Ep. 2 - Probate: Why is it bad?

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Hey, this is the second episode of Good Steward Law and Wealth Podcast. Today, it's going to be one of the first of our short-form educational episodes. So I'll try to keep this pretty short, you know, under 15 minutes so you can digest it. Heavily educational, but I want to keep it something somewhat interesting and you can have some takeaways from it. But today we're going to talk about probate and what is probate. So this is a key concept of estate planning and wealth transfer is the probate process. And it is a process that varies by state. So every state is a little different, but generally the same concepts, except for Louisiana, they're completely different than everybody. And we just don't— we pretend they don't exist, but every other state pretty similar. So probate essentially is the transfer of property, assets, wealth from a deceased name to the beneficiaries. How do you get into probate? Like I said, it's the court-led process of transferring assets from deceased name to the beneficiaries. But how you get in there is if you pass away with anything in your name alone, it has to go through probate. Now that leads to the further question of what I mean by in your name alone. Well, it's just anything in your name, like your car, your name's the only one on the title. Your bank account, your name's the only one on the account, your retirement account, your name's the only one, you know, things like that. You're the only owner of a business. That type of stuff is in your name alone. And by that I mean there is no joint owner and there is no beneficiary listed. So if you have any property, you think through your assets right now that are in your name alone, if you passed away today, it would have to go through probate. Now that leads to one of the biggest myths or misconceptions in my industry, and this is a question that I to ask every one of my guests is, what is the biggest myth or misconception in your industry? And my answer for that question is a will avoids probate. So clients come into me every day saying, well, I have a will, so I should be good, right? I don't have to go through probate. The answer is no, it could not be more of a no, actually, because a will is a document that mandates probate. So a will tells the court or a judge where you want your assets to go. And how you want it to get there. So yes, a will is one step above nothing because it provides a plan. It tells others where you want your stuff to go, but like I said, it mandates the court process. So basically, even if you have a will, you take this will and you submit it to the court, and the judge will sign off saying, yes, that's a good will, or yes, it isn't. And then even if you don't have a will, you still take all of your assets of the deceased and submit it to the court. And then the judge supervises a process of how we transfer assets. So, why are we even talking about probate? Like, why is it such a big deal? Why do you hear people say probate's terrible all the time? Well, it is kind of a dirty word in my office. We try to avoid probate. You know, anytime I do a plan for a client, that's the first thing we look at is, are we set up in a manner that can transfer wealth outside of the court system? That's what I always want to be sure of. But why is probate bad? Well, there's kind of 4 main tenets. It is time-consuming, it's public, and it's costly, and it does not always match the deceased's intent. So those are the 4 main issues. When we look at costly, that's what a lot of people focus on. And this varies by state heavily, but essentially every state has a statute that says what attorneys can charge for probate, and it's based on the total assets of an in a state, and it ranges anywhere from 1% to 6% that they can charge. That's not only the attorney, but in a lot of states, that's also the person named as executor can charge that same fee. So when you look at, like, say you die with a home and a retirement account totals $1 million, and that's fairly common when you add up everything. If you look at just say 3% of that, that is a large fee. So it's not uncommon to have $40,000-$50,000 fees being paid out to attorneys and executors when that could be easily avoided. But one of the main things, well, and we mentioned public too, everything filed with a probate is a matter of public record, so anyone can see it. It's available to everyone to see and view. But another thing is the time process. This is my least favorite part of every probate. It is time-consuming and tedious. And by time-consuming, I mean, in Arkansas, there is a minimum of a 6-month wait period. So as soon as you open a probate, you've got to sit on your hands basically for 6 months to see if any creditors come out of the woodwork and say, yeah, that person owed me money. So there's nothing you could do for a minimum of 6 months. But really, it lasts a lot longer than that. And an example of it lasting a lot longer, I'll use a current case example of mine. Basically, we did the whole probate process, we filed everything, we sat on our hands for 6 months, no creditors came up. And then this estate, this person passed away with no kids, no nieces, nephews, but she had like 8 or 9 aunts and uncles who ended up being the heirs of all this. So there's a lot of people. And every time we do a filing or make a decision in the court process, we have to send notice to every one of those people. And a lot of those are hard-to-find people, they may be elderly, just, it makes it very difficult to get them notice. But as an example, we set through the whole 6-month period, now it's time to sell this deceased person's house. So just to sell the house, we have to get it appraised. So we know the value of it, then we have to file a petition with the court saying, hey, this is what this house worth, can we sell it? And the judge will say yes or no. But in this case, said yes, you can sell it, but it has to be for appraised value and no less. So we say okay, and we file an order that gets ordered, then we list it. And the house sits there for, you know, a month or two, does not sell, because it just so happened that at that time is when interest rates went up. So there wasn't as many buyers in the market for this type of house that could just pay cash. So that house didn't meet the standard. So then we had to turn around and go back to the judge saying, hey, we can't sell it for this appraised price, can we sell it for lower? And then the judge has a hearing on it where we talk about it. So you have to go through the hearing and the wait period and send all the notices. And finally, the judge says, yes, you can sell it for a lesser price. So then we sell the house, someone agrees, go through the whole closing process. But it's still not closed because then you got to file a petition and an