When Norman Dacey wrote his book “How to Avoid Probate” almost fifty years ago, it contained a scathing condemnation of the arcane and costly probate system that existed in most states. The Washington state legislature was among those that soon took action to simplify the probate system with the passage of the Uniform Probate Act in 1974. Since then, numerous additional changes have been made to further simplify the probate process. Today, Washington state has one of the best, most streamlined probate system in the country. The usual reasons for avoiding probate in other states—such as statutorily mandated personal representative and attorneys' fees, court appointed appraisers, filing of the inventory of the estate, and costly court intervention—are not present in Washington.
However, alarming stories about probate seem to persist, and many individuals remain determined to avoid probate “at any cost.” Unfortunately, too often unscrupulous out-of-state salespersons capitalize on this lingering fear of probate to sell unsuspecting consumers expensive, often unsuitable living trust packages. Regular newspaper accounts of these schemes reveal repeated intervention in such schemes by the Consumer Protection Division of the Washington State Attorney General's office in an effort to protect Washington citizens.
In this article we will first explore the use of the revocable funded living trust as an alternative to probate of a Will. We later examine the probate process to try to fairly assess the burdens and benefits that it imposes.
Some persons believe that it is a relatively simple matter to avoid probate—just place one's assets in joint tenancy or dispose of them through a community property agreement. These methods are frequently disadvantageous from a tax point of view, and only offer limited flexibility. And in any case, these devices only avoid probate on the first death. Instead, the use of a funded revocable living trust is the best way to avoid probate.
A revocable trust is a legal document created during one's lifetime that serves as a substitute for most of the provisions of a Will. The creator of such a trust is usually called the “grantor.” The trust provisions, rather than the provisions of a Will, direct the disposition of the trust assets upon the death of the grantor. In order to avoid probate through use of a revocable trust, legal title to the assets now owned and acquired in the future must be placed in the name of the trustee, and not left in the name of the grantor. Any property not transferred to the trust will be subject to a probate proceeding, inadvertently subjecting the estate to the very procedure which the grantor was trying to avoid! This very commonly happens since it is easy to forget to title all of your property in the future in the name of the trust. In addition, assets that pass by virtue of separate written beneficiary designations (e.g., life insurance, IRA’s, 401k’s and other retirement plans) must be coordinated with the provisions of the revocable trust.
The revocable trust, when properly drafted, fully funded, and competently administered, can be an excellent asset management tool during the grantor's life, as well as after his or her death. The revocable trust permits the grantor to control and benefit from the trust assets while the grantor is living, but upon disability or death of the grantor, shifts the burdens of management to a third party trustee named in the trust instrument, usually a family member or an institutional or professional trustee. The creation of such a trust and naming of such a trustee during the grantor's lifetime permits the grantor to observe firsthand the quality of management of his or her property by the trustee, and gives the grantor the opportunity to replace an incompetent or unsatisfactory manager before the grantor's incapacity or death. The use of a qualified trustee can provide uninterrupted management of the trust assets until the grantor's death and the eventual distribution of the assets to heirs.
After death of the grantor, the trust is used as the vehicle to transfer the grantor's property, and this is done without the interruption of a probate. The result is that the revocable trust provides for the disposition of the grantor's estate in the same way as under a Will, but without a probate proceeding.
A common misconception is that the use of a revocable trust reduces or eliminates estate and inheritance taxes. Successful avoidance of probate does not mean that you avoid death taxes. The exact same tax-saving mechanisms that are used to reduce or eliminate federal and state estate taxes in revocable trusts are used in Wills. Therefore from an estate tax savings standpoint, there is no difference between the two.
As a general rule, the legal costs of preparing a revocable trust are greater than the fees for preparing a comparable Will. This is because all of the costs of transferring the assets of the grantor are incurred at the time of creation of the trust rather than at the death of the grantor. Where a professional or institutional trustee is used, the trustee's annual fees will be an additional cost; these fees can, in some instances, be substantial. If you plan to use a professional trustee, fee comparisons are an important consideration.
The balance of this article will discuss the benefits and costs of Washington's probate system, and compare it with the use of a revocable living trust.
Probate is the process of “proving the Will,” i.e., having the Will admitted by the court and then carrying out the administration of the estate in accordance with the law. Probate costs consist primarily of personal representative and attorneys' fees, as well as court filing fees. The probate filing fee in King County Superior Court are currently $230. The cost of the publication of the Notice to Creditors, as required by statute, runs about $105 depending on the legal newspaper used. A common misconception is that if no probate is necessary, no other costs will be incurred. In fact, all of the other costs of estate administration, such as appraisal fees, estate tax return preparation costs, attorneys fees, accounting and tax planning fees, and expenses incurred in the sale of assets, are incurred whether a probate is necessary or not. These latter costs are not avoided through the use of a revocable trust.
