10 Aug Estate Planning Q&A Series: What is Probate, What Occurs During a Probate Administration, and How may Probate be Avoided?
What is Probate?
The word “probate” is derived from a Latin word meaning “to prove.” The idea behind the Probate Courts is that all expenditures and actions taken with respect to a decedent’s property should be carefully supervised and approved by the court. Probate Courts in Missouri concern themselves only with the estates of decedents and the estates of incompetents. In other words, the Probate Courts are concerned with supervising property being managed for the benefit of others. However, Probate Courts usually do not become involved with trusts unless a lawsuit over the trust is filed.
- (a.) All Wills must be subjected to the jurisdiction of a Probate Court if they are to be effective. A Will is just a piece of paper until the Probate Court admits it to probate as the “Last Will and Testament of the Decedent.” Thus any property owned by you which is to be given to someone else by reason of a provision in a Will must first be subjected to the Probate Court’s jurisdiction.
- (b.) “Avoiding probate” has become a frequently heard expression. Why are people anxious to avoid probate? The history of the Probate Courts shows the extreme need for these courts. In the past, both in England and in this Country, when a person died, the property owned by the decedent at the time of death frequently “disappeared.” Persons in charge of the property often “appropriated” assets for their own personal use, instead of seeing that they were distributed to the proper beneficiaries. This was particularly true when the beneficiaries of a decedent’s estate were minors or aged or ignorant persons who were not able to look out for their own best interests. Accordingly, a system was developed whereby experienced and learned judges would supervise the administration of each decedent’s estate to make certain that all funds were properly accounted for, and that all property was eventually distributed to the proper beneficiaries. These Probate Courts also functioned to assure creditors an opportunity to get paid for loans or goods acquired by the decedent prior to his or her death on credit. So the purposes for which the concept of probate came into being were all valid, and in many cases the probate administration of an estate worked for the benefit of all concerned.
- (c.) All probate records are public, and everyone has an opportunity to scrutinize the assets and liabilities in a probate estate to make certain that there is no dishonesty being practiced. However, probably in less than 1% of the probate estates of decedents is there any active dishonesty or misappropriation of funds for which actual supervision of the court is necessary. The overwhelming majority of probate estates are routine matters requiring minimal attention by the court. The mistakes caught by Probate Courts tend to be clerical and arithmetic mistakes rather than mistakes caused by fraud and chicanery. But the fact remains, if a person leaves his property to his intended beneficiaries by means of a Will, a probate estate must be opened.
- (d.) The major beneficiaries of the probate system have come to be attorneys. Probate matters are rarely complex, but in most cases a probate administration results in a fee payable to an attorney which is usually adequate (if not more than adequate) to compensate the attorney for the amount of time spent. The Probate Court charges court costs, and the records associated with a probate administration may be examined by any nosy person, regardless of his or her relationship to the decedent.
- (e.) How much may be saved by avoiding probate? The fees charged by attorneys and the courts are usually a function of the size of the estate as opposed to the amount of work involved in setting it. As a general rule, of course, the larger an estate, the more work there will be involved in closing and the greater the lawyer’s responsibility in handling it. However, this is only true to a certain extent, and it is probably not going to be any more difficult for a lawyer to handle an estate which has $1,000,000.00 worth of General Motors Stock in it than it will be to handle an estate which has $100,000.00 worth of General Motors Stock. Nevertheless, the fees associated with the larger estate will be at least five times greater than that of the smaller estate in this example. The probate laws of Missouri establish a “minimum fee schedule” which is based on the size of the estate. Section 473.153 of the Revised Statutes of Missouri provides:
“. . . (There) shall be allowed as the minimum compensation for [an attorney’s] services the following percentages of the value of the personal property administered and of the proceeds of all real property sold under order of the Probate Court:
On the first $5,000.00 5%
On the next $20,000.00 4%
On the next $75,000.00 3%
On the next $300,000.00 2 ¾%
On the next $600,000.00 2 ½%
On the next $1,000,000.00 2%
. . . The court shall allow such additional compensation as will make the compensation of the (attorney) . . . reasonable and adequate.”
