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Avoiding Probate

Avoiding Probate

Q. Do you really want to avoid probate?
A. In many cases, “no.”

One of the first questions I’m asked as an estate settlement attorney when I’m settling an estate is, ”Will I have to go through probate?” Avoiding probate has become a cottage industry, with lawyers touting the benefits of “living” trusts to people who would rather have a root canal than have anything to do with a probate court. For several reasons, avoiding Connecticut probate might not be a good idea.

You may have heard horror stories about “probate.” Many of them are simply not true. People refer to estates being “tied up in probate.” We can settle most estates in six months to a year. We can, in almost all cases, have the executor appointed within a week or two. We do not have to wait until the estate is closed to begin making distributions. A minority of estates are “tied up” for reasons having nothing to do with the probate court system. Most delays are caused by ambiguous will provisions, disputes among family members or estate tax controversies.

Most probate court personnel are decent people dedicated to making the administration of estates more efficient. There are definite advantages to having an estate go through probate. Here are some of them.

Reason #1: Avoiding probate Does Save on Court Fees

Avoiding the probate process doesn’t save any probate fees. Unlike other states, Connecticut imposes a probate court fee on virtually all assets that you can pass on. This means that, in general, if someone is going to receives something when you die, there will be a probate fee on the transfer of that asset. These assets include jointly owned property, most life insurance and retirement plans and assets of so called “living” trusts.

Reason #2: Connecticut Probate Fees Are Much Less than the Free Living Trust Seminars Claim

Please do not misunderstand. I’m not happy with the fee system. Let’s call the probate fee what it is. It’s a tax. A “fee” is a payment for services. Suppose someone has an IRA payable to his wife and a life insurance policy to benefit his children. The probate court is not involved at all, except to receive the Connecticut estate tax return and collect a “fee.”

Connecticut probate fees are much less than the percentages quoted in the “free living trust seminar” ads. These ads often claim probate costs are 4% of your estate when in reality probate fees are one quarter of one percent of the assets. That means that, on a $500,000 estate, probate fees are $1865 when the free living trust seminars would have you think probate court fees are closer $8,000 [text deleted].

Reason #3: Probate Limits the Amount of Time Creditors Have for Making a Claim Against an Estate

A probate proceeding limits the amount of time creditors have to present claims against an estate. You’ve no doubt seen “limitation of claims” notices in the newspaper. These serve as announcements to the world that potential creditors have a fixed time to present claims to the executor of an estate. Claims presented after that time period may be barred. This time limit can protect an executor of an estate from personal liability claims in the future.

Reason #4: Probate Can Save on Income Taxes

Most income taxes are paid based on the calendar year January 1st through December 31st. A probate estate can save income taxes by electing to pay them on a non calendar year basis by making a “fiscal year election.” Here’s how a fiscal year election works. Sometimes an estate will receive a large amount of income that is taxable at a very high rate. In order to avoid subjecting other income to tax at that rate, an executor can elect to be taxed on a fiscal year, rather than a calendar year, basis. For example, suppose that a lawyer’s estate received a significant contingent fee one month after he died. The executor can elect to cut off the first fiscal of the estate at the end of that month. This would isolate the large income item and not subject later income to tax at a high rate. This tax planning opportunity is only available to estates that go through probate and are generally not available to trusts.

As you can see, avoiding probate is not always a good thing. There are several situations where going through probate might actually be the better option. If you’re thinking about avoiding probate but aren’t sure, please call us.