Estate Planning Overview
- PROBATE IS A COURT PROCEEDING
- THE PROBATE PROCEDURE INVOLVES THREE BASIC STEPS
- SELECTION & DUTIES OF THE PERSONAL REPRESENTATIVE
I WHAT HAPPENS TO MY PROPERTY, WITH OR WITHOUT A WILL?
If the decedent had a Will, the Court orders distribution of property comprising the decedent’s probate estate under the terms of the Will. If there is no Will, the property is distributed according to state law. (A person who dies without leaving a Will is said to have died “intestate”. A person who makes a Will is called the “Testator” (male) or “Testatrix” (female) and is said to have died “testate.”
What is included in the probate estate? All property the decedent owned in his or her own name, plus all other property interests that do not pass to somebody else by operation of state law. This does not include any property held in a Tenancy by the Entireties or as Joint Tenant with Right of Survivorship (JTWROS). The decedent’s assets for Federal “Estate Tax” include all the probate estate and several other assets not probated, such as a portion of JTWROS property and the proceeds of life insurance policies owned by the decedent.
DO I NEED A WILL?
Your Will allows you to give the Court instructions on several critical matters:
- Who gets your property,
- Who is in charge of making the distribution, and
- Who you want to be named guardian of any minor children.
The following is an example of the Florida Probate Law. While each State may have a slightly different law, for purposes of example, the differences are minor.
What happens if you die without a Will while you are a Florida resident:
Florida law provides for an allowance to be set aside for the surviving spouse and/or children whether there is a Will or not. This is free from any claims against the estate or debts of the decedent. These survivors take up to $18,000.00 “off the top” of the estate, before the creditors, heirs and beneficiaries line up to receive their shares of what remains, under the Will (if there is one) or the state law of intestate distribution (if there is no Will). If there is no Will, Florida law also gives the surviving spouse an interest in any homestead real estate owned by the decedent.
Married with children?
Many people falsely believe that the surviving spouse/parent would take all the deceased spouse’s property. That is not always the case. If the decedent and the surviving spouse had no children outside this marriage, the law awards all of the decedent’s property to the surviving spouse. If the decedent had any children by another person, not the surviving spouse, or the surviving spouse had any children by another person not the decedent, the surviving spouse only receives one-half the estate and the children of the decedent receive the remaining half.
Married with no children?
The intestate decedent’s surviving spouse would take all.
Single person with children?
When a single person with children dies without a Will, the entire estate is divided evenly among the children.
Single person with no children?
In this situation, the decedent’s parent(s), or the survivor of them, receive the entire estate. If both parents are deceased, the decedent’s brothers and sisters divide the estate, with the share of any deceased sibling divided among that sibling’s children.
If there is a Will written before a marriage, the surviving spouse can, under some circumstances, take a share of the estate just as if there had been no will.
If there is a Will, and a child is born after the Will was written, that child may take a share just as if there was no Will.
If there is a Will, the surviving spouse can renounce it and the inheritance it contains (if any), and instead take what’s called an “elective share”. This is a legal device originally intended for the protection of the wife. Historically, all of a family’s property might be titled solely in the husband’s name. The “elective share” protects a woman (or man) against being “written out” of a spouse’s Will. This may be a matter of some concern when a couple has married later in life, both bringing property and existing children to the second marriage.
For example, a husband might have investments and other property in his name alone, and write a Will directing all of it to his children by a previous marriage. The wife could petition the probate court to take her “elective share” or 30% of the estate under the law. The 30% does not include any amount the spouse might receive as family allowance, homestead property, and any exempt personal property, which the surviving spouse also takes.
If there are minor children, a Will should always be used to name a guardian(s) of the minor children and property. Alternates should also be named. While the Court is not bound by this declaration, it does carry great weight. The purpose of the Will in this regard, though, is to guide the court, and to avoid family arguments over who is better qualified.
Many of these concerns can be addressed by signing a prenuptial agreement or postnuptial agreement, by creating a Living Trust, or a combination of the two.
If you don’t fall into any of the categories above, there are further instructions in the law to decide who gets your property. If YOU want to decide who gets your property, you need, at minimum, a Will.
THE SIMPLE WILL
This is what most married couples first think of. Each spouse’s Will is a “mirror image” of the other. The entire estate is left to the surviving spouse and at the death of both the estate is divided among the children or named heirs.
This kind of Will provides as follows:
- Payment of debts and taxes.
- Enables use of a “Separate Writing” to dispose of items of tangible personal property, you create your own list to specify that certain items be left to a specific individual. You can amend this list at any time without revisiting an Attorney.
- Disposition of the remainder (the “residue”) of property. This consists of everything that remains after steps 1 through 2, above. Usually, people want it this way: “If I die first, everything goes to my spouse. If my spouse has already died, all to the children, in equal shares, per stirpes.” (Latin for, “If a child dies before the parent, that child’s children split the share.”) The Wills are mirror-images of each other.
