Property Law: One Reason for Probate

In our "system" of property law, property must at all times be transferable. Any asset transfer that requires the signature of the decedent or ward must go through probate. The essential purpose of probate is to retitle assets held by the decedent or the ward.

A. What is Probate

1. A process by which the court supervises the settlement of your estate when you die.

2. A process by which the court takes control of your affairs should you become physically or mentally incompetent.

3. A process by which the court takes control of the affairs of minor children.

B. What are the Problems with Probate?

1. Loss of Control: A court supervises the settlement of your estate.

2. Burdensome: Probate often requires detailed inventories and accountings.

3. Expenses: Court costs, legal fees, and executor commissions can add up to seven (7%) percent of the estate.

4. Time: It is time consuming often taking two to three (2-3) years or more.

5. Lack of Privacy: It is public, anybody who wants to can find out t.he details of your estate.

C. What Assets/Property Are Probatable?

1. All assets that require your signature to be transferred.

2. All assets titled in your name individually.

3. All assets held as tenants-in-common (as opposed to joint with-rights-of-survivorship).

4. All benefits that are payable to your "estate." Your Will Controls Only Your Probate Property

Probate Assets = Your Will

Wills: What They Will and Won't Do For You

A. Wills can be used effectively for the following purposes:

1. To transfer relatively small and uncomplicated estates where an expedited or simple probate is available.
2. To appoint guardians for your minor children.
3. To transfer probate assets into your trust (a Pour-over Will).

B. Wills should not, however, be relied upon as your sole estate planning document:

1. When used alone, they are a one-way ticket to probate court.
2. They do nothing for you should you become physically or mentally incapacitated.
3. Wills do not go into effect until you die.
4. Wills may be contested and anyone may come forward to make a claim against your estate.
5. Probate is public document not a private document.
6. It does not solve the problems associated with disability ("living probate").
7. It is usually inconsistent with estate tax planning.

You Can Avoid Probate by Wisely Titling Your Assets

A. Property held jointly-with-rights-of-survivorship will not go through probate upon the death of the first tenant. However, if the joint tenants are husband and wife, this merely postpones probate until the death of the surviving tenant. There are other drawbacks such as:

1. There is a potential gift tax problem upon the creation of the tenancy. If the joint tenants are other than husband and wife.

2. There is a potential loss of control, if you and the other tenant do not agree on matters relating to the asset.

3. There is a potential disinheritance of desired beneficiaries, for example, if death does not in occur the expected order.

4. The executor/trustee for the first tenant to die has the burden of proving that the entire value should not be included in that individual's taxable estate. Certain assets held jointly (your house, for example) may require a guardianship to sell if one of the tenants becomes incapacitated.

5. The tenants are exposed to the creditors of the other tenants.

6. The asset is transferred all at once. You have no opportunity to gradually payout to the beneficiaries.

B. Life insurance, pension benefits and other property transferred by a beneficiary designation will not go through probate unless you designate your "estate" as the beneficiary.

C. There are, however, some planning points to be aware of with regard to these assets:

1. They are generally included in the gross taxable estate for federal and state estate tax purposes.

2. They cannot be paid directly to minor beneficiaries or to incompetents.

Non-Probate Assets = Outside Will

1. Assets titled in the name of the Revocable Living Trust
2. Joint with Survivorship
3. Life Insurance
4. Pension Death Benefits
5. Transfer on Death or Payment on Death Accounts

Even if these assets do not go through probate as a matter of law, it does not mean that these assets are exempt from federal and state estate taxes.

The Revocable Living Trust: Avoiding Probate

A. A Revocable Living Trust is a legal document that looks like a Will. Unlike the Will, however, a Revocable Living Trust allows you to avoid probate and endures during periods of disability and death. It is established during your lifetime. The key to this probate avoidance is that the Trust must be separate document outside of your Will, and it must be properly funded.

B. Funding the Trust. This refers to your transferring your property to your Trust. It is simply a matter of retitling you assets into the name of the trustee, e.g., from "John Smith" to "John Smith, Trustee, of the John Smith Revocable Trust dated May 31, 2006."

C. Determine the benefits of the lower rate schedule and avoiding probate compared to holding the assets until your death.

Primary Exceptions to Estate and Gift Taxes:

1. There is an unlimited marital deduction for all assets being transferred to your spouse. Essentially, any assets transferred to your spouse are free of tax. However, when that spouse dies, estate taxes will have to be paid. Thus, this merely serves as a delay which may not be beneficial if that asset is appreciating in value. Note that transfers to non-US citizen spouses are not deductible.

2. The Thirteen Thousand ($13,000) Dollars per year per person ("donee") is excluded from gift taxes. You can give away up to Thirteen Thousand ($13,000) Dollars of present interest gifts to an unlimited number of people without taxes. Together, a husband and wife, for example, can give away Twenty-Six Thousand ($26,000) Dollars to each of their children and have the entire amount excluded from gift taxes.

3. Unlimited Charitable Deduction for completed gifts to charities. Certain charitable gifts, such as future interests (e.g., charitable re mainder trusts) must meet certain requirements before they produce a current tax deduction or even an estate tax deduction.

Copyright 2008 The Arnett Law. All rights reserved.

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