contacting heirs, and completing the estate. The attorney is charged with the responsibility of seeing the estate process to conclusion, including final distribution. It is easy to overlook the many responsibilities the attorney has to undertake: aiding the valuation process, preparing the asset inventory, the inheritance tax return, and the deceased person's final income tax returns, transferring real estate and vehicles, and communicating with all interested parties.

The public is often misled to think that the probate process typically stretches out for 2 or 3 years and costs upwards of half of the estate resources. This is not the case. While the alternatives to probate may in some cases reduce the costs or timeframe, they cannot completely eliminate them. In any instance, an attorney will need to be retained and there will be fees and costs involved.

WHAT ABOUT AVOIDING PROBATE?

In an attempt to avoid probate, people sometimes shift ownership of assets before death, so that at the time of death, nothing remains in that person's name. Revocable living trusts transfer ownership of assets out of an individual's name and into a trust. At the time of death, the trust, not the individual, passes the asset to the beneficiaries. This transfer may avoid probate, but does not avoid inheritance taxes. More importantly, transferring assets to a living trust might create a problem if nursing home care and medical assistance are on the horizon.

Shifting ownership of assets should never be done lightly. Most people want to own their assets as long as possible. By keeping their homes, bank accounts, investment accounts, stocks or bonds in their own names, people retain control, which conveys a sense of security.

When we discuss estate planning needs with our clients, we review the probate process and the alternatives to that process to create an individual plan. That plan may blend the assets that are retained with those that are transferred into joint names or into a trust. We make it clear that all costs and fees cannot be eliminated by avoiding the probate process. Contrary to the advertisements, the schemes that they propose cost money in themselves. The client pays to create the living trust and the documents necessary to implement it. These living trust packages can cost from $1,500 to $3,000, and in some cases are not complete. Some do not recognize the importance of having all of the essential estate documents in place, including a Will, a Financial Power of Attorney and a Medical Power of Attorney.

Estate planning, in general, is not a "one size fits all" process. At QR, we analyze your particular situation and design an estate plan to fit your needs. If avoiding probate makes sense in your situation, we will prepare all necessary documents and guide you through the steps necessary to accomplish this goal.