- Naming of a Personal Representative – usually the spouse, but there should be an alternate, too. The Will also usually waives posting of a bond by the Personal Representative.
- Specifying the powers of the Personal Representative, including a specific mention of whether the Personal Representative may sell real estate without Court approval.
To qualify as a Will, it must appear to the court – looking only at the document itself – that it was intended to be the final expression of the Testator’s wishes as to the disposition of his property to take effect upon death. That is why a general letter stating one’s desires, or a list of property with beneficiaries’ names usually is insufficient. For ease of explanation, the male gender is used in these explanations. A female who makes a Will is a Testatrix.
Most importantly, the Will maker must have “testamentary capacity.” This requires that the Testator be of “sound mind,” which might be a misleading term. He must only be aware of the nature and extent of his property; must know who are the “natural objects of his bounty,” i.e., his family, and the Testator must be aware that by signing the Will, he is making a final disposition of his property.
The Will must be properly executed. This means that the Will must be signed in the presence of at least two witnesses, who must sign in the presence of the Testator and each other. Most Attorneys will have the Testator and witnesses sign a self-proving affidavit attached to the end of the Will, in the presence of a Notary Public. This self-proving affidavit can eliminate the necessity of producing witnesses when the Will is probated.
Many States do not recognize what is called a Holographic Will, in which the significant portions are written in the handwriting of the Testator and is signed but not witnessed.
Codicils are amendments to an earlier Will. No written additions or changes should ever be made on the original document, however. Instead, a separate page can be prepared, referring specifically to the original Will, and executed with the same formalities required of a Will. In most cases, it is simpler and no more expensive to just start from scratch and do another Will. (Remember to destroy the old one to avoid any confusion.)
II THE PROBATE PROCESS
PROBATE IS A COURT PROCEEDING
It is here that final debts are settled, and legal title to property is formally passed from the decedent to his/her heirs. Probate occurs in the county of the decedent’s legal residence at death. Usually, the first step is taken by the person named as Personal Representative, or other interested person who has the original Will.
The custodian of the Will is required to file the original Will with the Clerk of the Court after a person dies. They should also file a certified copy of the Death Certificate at the same time. The nominated Personal Representative should file a Petition for Probate of Will and Appointment of Personal Representative. If there is no Will, somebody must come forward and ask the court to be appointed as Personal Representative. Probate law provides for certain persons to have priority in being appointed, with the person nominated in the Will receiving the highest priority.
The “probate estate” simply refers to any property subject to the authority of the probate court. Assets disposed of outside the probate process are part of the “non-probate estate.”
Probate is conducted by the Court in and for the County in which the decedent resided. If the Estate subject to administration is small, there is a streamlined procedure that can save time and legal fees.
After the document’s genuineness and validity are established, the court issues an order admitting the Will to probate and it is then recorded by the Court Clerk. Usually, this is a routine matter. State law then requires public notice of the probate proceeding by the publication of newspaper ads which give creditors three months to file any claims against the Estate.
Occasionally, however, there might be an objection. For example, somebody might claim that the document being offered to the court is actually a forgery. Or, more commonly, the document being objected to has been revoked by a later Will. Whatever the objection or claim, the objector must bring it to the Judge’s attention.
The Judge also formally appoints the Personal Representative. This appointment confers on him full authority to handle the decedent’s accounts. The Personal Representative is given a certified court document that will be recognized by financial institutions and others, called the “Letters of Administration.”
Once probated, a Will is a public record, and so is the final settlement and inventory of estate property. As such, these papers may be viewed by anyone. This is a fact of great concern to some, but to others, none at all.
THE PROBATE PROCEDURE INVOLVES THREE BASIC STEPS:
- Collection, inventory and appraisal of all assets that are subject to probate;
- Payment of taxes and creditors;
- Formal transfer of estate property according to the Will, or by the laws of intestate succession, if there is no Will.
The surviving spouse and/or children are generally allowed a set-aside under state law, as discussed earlier, whether or not there is a Will. Generally, that comes “off the top” first. Homestead property and certain exempt personal property are also not subject to the claims process, except where there is a mortgage on the homestead property. After that, the order of payment of claims against the estate is set by law. Only after all claims are settled can distribution be made to the heirs.
SELECTION AND DUTIES OF THE PERSONAL REPRESENTATIVE
Your Personal Representative should be a trustworthy person (or institution, such as a bank or law firm) with common sense and good judgment, who will treat everybody fairly. He/she must be ready, willing and able to play referee, if necessary. Certainly, geographical proximity to the probate court and the decedent’s property (especially real estate) should be considered.
