The Fool’s Fooling Himself

The Thursday, March 31, Intelligencer/New Era carried The Motley Fool’s School article entitled “Probate 101.”

I was appalled. I thought those guys were pretty smart. And I always liked the Shakespearean allusion to the Fool who could tell the truth to the King and Queen. But what happened?

Probate is not the horror it is made out to be. As a matter of fact, in Pennsylvania, probate is very innocuous.

The Fool says probate involves “lots of paperwork and fees to lawyers, accountants, appraisers and executors, as well as court costs. All that money would otherwise have gone to beneficiaries.” That is the worst kind of misleading propaganda. Most of the paperwork, and attorneys’, accountants’, appraisers’ and fiduciary fees will be paid in any event, whether or not there is a probate. That money will not go to beneficiaries.

Whether a decedent dies with a will or a trust, whether the estate is subject to probate or not, much of the same work must be done. All assets must be valued and appraised. Debts and expenses must be determined and settled. Consideration must be given to the various tax elections that are available to the Executor or Trustee. State and possibly federal death tax returns must be prepared and filed. The decedent’s final income tax return must be filed. Bequests and specific dispositions directed in the will or trust must be carried out. Assets must be liquidated. The directions for distribution of the property given in the will or the trust must be carried out. The income tax returns for the estate or for the trust must be prepared and filed. The executor or the trustee must account to the beneficiaries for all activity and transactions.

Most executors and trustees need help. The legal, tax and accounting issues can be complex – even in what you might think is a simple estate. The executor or trustee must understand and be able to compute and file state estate tax returns, federal estate tax returns, and fiduciary income tax returns. They must know the due dates and time table, how to interpret the words of the governing documents, how to notify beneficiaries, how to value assets for tax purposes, what items are permissible deductions, the list goes on and on. Usually the executor hires an attorney to help, sometimes an accountant as well.

The Fool says “Probate can eat up 5 percent to 10 percent of the value of the estate.” That’s baloney in PA.

Lancaster County the fees for probate are:

Including probate and recording Will (first estate not over $1,000.00 page), Estimated gross probate value of
Over $1,000.00 and not exceeding $25,000.00 40.00

Over $25,000.00 and not exceeding $50,000.00 70.00

Over $50,000.00 and not exceeding $100,000.00 100.00

Over $100,000.00 each additional $100,000.00 or fraction thereof 25.00

There are other fees – $10 to file an inheritance tax return, $5 for a short certificate of appointment, $5 automation fee, etc.

In large part, probate gets its bad reputation from the professional fees that are charged. The procedure itself is not expensive; but the professional fees charged are sometimes out of kilter with the amount of work involved.

It is up to the executor or trustee to be an educated consumer. Interview several lawyers and several accountants. Determine their experience level. Ask what their fees will be. How are they computed? Are they on a percentage basis or will they charge by the hour? If you want to do some of the work yourself, will they accommodate you?

The Fool goes on: “Also, property remains in a kind of limbo while in probate – and that can last months or even years.” Avoiding probate will not cause the estate to be settled faster. Most of the time involved has to do with tax filings, waiting for acceptance letters from the IRS and the Department of Revenue, waiting for creditor’s claims, and perhaps going through tax audits (which are quite common in estates). The time-frame is the same for a probate estate or a trust. Going through probate does not make the process longer.

The Fool continues: “For example, it tends to be a methodical and unbiased system, since a judge oversees it.” Wrong again for PA. In Pennsylvania a judge is never involved in most probates. Only if there is a contested matter or a petition to adjudicate the fiduciary’s account does it go before a judge.

The Fool goes on to say, “and, it can be avoided (such as via a living trust, for example), if you learn more about it and take some action.”

Usually avoiding probate means creating a living trust and transferring title of your assets to the trust. There is nothing wrong with this, and there can be good reasons to do so. However, just avoiding the probate process is not a sufficient reason to go this route.