Many people have said this to me recently. They believe that because they have high amounts of debt―even to the point of having a negative net worth―they do not need an estate plan.
That's simply not true.
An estate plan does many things. It can be used to lower death taxes, it can be used to plan for your incapacity, and it can be used to avoid probate.
Why do you want to avoid probate?
Probate Fees
If your estate goes through probate, it is not free. There are court filing fees, attorney fees, and potentially personal representative or executor fees. Here are the statutory limits for attorney fees or personal representative fees:
Estate Value
First $100,000 - % 4
Next $100,000 - % 3
Next $800,000 - % 2
Next $9 million - % 1
So if you have a $200,000 estate, you could end up paying $7,000 in attorney fees and $7,000 in personal representative fees. Plus, your estate will have to pay court filing fees.
"But I have a negative net worth. I don't have to worry about probate."
Your net worth is not what California uses to determine the value of your estate. The value of your estate is based on its gross value. If you own a $200,000 home, your estate is large enough to end up in probate. And if you have a negative net worth, your family may have to sell the home to pay probate fees.
This is just one reason to avoid probate by preparing an estate plan.
Delay: Probate can take a year or more
During the year or more it takes to probate your estate, your family will not have access to the money in your estate. Many people do not want their families to wait that long, so they prepare an estate plan to avoid probate.
No Privacy: Probate is public
If your estate goes through probate, anyone can see what is in your estate. It will not be private. You must prepare an estate plan to avoid probate, if you want to maintain your privacy.
How do I avoid probate then?
Prepare an estate plan. Specifically, remove your assets from your estate by putting them in a revocable trust. A revocable or living trust is not included in the gross value of your estate. So if your house is in a trust, it is not considered part of your estate (for probate purposes), and it will not go through probate.
The goal is to take all real estate out of your estate and to lower the value of your estate to below $150,000, so that you can avoid probate. You may not have a lot, but if you don't have estate plan, your family may lose even that. That is something that no one can afford.