The Personal Representative may hire lawyers, accountants and other professionals with estate funds for assistance, but fees and other costs can be saved if the Personal Representative or family members are available and able to do some of the legwork themselves. The Personal Representative should generally not act, however, until the Will is probated, because he has not been officially given authority till then.
All family members should regard the Personal Representative’s job realistically. Yes, it is an honor to be considered worthy of this responsibility. But there is time and work involved. Even though entitled to compensation, most Personal Representatives would agree the position is more of a pain in the neck than anything else, especially if there are any difficulties or disputes. This might be an important point to discuss in advance. Some parents worry that naming one child as Personal Representative would cause hurt feelings among the children not chosen. Realistically, they should be grateful.
If the Personal Representative is also a beneficiary, he cannot give himself preferential treatment. Try to think ahead and not put him/her in a difficult situation. It is essential to family harmony that the Personal Representative not only is fair, but that all beneficiaries recognize this fairness. Most Wills give the Personal Representative very wide discretion in handling property and the affairs of the estate, and the law permits this. But the intention of the Testator in writing the Will, and the desires of the beneficiaries should always be considered.
One of the Personal Representative’s first and most important duties after appointment is to take an inventory of Estate assets. The detail required in the inventory of tangible, household personal property varies, depending largely on its value, and on the distributional scheme. In a large house full of valuable antiques, an item by item professional appraisal is called for, at the estate’s expense, before distribution among suspicious siblings. But why bother, for example, if the contents of a modest home all go to the surviving spouse? In that case, the Personal Representative’s honest, best reasonable estimate would probably be acceptable.
Most simple Wills have a standard clause directing the Personal Representative to pay all debts and taxes. Such a blanket instruction does not oblige the Personal Representative to pay off real estate mortgage loans.
The Personal Representative may sell real estate – only after the legally mandated waiting period – and only if the Will so provides, or gives him discretionary power to sell it (most Wills give this discretion). Usually the Personal Representative may sell personal property any time after his appointment, but may not begin final distribution of property or sale proceeds until after the period for filing claims has passed. He should not sell any property specifically bequeathed or devised, unless that sale is necessary to pay estate debts.
The waiting period before distribution of property is a very practical idea. Creditors of the decedent then have a chance to present their claims. If claims are not made in writing to the Personal Representative within this period they may be barred forever by law. In fairness, the law requires that for such a bar to be effective, the world must have been put on notice of the death. That is why the Personal Representative must publish in the newspaper legal notice that the estate is in probate.
The Personal Representative reviews the claims and supporting proof, pays those he deems valid, and rejects the rest. The Personal Representative may hire an attorney with estate funds for advice, or to defend or settle any claims. Examples of such claims might include a request by the decedent’s associate for repayment of a loan he had made to the decedent. In other cases, someone might demand payment for injuries received in a car accident caused by the decedent a few months before his death. It is better to take care of potential claims right away, rather than have them pop up years later, after the estate’s assets have been distributed.
A rejected claimant then has thirty days to file a lawsuit against the estate. If that time limit expires, the claim is dead. The certainty of that “cut off” is an often-overlooked argument in favor of going through probate.
When all claims, debts and expenses have been paid, the remainder of the property is distributed by the Personal Representative as the Will directs. (At this point, if there is no Will, the Administrator distributes property according to state law, discussed earlier.) The Personal Representative generally has the discretion to distribute the beneficiaries’ shares in cash or in kind, but the Will can specify otherwise. Finally, the Personal Representative or Administrator submits a report or final accounting for approval by the court.
At this time, if not before, beneficiaries or other interested parties (e.g., creditors) can file objections to the final report, and ask that the judge not approve it. A hearing might be necessary to settle the objections. This might happen, for example, if a beneficiary felt he did not, in fact, receive all to which he was entitled under the Will.
The Personal Representative is entitled to reasonable compensation, often limited to a certain percentage (e.g., 3%) of the property in the probate estate. (Extra compensation, related to handling some special matter, may be allowed by the court.) That does not mean the Personal Representative automatically gets that much. The fee taken is usually listed on the final report, and is, therefore, subject to approval by the court. As with anything else, an objection can be raised if the fee appears excessive, considering the time and effort actually expended by the Personal Representative. Professional fees (lawyers, accountants, appraisers) will also be allowed. The Attorney for the estate can charge a percentage of the gross value of the estate for most estates for conducting the Probate. This percentage varies according to State Law. For instance, if a Florida Estate has an inventory value of $200,000.00, the Attorney’s fees would be 3% or $6.000.00, plus costs of about $350.00. On the other hand, a Living Trust can avoid Probate entirely and at a considerable savings.
MORE FACTS ABOUT WILLS AND PROBATE
- A child born after a Will is made receives a share equal to what he/she would have received if the Testator had died without a Will (i.e., intestate) unless: It appears that the omission was intentional, OR the Testator already did have one or more children and left substantially all to the surviving parent of the omitted child.
