When I Die, Will There be a Probate?
This is a question that we are asked nearly every day.
Probate is the process of paying the bills and transferring the assets from the dead party to his heirs or distributing the assets in accordance with his will. Minnesota is a Uniform Probate Code State, so this process is not real complicated or expensive.
Probate has nothing to do with taxes. Minnesota has not had an inheritance tax for over 20 years. There is a federal estate tax but that applies only to large estates (In 2007, over $2,000,000.00) and there is a 100% marital deduction. In Minnesota, you pay a flat filing fee of $245.00, regardless of the size of the estate. This is not the situation in other states. Iowa and Florida, for example, have fees based on the size of the estate. Also, in Minnesota, the attorney fees are based on an hourly rate. In some states, the attorney fees are a percentage of the estate assets and in some states (i.e.: California), you may also be charged an "appraisal fee."
In Minnesota, there will be no probate if:
- all the assets are in joint tenancy or are payable on death to a specific person or persons; or
- if there is no real estate and the personal property and assets have a value of less than $50,000.00; or
- all the assets are in a trust; and
- no one DEMANDS a probate proceeding.
In an attempt to avoid probate, people can (and often do) make costly mistakes, for example:
- gifting appreciated property and thereby losing the step-up basis. This results in paying a capital gains tax that otherwise could have been avoided.
- adding the name of one child to the account(s) and expecting that he will pay the bills and fairly divide the assets among the family. There is nothing to make him do this.
- adding the name of an irresponsible or dishonest person to an investment or an account.
- adding the name or a child to real estate, only to have that child die, get a divorce or file bankruptcy.
The advantages of having a probate proceeding are:
- There is direction and, if necessary, supervision of the process of collecting the assets, paying the bills and distributing the estate.
- It is a convenient and relatively inexpensive forum for settling disputes between heirs or with creditors. All probates are expected to be concluded in eighteen (18) months and there are no jury trials.
- It gives you an automatic step-up in basis on appreciated assets and therefore eliminates most capital gains.
- It is structured and the executor must follow the rules.
The best way to avoid probate is to put everything into a properly drafted living trust. Living trusts are more costly and complicated than wills. Also you must follow up and actually transfer the assets into the trust. Otherwise, all you have is a pile of papers and everything goes through probate anyhow. Even a trust can be forced into court by a disgruntled heir (i.e.: the James J. Hill Trust Case).
The keys to efficient and cost effective are (in no particular order):
- clearly drafted documents;
- children or heirs who get along and trust each other;
- selecting a trustworthy executor or trustee; and
- making a plan that fits your assets, your family and your situation.