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Motley Fool: Introduction to Probate

When we die, our assets often go into probate. It’s important to understand the probate process to help in your estate planning.

Probate is the legal process of administering an estate once someone dies, and it features several parts. First, it must be determined that the will is valid. If you don’t have a will, the probate court will have your assets distributed according to the rules of the state. (It’s estimated that more than half of Americans die without a will or estate plan.)

If there’s a valid will, the probate process will include making an inventory of the deceased’s property and appraising its value. Debts will be repaid and taxes due will be paid. What’s left will be distributed to inheritors according to the terms of the will, with title and ownership being formally transferred. This can be a complicated hassle, and it can often be costly, too, involving lots of paperwork and fees to lawyers, accountants, appraisers and executors, as well as court costs. All that money would otherwise have gone to beneficiaries.

Probate is sometimes inexpensive, but when it’s not, it can eat up 5 percent to 10 percent of the value of an estate. Also, property remains in a kind of limbo while in probate — and that can last months or even years. And finally, the probate process is public, so anyone who wants to know your business will likely be able to find out. Still, probate does have some advantages, such as being a generally methodical and unbiased system overseen by a judge.

Overall, though, many people find that its drawbacks outweigh its advantages and aim to avoid it — such as via a living trust or other means.

Learn more about estate planning strategies in “Estate Planning Basics” by Denis Clifford (NOLO, $25) or “Estate Planning Smarts” by Deborah Jacobs (DJ Working, $25). Consider consulting a financial pro, too, about your tax concerns and your financial planning needs. You can find a fee-only one via napfa.com.

Looking forward and back

Question: Should a company’s forward price-to-earnings (P/E) ratio be higher or lower than its current P/E ratio?

Answer: A company’s current P/E ratio is its current stock price divided by its earnings per share (EPS) for the trailing 12 months. Thus, it’s based on past results. The forward, or projected, P/E divides the stock price by next year’s estimated EPS. Investors like to see a forward P/E lower than the current P/E because it means earnings are expected to rise. Imagine Sisyphus Transport Corp. (ticker: UPDWN) trading at $48 per share with EPS over the past year of $2. Its P/E would be 48 divided by 2, or 24. If Sisyphus is expected to generate $3 in EPS next year, its forward P/E would be 48 divided by 3, or 16. The lower number is due to Sisyphus’ expected growth. Remember, though, that earnings can be manipulated and estimates can be proven wrong. So don’t make decisions based on these numbers alone.

Q: What are ADRs?

A: They’re American Depositary Receipts, which help us buy and sell shares of foreign stocks that don’t normally trade on U.S. exchanges. Without them, if you wanted to buy stock in Toyota, you’d have to convert your dollars into yen and then somehow buy shares on the Japanese exchange. Selling shares would be a hassle, too. Through ADRs, shares of Toyota are held by an American financial institution overseas, and you can buy them with U.S. dollars. ADR holders are entitled to dividends and capital gains. Other foreign companies you can invest in via ADRs include BP, Canon, Credit Suisse, GlaxoSmithKline, Honda, LG Display, Luxottica, National Grid, Royal Dutch Shell, Sony and Unilever.

Why bother?

At the beginning of 2014, I invested $560,000 in 10 stocks recommended by The Motley Fool. Well, after four months, I’m down about $10,000. I ask myself, why bother? Why not just invest in an S&P index fund and forget about it? Did I make a good decision in buying these individual stocks in an attempt to outperform the S&P, or should I have just invested in the S&P to begin with?

The Fool responds: It’s never fun to see your holdings lose value, but stocks can be quite volatile over the short run, such as four months. Over years, the stock of most healthy and growing companies will tend to rise in value. You posted this story in early 2014. It’s now been about two years since you bought those stocks, and while three of them sport negative returns over the past two years, seven of them have gained value, four by more than 20 percent annually, on average. That said, if you don’t have confidence in your ability to choose individual stocks likely to outperform the overall market, or you’re not convinced about any company’s prospects, then there’s nothing wrong with just sticking with index funds. Over many years, inexpensive broad-market index funds are likely to serve you very well. Remember, too, that even the overall market will have good and bad years, though its long-term trend is to rise.

The Motley Fool take

A demographic opportunity

Want solid dividend income from a company with a promising future? Consider Welltower Inc. (NYSE: HCN), a real estate investment trust (REIT) focused on the health care sector, where favorable demographic trends serve as tailwinds.

Welltower, until recently known as Health Care REIT, specializes in senior housing and post-acute care properties. Given the aging population in key areas of the United States, Canada and the United Kingdom, where Welltower operates, its growth seems assured. Indeed, about 10,000 baby boomers will be turning 65 every day in the U.S. from now through 2029.

Welltower has 1,400-plus properties in those three countries, often focusing on affluent areas, and it sports high occupancy rates, too. With the senior-care industry very fragmented, there’s much opportunity for Welltower to keep making strategic investments. The company’s last quarter featured revenue growth of 15 percent over year-ago levels, driven in part by about $3.3 billion in acquisitions. Its CEO has noted that it has “a strong balance sheet, low (debt), and a robust pipeline of opportunities focused on innovative care models.”

Welltower’s dividend, which it has paid for 178 consecutive quarters, has been gradually growing over the years, and it recently yielded 5.2 percent. Dig a little deeper to see if there’s a place in your portfolio for Welltower. (The Motley Fool has recommended Welltower.)