Is Maryland estate law complicated?

FACT: Probate in Maryland is relatively uncomplicated.

Probate is the process whereby a court determines the validity of a will and supervises the distribution of the assets that a person owns individually, as opposed to assets that pass automatically upon death to beneficiaries or joint owners, such as life insurance proceeds, retirement plan proceeds, and jointly owned assets. Although advocates of living trusts stress that probate must be avoided at all costs, the evils of probate are greatly overstated. Certainly, there are court costs and legal fees associated with probate, but these future costs may be less than the immediate costs of setting up a trust. In addition, many of the costs associated with probate, such as preparation of the federal estate tax return, will be incurred in administering a living trust as well.

Probate provides certain benefits that living trusts do not. The probate process allows supervision of estate administration by the probate court and provides notices to beneficiaries, who are given an opportunity to object. In contrast, a beneficiary of a living trust may have to sue a trustee in order to challenge the trustee’s actions.

In some states the probate process can be time-consuming and expensive, but in Maryland it is relatively uncomplicated. Maryland allows a streamlined probate procedure for small estates (net estate $30,000 or less or $50,000 or less if the spouse is the only beneficiary). Maryland also permits a less burdensome modified administration in certain circumstances if the residuary beneficiaries consist only of certain people who are exempt from the Maryland inheritance tax. These options reduce the cost and administrative burdens that often are associated with probate.

In fact, in most states the actual probate fees are nominal, compared to other costs of estate administration, such as preparation of the federal estate tax return. In Maryland, for example, the probate fee for an estate of between $500,000 and $750,000 is $750. The cost of preparing a federal estate tax return and a fiduciary income tax return (both of which may have to be prepared whether a will or a revocable trust is used) could be several times the cost of the probate fee.

Proponents of living trusts argue that a grantor can establish maximum trustee commissions that are lower than Maryland’s statutory personal representative commissions. Unlike in New York and some other states, personal representative commissions in Maryland are not mandatory. Instead, they are optional and are subject to a statutory cap (9% of the first $20,000 and 3.6% of the balance of the estate). Furthermore, in certain situations it makes sense for a personal representative who is also a beneficiary to elect to receive the greatest commission possible. This may result in overall tax savings because an estate may deduct the commission at the federal estate tax rate, but the personal representative pays taxes on the commission at his or her personal income tax rate (which may be as low as 15% for federal income tax purposes).

If a person wishes to avoid probate, a living trust is not the exclusive method of doing so. Probate property generally includes only those assets that a person owns individually. Jointly owned property passes automatically to the surviving joint owners without going through probate. Similarly, life insurance proceeds and retirement benefits pass directly to the designated beneficiaries. A life estate deed also will pass property to the remainder person without going through probate. So will other forms of ownership, such as a "pay on death" account. Joint titling and pay on death designations should be discussed with an estate planning attorney to ensure that they are consistent with the overall estate plan.

If a person decides to utilize a living trust, he or she must transfer all of his or her assets to the trust (or some other form of non-probate asset) in order to avoid probate completely. If any assets have not been transferred to the trust (or some other form of non-probate asset) prior to death, the estate will have to go through probate anyway. In some situations the value of the assets may be low enough to permit use of the small estate procedure. Nevertheless, improper or incomplete transfer of assets to the trust may result in full-scale probate in any event.