WILLS, TRUSTS and PROBATE The following section deals with general concepts related to WILLS, TRUSTS and PROBATE. You may read this section in it's entirety or click on the section below to go directly to your topic of interest.
What is Probate? Probate is the privilege that the government grants to transfer assets that are owned by a deceased person to a living beneficiary. This means that you cannot transfer title of an asset that is subject to probate without obtaining the appropriate government authority, usually at the county courthouse. Because power of attorney ceases upon death, an agent under power of attorney does not have the legal authority to transfer assets out of the name of someone who is deceased. Obtaining the appropriate authority to transfer assets out of the name of a deceased person usually involves a petition to obtain letters testamentary, or letters of administration, to the appropriate court. You will also need short certificates issued by the appropriate court. What property is subject to probate? Any property owned solely by the decedent at the time of their death that does not convey as a matter of law to another is subject to probate. Assets titled as joint tenants with right of survivorship or as tenants by the entireties are generally not subject to probate, although they are generally subject to inheritance tax. Assets titled as tenants in common are subject to probate. Life insurance is generally not subject to probate unless there is no living beneficiary designated or the estate is the named beneficiary. Most qualified plans such as IRAs 410(k)s, 457 plans, 403(b) plans and other IRS qualified plans are not subject to probate (they are subject to income tax and death taxes) unless there is no living beneficiary designated, or the estate is the named beneficiary. POD (payable on death) accounts, TOD (transfer on death) accounts and ITF (in trust for) accounts are generally not subject to probate unless there is no living beneficiary designated or the estate is the named beneficiary. Assets held in a trust are generally not subject to probate but are subject to inheritance tax. POD, TOD and ITF accounts are, however, generally subject to inheritance tax. Exactly how an asset is titled becomes critical in determining which assets are subject to probate and which assets are not. Why do we have probate? The first purpose of probate is to protect the interests of creditors of the deceased. While many who die have little, if any, debt, probate provides an orderly process which ensures that whatever debt may be owed gets paid. Secondarily, it is the personal representative's job to pay any income taxes owed, file an inheritance tax return and pay inheritance taxes, if owed by the estate, as well as any other death taxes such as federal estate and gift tax. Generally, after creditors and income and death taxes are satisfied, then the personal representative ensures that each beneficiary receives what they are entitled to receive. Because a personal representative can become personally liable for unsatisfied debts and claims against the estate a personal representative needs to take the appropriate steps to ensure that creditors, the government, and beneficiaries cannot later come back and claim that the personal representative failed to properly perform their job. Most personal representatives will hire a law firm to ensure that the personal representative is protected from potential claims of creditors, government agencies or beneficiaries. What is a personal representative? A personal representative of an estate is the person who is obligated to carry out the orderly administration of the estate of the deceased as required by law and according to the will. In the case of a decedent who had a will naming a personal representative, the personal representative is called an executor or executrix. If the decedent dies without having a will naming an executor or executrix, then the personal representative is called the administrator or administratrix of the estate. The personal representative can be a person or an entity, such as a bank. When you consider naming a personal representative, it should be a person that you trust to handle your money and honor your wishes. Your personal representative can hire a competent law firm to provide them with advice on how to properly administer the estate. You should have a high degree of confidence in the integrity of your personal representative when it comes to handling the assets of your estate. Last Will and Testament vs. Intestacy Assets of a decedent can be subject to probate whether the decedent died with a will or without a will. When a person dies with a last will and testament that names a living personal representative or existing entity and disposes of all probate assets, then that person dies "testate". Their wishes as expressed in their last will and testament will be incorporated into the probate process. If a person dies without any last will and testament, then that person dies "intestate" and the laws of intestacy will dictate what happens to the assets that are subject to probate. Where there is a will that does not name a living or existing personal representative, or all of the assets are not disposed of by the will, you can have a partial intestacy. In some cases, the decedent's wishes are identical to the law of intestacy, in other cases it is not. The best way to ensure that your wishes are carried out upon your death is for you to execute a last will and testament. Each state has requirements for a will to be valid. You should consult an attorney in your state to be sure your will is valid. What is a Will? A will is a document that directs what happens to the assets that go into the probate estate of a deceased person. A will is an expression of what you want to happen to the things you own when you die, such as your money, house, car, and anything else you own. It's also and about who you appoint to ensure that your wishes are carried out. There are several elements of a will. First, there must be a testator, (if you are a male), or a testatrix, (if you are a woman). You are considered the testator or testatrix because you are making your wishes known in what is commonly called your last will and testament. The testator/testatrix must have the capacity to make out a will, which means you must be 18 years of age or older and have enough of your mental abilities to know what you are doing. Exactly how much of your mental abilities you must have is determined by the law of the state where you establish your will. A will normally states that all debts, funeral expenses, and expenses incurred in administering the estate be paid. After paying those expenses, a testator or testatrix may state that certain individuals receive certain items, or specific amounts of money. These are called specific bequests. After the specific bequests, most wills will have a residue clause that disposes of any assets left that have not been used to pay expenses or to pay the specific bequests. In many cases the residue clause distributes the most assets in the will. In a will the testator or testatrix will usually name an executor or executrix who is the person that actually carries out the provisions of the will. An executor can be one or more persons or an institution like a bank. Related to Probate - What about Guardians of Minor Children? In general, Guardians are appointed by the same Judges that rule on probate matters. A will is an appropriate place for a parent with minor or dependent children to nominate one or more