Washington’s probate system is known as a “non-intervention” probate system. This means that the day-to-day work of the personal representative is almost always carried out without any intervention by the court. The most common exception is where the personal representative wants to get court approval of a specific transaction, usually to insulate the personal representative from personal liability. Insolvent estates, by statute, must be administered with court supervision for obvious reasons.
Where there is a probate, there will be a short period of time after a person's death before the personal representative is appointed and qualified to act on behalf of the estate. While distribution of the estate to the beneficiaries is usually withheld until after the 4 month creditors' period has elapsed and any estate or inheritance taxes have been paid, the surviving spouse and minor children are eligible to receive a family allowance during the course of the probate. In addition, partial distributions of the estate are often made to the heirs during the probate process.
One advantage of planning an estate so that it will undergo probate administration is that the estate will be administered and distributed with some oversight of the probate court including through notice procedures to heirs of the estate. This helps ensure that the estate will be transferred to those who are entitled to receive it. Where assets are held in a funded revocable trust, a well-intentioned trustee may misinterpret the intent of the grantor and make an incorrect distribution upon the grantor's death.
A significant advantage of having an estate go through probate is the discharge of all possible creditors' claims. In a probated estate, all creditors must file a claim against the estate within a specified period after publication of the notice to creditors. If the creditor fails to timely file a claim, the claim is forever barred. As long as the requirements of the probate statute have been met, all types of claims, whether known or unknown, are barred. In the absence of a probate proceeding, unless a statutory creditor clearing process is specifically performed, creditors can make their claims against the estate and its beneficiaries many years after the grantor's death. No creditor clearing automatically occurs with the use of a revocable trust to avoid probate, with the result that creditors can appear years later and assert claims against trust property, even after it has been distributed.
Professional persons (i.e., physicians, dentists, engineers, accountants, attorneys, etc.) should always have their estates probated to insulate them from professional liability and other claims that can be made many years after the death of the professional. Only in this way can the surviving spouse and the family of the professional be protected. Alternatively, if a revocable living trust is used for the professional, the statutory creditor clearing procedure must always be used.
Unlike other states where fees can be prohibitive, in Washington probate matters there are no fee schedules or statutory fees for personal representatives or lawyers. The Washington state standard is “reasonable compensation.” Most such work is done on an agreed hourly basis; it is not based on a percentage of the estate.
One advantage of use of a revocable living trust over a Will is that nothing gets filed with the court. This affords greater privacy to the estate and its beneficiaries. On the other hand, Wills must always be filed with the court, with the result that third persons can view their contents. If privacy is a significant concern, for example in estates with an unusual disposition of property, a revocable living trust will likely be the preferred estate mechanism. On the other hand, since most estates pass, either outright or in trust, to the surviving spouse and then the children, privacy is not much of a concern.
While the same estate tax saving mechanisms can be used in both revocable trusts and Wills (such as the use of a “credit shelter” or “bypass” trust), certain favorable income tax provisions apply to estates but not to trusts. For example, trusts are required to adopt a calendar tax year, whereas an estate may adopt a fiscal tax year, thus allowing income tax deferral opportunities and the possibility of minimizing the number of income tax returns needed (with consequent lower accounting fees). In addition, it is still unclear if a trust can make certain income tax elections. Finally, with proper planning the income earned by an estate can be divided between the estate and the beneficiaries, resulting in modest income tax savings.
Other income tax differences include that estates can deduct realized capital gains set aside during the taxable year for ultimate distribution to a charitable residuary beneficiary, while trusts cannot. A trust cannot recognize the capital loss upon funding a pecuniary bequest with depreciated property, while an estate is permitted to recognize such a loss. Finally, a trust cannot recognize a loss on the sale of what is known as “Section 1244 stock.” Such an ordinary loss can be realized if such stock is sold by an estate.
In conclusion, a careful analysis of each estate plan should be made by weighing the advantages and disadvantages of the use of a revocable trust versus use of a Will which has to be probated. The best way to determine what form of estate plan is right for you is to consult with an experienced estate planning attorney. Whatever the conclusion, a coordinated estate plan is the most important result. Inconsistencies in an estate plan between the disposition of probate and non-probate property often results in expensive litigation and inappropriate dispositions of property.
(Originally published in the Seattle Daily Journal of Commerce, April 12, 1991; updated March 2012.)