Trust & Will, the on-line estate planning site, has released a report about Americans’ understanding of the probate process, The State of Probate in America, which reveals widespread misunderstandings. Unfortunately, it conveys its own misconceptions.
The report has two key findings:
First, that while the average time it takes to complete the probate process is 20 months, only 2% of respondents believed that it takes so long.
Second, that most respondents (56%) have no idea how much the probate process will cost and that very few anticipate the actual expenses, which Trust & Will asserts average between 3% and 7% of the “total value of the estate.”
The report does not state its sources for the amount of time and cost of probate, neither of which is line with my experience. They may, however, be accurate with the difference being explained by the use of “average” numbers and the definition of “probate.”
Length of the Process
In my experience, it usually takes a little more than a year to administer an estate. (I’ll explain below why I use the term “administer” rather than “probate.”) It takes this long because there’s a lot involved in the process, including filing formal probate papers, cleaning out and perhaps selling a house or apartment, filing a final income tax return, paying outstanding bills, and distributing both personal belongings and savings and investments.
Sometimes the process takes longer, especially if there are family disagreements, unfiled tax returns to clean up, or litigation, such as a wrongful death lawsuit. There was a recent Massachusetts court decision about a will dispute that had been going on for 25 years.
It’s these unusual cases that can throw off averages and why a median figure would be more useful in this context than an average one.
If you have 10 estates and eight are resolved in 14 months or shorter, one in four years and one in seven years, the median amount of time for the process will be 14 months with half the matters taking this amount of time or less to complete and half this amount of time or more. But the average would be 24 months, even though this length of time would be experienced by only two of the estates. That’s because the two long-duration matters skew the average figures. It’s my guess that this is what is happening with the Trust & Will numbers.
Cost of the Process
Costs of administering estates vary considerably depending on their complexity and size. And as a percentage of the value of the estate, they vary even more widely. For instance, a $5,000 cost for an estate valued at $200,000 would constitute 2.5% of the estate while a $15,000 cost for an estate valued at $2 million would be just 0.75% of the estate. Costs as high as the 3-7% cited by Trust & Will — in their example, $22,500 to $52,500 for a $750,000 estate — are very rare in our experience (especially the higher end of the range).
But when Trust & Will is talking about “probate” and the “value of the estate,” what is it really talking about? The reality is that most estates include very little probate property. Probate is the legal process of transferring property owned by the person who died to their heirs. It governs only the property in their name alone.
These days, most property passing at death does not go through probate. Property in joint names passes automatically to the joint owner or owners. Retirement accounts and life insurance pass to the named beneficiaries. It’s now possible to name beneficiaries to most investment accounts. Property in trust also does not go through probate.
The result is that very little property actually passes through formal probate. As a result, the fees quoted by Trust & Will may reflect their value relative to property that actually is probated but not to the total value of estates including non-probate property. But it’s hard to know since they don’t cite their sources.
This is also relevant to the timing issue discussed above. While it may take a year or longer to complete the estate administration, most estate property is distributed much sooner. Property in joint names or with beneficiary designations can be retitled quickly with the presentation of a death certificate. Most trust property and even probate property can be distributed once the trustee or personal representative has a good idea of what bills, costs and taxes need to be paid. They may still keep some funds in reserve until the process is complete, but the heirs and beneficiaries should be able to receive the bulk of their distributions before that occurs.
Another Disturbing Misconception
The Trust & Will report contains the following inaccurate and surprising statement: “50% of Americans have no idea if they live in a location that requires probate to settle an estate.” All state laws are consistent on this point. Probate is required for probate property — property in the sole name of the decedent — and not for non-probate property — joint property, property with beneficiary designations, and property in trust. Often there’s a simplified procedure when the amount of probate property is very small, but it’s still probate.
Note: I’m quoted in an USA Today article about the report, but not about the issues I discuss above, instead for the proposition that families should discuss estate planning before it’s too late and that it’s often easier for the older generation to bring up the issue. If their adult children start asking about estate planning, it may seem like they’re worried more about their inheritance than their parents’ welfare. This is not the case when the older generation initiates the conversation.