order to tell the judge you did what you— he said you could already do, and is it okay? So that's the whole process of every asset. That's just a house. You have to do that with personal property, all the things. So you could see why probate's not the most fun thing. One other example of the scary side of probate is following the intention of the deceased's wishes. So I had another example of a husband-wife that owned a large investment property together. And at some point it was part of the husband's business and they sold the business but kept the property. So the property ended up just being in the husband's name on the deed. The wife or the husband weren't really aware of this. They didn't really understand or know that, but suddenly the husband passed away and then the wife's looking at it like, well, I depend on this rental income from this investment property to live off of, but now it's just in my husband's name. What do I do? Well, we had to take it through probate. But in Arkansas, and I think a lot of states are similar, is beneficiaries to homes by the statute is one-third of the property goes to the spouse and two-thirds of the property goes to the kids. So the wife was looking like, well, I need all this money to live off of. This wasn't my husband's intent to have two-thirds of this property go be owned by my kids. But that's what the statute said. So luckily, in this case, the kids all got along, same kids from the mom and dad, so they agreed to give it back to the mom. But you could see how that would cause a problem throughout probate. So that's a pretty good example of why probate's bad. And I think it's clear that it's time-consuming and, you know, meets all the things that you would rather avoid if you could. So that leads to the question of, well, how do you avoid probate? Basically, the concept is you have to pass away with nothing in your name alone. So what does that exactly mean? Well, it could mean you have a joint owner on the account or the property, or it could mean you have a beneficiary listed. So they call it beneficiary designation, like a transfer on death or payable on death. The other example that we'll really hit on is you could have property owned by a trust as well, and that avoids probate. So let's hit on some of the joint ownership things. Why is joint ownership maybe not the best way to avoid probate? Well, think about it this, if you own property with a joint business partner, y'all have a business property together. Well, yeah, if y'all own it jointly, that property becomes open to your partner's creditors. So say your, your partner gets sued for something completely outside of y'all's relationship. But now those creditors can take his portion of the property. Same thing with the divorce. If that partner gets a divorce, you could then be an owner in that property with the spouse, and that was not your intent. So that's not always the best method. And then you think about bank accounts. I have clients that come in every week saying, well, I've got my daughter on my bank account with me, so we're okay. She can access it if I'm incapacitated and it avoids probate, right? I say, well, yes, it does avoid probate. But there's a lot of risk with that as well. So not only are your daughter's creditors now able to take that account, but she could withdraw that money at any time she wants. It's just as much your money as it is hers. Now, you may trust your daughter, and that would never happen. But it could. So really, the joint ownership has its own downfalls and is not always the best method to avoid probate. We mentioned beneficiary designations. This is a great way to avoid probate in a lot of instances. You think about like your retirement accounts, you have a beneficiary listed, your bank accounts, maybe you have a beneficiary on that. Those would avoid probate, like life insurance is payable on death to so-and-so, that avoids probate. That's a private contract. All that is outside of the court system. But why could that be bad and not the best solution? Well, sometimes it doesn't always match the intent of the deceased. So I have a lot of clients that come in and say, well, I made my daughter the beneficiary of this account, and they know what to do with it when I'm gone, meaning they know they're supposed to give the portions to their brothers and sisters. Well, that may be true, and they may abide by those wishes, but they do not have to. Once it is paid to your daughter upon your death, it's hers. She can do whatever she wants to with it. So there's a lot of risk there. But my other thing that I really focus on with beneficiary designations is once that is paid out to the kids, it's theirs. Meaning not only can they do what they want to with it, but it's open to divorce and creditors. So a lot of times you say, I want to leave my IRA or my investment account to my son. Well, you may do that, but if your son gets a divorce, then it could go to his ex-spouse. And most people's intent is no, I want to make sure it goes to my son., and what I've built up stays in my family. So that is a downside and a scary side of beneficiary designations going outright. And some people say, well, I'm not really concerned about divorce either. My, my kid's happily married. Well, what if your kid is a doctor? You know, they're great with money. They have a successful career, all that. But doctors are open to liability. They have malpractice suits. They have you know, they're open to risk. So if you leave them something outright, that account is then open to risk. So that's kind of the scary side of things of dang, probate's terrible. And there's ways to avoid it. But none of those sound really good either. So what is the solution? Well, that leads us to a whole separate episode that I'm going to dive deep into. But the best solution that I do, and you know, the majority of my practice is revocable trust planning. So if you have assets in a trust, it passes outside of probate. And that is really the best solution. It's the most flexible and most efficient, but that deserves its own episode. So the takeaways I wanted to at least get out here is understand what probate is, and how you could avoid it, and understand the process a little bit. We want to keep this digestible so you can take it away and not overwhelm you with too much information. And generally, that is, that is it. We just want to make sure you know the downsides of probate, but that it can be avoidable if you talk with a qualified advisor, someone that knows what they're doing, whether it's a financial advisor, preferably an attorney, or really preferably both of them talking together. If you just seek the advice of someone that knows what they're doing, that's about it. We will catch back up on our next episode where we'll dive deep into revocable trust planning. Thank you.

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