The State of Our Estates:

The Costly Myths of Probate

by Jeffrey Marsocci

A large part of my legal practice involves helping domestic partners plan their lives and estates to avoid complicated, costly, and frustrating bureaucracies whenever possible. The crème de la crème of bureaucracies is probate, a nightmare for any family but most especially for domestic partners.

When someone passes on with assets titled in their name, their assets have to go through the probate court inventory process before going to the eventual heirs. This happens regardless if a person has a Last Will and Testament or not. In fact, a Last Will and Testament is nothing more than a person ordering a court to take their assets through that bureaucracy.

In general, probate is costly, time-consuming, and causes a loss of privacy. National studies vary greatly, but I am comfortable estimating the average cost of probate as totaling between four and ten percent of assets. While married couples typically have some relief when one spouse dies in that there are often few assets subject to probate, the costs kick in when the second spouse dies and assets go to the next generation. For domestic partners, these assets are often subject to the same level of expenses twice.

Probate is also time-consuming, often taking between six and eighteen months before finally being completed. For domestic partners, this may be an interminable wait, especially if one partner was more financially dependant on the deceased partner.

In addition to being costly and time-consuming, probate also discloses much more information than most people are comfortable with. Every bank account, parcel of real estate, mutual fund and other assets in probate must list the financial institution, the account number, and the date of death balance. All beneficiaries must have their name, address, and age listed on the court forms as well. And because these are court documents, they are open to the public. Most partners do not wish to have this information out there for the world to see, but that is what probate requires.

But there is hope for domestic partners to avoid the probate process altogether by using a Revocable Living Trust instead of a Last Will and Testament. By both partners using and taking control of a revocable living trust and having title to their assets in the name of the trust, their assets can avoid probate and all of the negatives that go along with it.

Over the last twelve years of practicing law, I have heard of many attorneys disparaging revocable living trusts using a variety of pretexts. The four biggest are listed here, but before going into them I would like to make two points.

First, why would attorneys recommend a Will if it means a complicated, costly and time-consuming process? The most likely answer is that attorneys can make lots of money navigating this process for their clients, and legal fees typically comprise most of the 4% to 10% mentioned before. The other possibility is they simply do not realize just how negatively probate impacts their clients and their families.

Second, I want to point out that I have no problem with attorneys who take on the rough task of handling probate for their clients. They typically earn every penny that they charge. What I have a problem with is when attorneys who, in the planning phase, tell their clients that probate is no big deal, something I know to be false.

And now, the four biggest myths told by probate attorneys:

1. “Probate fees are not that high in our state”
While technically true, this statement is highly deceptive. In North Carolina, probate fees are 40 cents for each $100 of personal property and accounts with a maximum fee of $6,000. However, these are the direct fees imposed by the probate court and have nothing to do with the fees attorneys charge for their work. The next time an attorney suggests a Last Will and Testament rather than a Revocable Living Trust for you and your partner because “probate fees are not that high,” have the attorney put in writing an all-inclusive price quote for their firm to handle probate for the estate. And then watch as their expression changes and the disclaimers start.

2. “If you have less than $2 million, then you don’t need a revocable living trust.”
This is like telling someone that they don’t need to change the oil in their car because the gas tank is full. The $2 million limit has to do with estate taxes and has nothing to do with avoiding the problems associated with probate. While trusts can assist with avoiding unnecessary estate taxes, the primary purpose of a revocable living trust is to avoid probate for both partners.

3. “A trust is too complicated for your situation.”
While a Revocable Living Trust is more complicated to set up than a Will, the complicated part is for the attorney to set it up properly and explain it to you and your partner. It is only in rare instances when domestic partners have next to no financial assets that a revocable living trust may be too complicated for their particular situation. Do not take this statement with blind faith from an attorney. Be sure to go into detail why they feel your situation is too complicated. You may find only that the only complication is that they are not equipped to construct a proper revocable living trust for you and your partner.

4. “If you want to avoid probate, just use joint property.”
While joint property with a right of survivorship avoids probate upon the first death, both of these techniques use what I call “one-step planning.” It is only good once, and none of the other eventualities and contingencies that you and your partner may want can be put into affect.

Since joint property with a right of survivorship only works to transfer the property to the survivor once, what happens if both partners pass on together? Probate happens. What if one partner only wants the assets to be available for the survivor for their lifetime and then the remainder goes to their friends and family members? Joint property can not do this. The piecemeal approach of joint property guarantees multiple instances of potentially costly planning to get exactly what you want whereas a revocable living trust can both avoid probate and lay out multiple situations, scenarios, and levels of beneficiaries.

In addition to joint property having all of the drawbacks of one step planning, it can also come with costly gift taxes. When one partner “puts their partner’s name on” the deed to their house, they are actually giving a gift of half of the value of the house.

This gift comes with gift taxes if the value of the gifts from one partner to the other exceeds $12,000 in any given year. Re-titling a $300,000 paid up house from one partner to both partners with a right of survivorship is a gift of $150,000, only $12,000 of which is exempt. North Carolina gift tax on a $138,000 gift from one partner to another is $14,710. The tax on this one item is far in excess of what it costs to complete an entire revocable living trust estate plan for both partners to avoid probate for nearly all of their assets, plan out all of the contingencies they desire, and does so without incurring gift taxes.

The legal odds are already stacked against domestic partners. Using a Last Will and Testament or other piecemeal approaches to planning rather than using a comprehensive Revocable Living Trust only imposes more costs, delays, and public disclosure of personal information than is necessary.

So, next time you hear one of the myths of probate, be sure to get the attorney to assure in writing that probate for two estates will cost less than a revocable living trust for both partners, that there will be no time delays, and that all of your financial information will remain private. In the years of telling people to get those assurances from probate attorneys, I have yet to see one guarantee.

Jeffrey G. Marsocci is a Raleigh-based life and estate planning attorney who frequently lectures and works in Asheville. He is also the author of Estate Planning for Domestic Partners, and focuses on helping domestic partners achieve many of the same rights married couples have. He can be reached through his main Raleigh office at 919-844-7993, and his book can purchased at www.estateplanningfordomesticpartners.com