- (f.) In addition to the attorney’s fees involved, the executor or administrator (Missouri calls these people “Personal Representatives”) is entitled to the same “minimum” fee set forth in the above statute for handling the estate. Thus where the personal representative and the attorney are different persons, two fees for handling the estate come out of it. The fee is primarily based upon the amount of personal property in an estate, and not real property, unless it is sold by the estate. For example, the fee for handling an estate consisting of one million dollars’ worth of stocks, bonds, and other securities would be approximately $20,000.00. However, the attorney’s fees associated with handling an estate consisting of one million dollars’ worth of real property, but very little personal property, might only be two or three thousand dollars. Furthermore, as the above statute prescribes, the attorney and the personal representative are free to petition the Probate Court for additional fees if extra work is required on behalf of the estate, and frequently these additional fee requests are approved if the court believes the “minimum fee” authorized by law is inadequate.
- (g.) Thus, to answer the question: “How much is saved by avoiding probate?”, one must make a whole series of assumptions to provide an explicit answer. Your estate may change in content and form, to say nothing of valuation between now and the date of your death. Nevertheless, as a rough rule of thumb, a reasonable estimate of the fees associated with handling an estate through the probate process would be approximately three percent (3%) of the gross valuation thereof.
What occurs during a Probate Administration?
The probate process begins with the filing of a will in the typical probate estate involving a decedent. Thereafter the court issues letters authorizing an individual to act as the “Personal Representative” of the decedent for the purpose of the administration of the estate. For at least six months, little is done other than publishing a newspaper notice informing the public as to the existence of the estate. This is because during this six month period, any creditor may file a claim against the estate seeking to be paid. All such claims are barred after an estate has been open for one year. But the Probate Court usually will not permit any closing of an estate for probate purposes until after this one year period has elapsed. Furthermore, if a federal estate tax return is required to be filed, the Probate Court usually will not permit a probate estate to be closed until the Internal Revenue Service has indicated its acquiescence to the return filed by the estate and the fact that all taxes property due and payable have been so paid. The IRS does not audit an estate tax return until at least six months after it has been filed, and sometimes longer. The estate tax return is not due until nine months after the date of death of the decedent, and is usually not filed before then for a variety of reasons usually associated with valuing the assets. Thus the typical probate estate involving the possibility of a federal estate tax return takes at least a year and a half to close, and typically two and one-half years. During this period, all bills of the decedent are paid, and the property left over in the estate is distributed to the beneficiaries at the close of the estate administration.
How may Probate be avoided?
The most common method of avoiding probate is to own property as joint tenants with right of survivorship or as tenants by the entireties. Property owned by a joint tenant at his death, so long as he or she is survived by other joint tenants, is not part of the probate process. Life insurance, and certain other gifts made during your lifetime, even if they are to take effect only at death, occasionally avoid the probate process. This is because only property owned only by the decedent as an individual as of the date of his or her death is subject to probate.
One of the principal means of avoiding probate for relatively wealthy individuals is to establish revocable inter vivos trusts, i.e., separate legal entities to own property so that an individual’s property is not titled in his or her own name at death.
Estate planning is a complicated area of law and there are a number of mechanisms by which an individual can transfer property at death. If you are interested in reading more about estate planning, we encourage you to visit other articles in our Estate Planning Q&A Series:
- Introduction to Estate Planning
- Providing Others with the Power to Make Medical and Legal Decisions
Whether you are ready to begin planning your estate, you want to amend an existing estate plan, or you may administer a decedent’s estate, the attorneys at our firm would be honored to assist you.
This article seeks to provide a summary of some common questions about estate planning in Missouri and does not address all aspects, elements, restrictions, or requirements. This article is not offered, nor should it be construed, as legal advice. You should not act or rely upon information contained in these materials without specifically seeking professional legal advice. You should consult an attorney if you have any questions about your legal matter. Choosing a lawyer is an extremely important decision and should not be based solely upon advertisements.
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