When one of your financially savvy friends tells you get your estate planning together, you will often hear the line “You don’t want your assets to get stuck in probate!” wielded at the end of the conversation as though it were impending a disease. Why do finance guys use the word “probate” in the same tone that is used to warn of salmonella poisoning risks?
Well, there are three reason: your beneficiaries have to wait longer for the money, they have to pay thousands of dollars in expenses to go through the probate process, and they open up parts of their financial life to the general public.
Time Lag: If you are pro-active about your estate planning, you can take advantage of things like payable on death accounts that enable the beneficiary to immediately receive assets after your death. The average estate takes approximately 14 months to go through probate. At a minimum, this prevents your beneficiaries from accessing the capital and putting it to productive use. At a maximum, it can impose a financial hardship if you had regularly been providing for the beneficiary and then they must adjust to a “frozen period” in which they must wait for the assets to clear the state court system.
Expenses: It costs money to administer an estate. You have to pay an attorney. You have to pay a personal representative. You have pay the court probate costs that can reach as high as $3,000. You may face appraisal costs for the division of illiquid assets in the probate court. In 2016, the average probate cost was 7.7% of the overall estate.
Public Proceedings: If your assets go through the probate process after your death, many details about your financial circumstances will be revealed to the public. This means that your remaining family may be contacted by creditors pleading for them to pay off debts that you allegedly had because “it’s the right thing to do” and it also lets nosy people learn specific information about your wealth.
If you neglect your assets and defer to the probate process, you lose in terms of time, money, and information asymmetry. The general public can learn about the specifics of your financial life, your beneficiaries will take longer to receive the money, and perhaps most importantly, your remaining estate will most likely face higher fees that are part of the probate estate administration. It is just all-around inefficient compared to what you can accomplish if you structure your asset intelligently ahead of time. The most obvious way to sidestep the probate process is to create a revocable living trust.