individuals to serve as Guardian of their minor children should they die. Since it is presumed that a parent knows their children better than any other person, and a parent knows their own family better than any other person, Judges will ordinarily appoint the individual or individuals a parent nominates in their will to be Guardian of their children unless there are good reasons presented to the Court not to do so. What about taxes? You should divide the world of taxes into three separate types. The first is income taxes. Income taxes owed to local, state, and federal governments by a decedent up to the time of the decedent's passing are considered debts of the decedent. The second type of taxes are inheritance taxes and estate taxes that are owed to the state, depending on your domicile and location of real property at the time of death. The third type of tax is Federal Estate and Gift Tax, which is owed to the Federal Government. Federal Estate and Gift Tax The Federal Estate and Gift Tax is levied on the value of any asset you have an interest in at the time of your death. It also includes other items such as most life insurance policies, the value of annuities you own, the value of any qualified plans you own and any transfers you have made within three years of your death plus the value of gifts made during the lifetime of the decedent to the extent the cumulative gifts exceeded the annual exclusion limit to any individuals in any calendar year. For a long time, the annual exclusion was $10,000.00, in 2002 the annual exclusion was increased to $11,000.00 and in 2006 it was increased to $12,000.00 per person per year. The annual exclusion excludes the first $12,000.00 (in 2008) given to an individual in a calendar year from being added to a person's estate. If you died in 2007, and your estate plus certain other assets, plus gifts that exceed the annual exclusion limit do not exceed $2,000,000.00, your estate will not be liable to pay Federal Estate and Gift Tax. (A maximum of $1,000,000.00 is allowed for gifts). The $2,000,000.00 limit is called a floor for estate and gift tax purposes. This floor on the Federal Estate and Gift Tax is called the Applicable Exclusion Amount and it is also changing. It remains $2,000,000.00 for the years 2006, 2007 and 2008. In 2009 the floor increases to $3,500,000.00 and in 2010 the Estate Tax is repealed. In 2011, if Congress fails to act, the Federal Estate Tax is reinstated with an Applicable Exclusion Amount of $1,000,000.00. The Gift Tax remains at $1,000,000.00 from 2006 through 2011. What will happen in 2011 is a mystery at this point. Suffice it to say that if your net worth along with certain other assets exceeds $1,000,000.00 you should be considering the implications of Federal Estate and Gift Tax on your estate planning. With proper planning it is relatively easy for a married couple to effectively enjoy double the Applicable Exclusion Amount. Click here for more information concerning Federal Estate and Gift Tax. http://www.irs.gov/pub/irs-pdf/p950.pdf The value of many estates does not reach the floor. Thus, many estates do not have to pay any Federal Estate and Gift Tax. There are planning techniques that allow the exemption of double the Applicable Exclusion Amount for couples. You should consult an attorney who is licensed to practice law in your state if you have concerns about estate taxes. Inheritance Tax When you hear the saying that "the only two certainties in life are death and taxes", they must have had the inheritance tax in mind. With very few exceptions, any asset that passes to another person upon death is subject to inheritance tax. This is true whether the asset is subject to probate or not. Examples are probably the best way to illustrate the inheritance tax. Let's say that after her husband passes away, a widow adds her only child's name onto her house and all of her bank accounts. The house is now titled to widow and child as joint tenants with right of survivorship and each bank account is titled to widow and child. Upon the passing of widow, half of the value of the house is subject to inheritance tax and half of the balances in the bank accounts are subject to inheritance tax. The inheritance tax rate for assets that pass to children is generally more favorable that the rate of assets that pass to more distant relatives or non-related beneficiaries. In some states the inheritance tax rate to children and other lineal relatives, such as parents and grandchildren, is 0%. The inheritance tax rate changes depending on your relationship to the deceased. In addition, there is a look back for inheritance tax purposes. What this means is that gifts made or assets that were jointly titled within the look back come back into the estate for the purpose of determining inheritance tax. These transfers within the look back are often called transfers in anticipation of death. Look back periods vary from state to state but typically range from one to three years. One issue that surprises heirs from time to time is where a person is the remainderman of a life estate or were joint tenants with a parent or other person. Although probate is not required in these instances, inheritance tax can be owed and if it is not timely paid on a timely basis, penalties and interest may accrue. This issue arises most often when the heir sells the property and the title company demands to see the inheritance tax return showing that inheritance tax was paid on the joint tenancy or the life estate. REVOCABLE LIVING TRUSTS Many financial planners often recommend revocable living trusts in order to avoid the expense and possible litigation of probate. While that may be good advice in some states, it is not necessarily good advice in all states. The State of Pennsylvania is one example of a state in which a living trust may not be appropriate. Here is what the Attorney General of Pennsylvania says:
The Scams: "Unfortunately, when it comes to living trusts, unscrupulous con artists are ready to play on consumers' fears of the unknown. In some cases, consumers--mostly elderly--are solicited by phone or mail to attend seminars or to set up in-home appointments to discuss living trusts. Living trusts are then marketed through high-pressure sales pitches which prey on the fear that assets will be tied up indefinitely or that estates are prone to heavy taxes and fees if a living trust is not in place. Con artists often rely on unfamiliar terms such as "probate" and "executor" to convince consumers that a living trust is right for them even though many of the complex rules and fees that can complicate estate distributions do not exist in Pennsylvania. " from http://www.attorneygeneral.gov/consumers.aspx?id=304
There are simple and inexpensive ways to avoid probate, if that is an appropriate goal. Despite the claims, even if you have a living trust, you must still pay inheritance and estate taxes on the assets in a living trust. You may hear claims that a living trust helps avoid tying your estate up for years in court. Beneficiaries of a living trust can sue the trustee every bit as much as the beneficiary of a will can sue the executor or executrix. So be careful of the claims made about the advantages of a living trust. A living trust can be an appropriate tool for estate planning in some circumstances. You should consult a qualified estate planning attorney to determine if a living trust is appropriate for you. This article is not intended to provide legal advice and you should consult an attorney prior to acting on any information contained in this article. |