- Florida law does not allow you to automatically exclude anyone who challenges the Will in court.
- Marriage does not revoke a person’s Will automatically, but the surviving spouse will receive a share of the estate as if the Testator had died intestate. A divorce and final property settlement bar all claims of the divorced survivor to the estate of the ex-spouse, if the couple was married when the Will was executed.
The “joint” bank accounts most people speak of are owned as “Joint Tenants with Right of Survivorship” (JTWROS). Therefore, they do not have to wait for distribution through probate court.
III TRUST BASICS
DEFINITION OF TERMS
A Trust is a creature of the law in which one party – the Trustee – has legal ownership of any form of property that has been transferred to him/her or “it” (e.g., a bank) by the person establishing the Trust. That “establishing” person is called the Grantor. The property is known as the Trust “principal,” or “corpus”. These Trust assets are invested and/or managed for the benefit of one or more beneficiaries. Sometimes, the Grantor also wears the hats of Trustee and beneficiary. Generally, however, if the Grantor is the Trustee, he/she cannot be the only beneficiary.
THE BASIC CONCEPT AND ITS VARIATIONS
Think of a Trust as an empty vessel into which the Grantor pours property. Like an Executor, a Trustee has the highest of legal obligations – a fiduciary duty – to manage the property, and see that it is used only in a manner, and for the purposes established by the Grantor in the Trust document.
Trusts can be “Living”, established during the Grantor’s lifetime, or testamentary, established in a Will. A Living Trust can be revocable, subject to termination or modification at any time by the Grantor for any reason or irrevocable. As for Testamentary Trusts, of course, a deceased Grantor is unable to change the terms of a Trust created under his/her Will, so these Trusts are always irrevocable. (Before death, however, the Grantor is certainly free to change his/her Will, including any Testamentary Trust that is to be created.) If irrevocable, the Grantor is unable – forever – to end the Trust, modify its terms or withdraw assets if plans change, or in an emergency. An irrevocable Trust is an independent entity under the law.
Although an empty Trust can exist, in order to function at all, a Trust must have assets formally transferred to the Trustee, with this title used in the documents of ownership. Even when husband and wife serve as their own Trustees, real estate deeds and financial accounts must be re-titled in order to be owned by the Trust. For a Living Trust, legal title is transferred, during life, to: John and Jane Doe, Trustees of the Doe Family Trust, dated . Financial institutions will also require authorization, in the form of the Trust document, before they will accept instructions from a Trustee.
It is important to note that Testamentary Trusts require that the Will be probated; therefore, the expense of Probate is not avoided. Moreover, these Trusts might then be accountable and have to report to the court, under state law, unlike Living Trusts. These are significant drawbacks, without offsetting advantages. Yet many people choose the Testamentary over the Living Trust, maybe because it is more familiar.
Perhaps, too, the popularity of the Testamentary Trust is due to people’s desire to avoid making any kind of property transfer presently, as should be done if a Living Trust is created. The re-titling of assets into the Trustee’s name, discussed above, does not occur until after death and probate, if the Trust is established in a Will. The same would be true if an asset were transferred to the Trust after the Testator’s death via a “pour over” will.
True, lifetime property transfers into a Living Trust inevitably involve “paper work,” and the process might be a bit discomforting, even if people understand the situation. This sentiment is perfectly reasonable. The “catch,” however, is that a Testamentary Trust only delays the property transfers until somebody else has to bother with them, after your death, and at the expense and delay of probate.0
IV THE BASIC LIVING TRUST
This kind of Trust includes the “one size fits all” model widely touted in books and advertising. These are called “Living Trusts”, just because they are created during lifetime, not by a Will. These Trusts will not save any taxes. Tax avoidance can be accomplished only by more complicated Trust arrangements, presented later.
The basic Living Trust, sometimes called an inter vivos Trust (Latin, for “lifetime”) is revocable. The Grantor initially transfers ownership of assets to the Trust. But the Trust document reserves for the Grantor complete control over everything, including the right to terminate the Trust, during the Grantor’s life.
HOW IT WORKS AFTER DEATH
If there is only one Grantor, the basic Living Trust becomes irrevocable at his death; like a Will, it has become final. If the Grantor has been serving as his/her own Trustee, it is imperative to have an alternate named to handle post-death affairs and property distribution.
The assets are distributed by the Trustee as directed by the Trust, bypassing probate court. Instead of the court order which gives the Personal Representative his authority, the Trustee will use a copy of the death certificate and a certified copy of the Trust document as authorization to act. The Will that should accompany a Living Trust is sometimes called a “pour over” Will, because it “pours over” into the Trust any assets that have not already been formally transferred to it, or have been acquired in an individual name after the Living Trust was created. A Will is also still necessary to name a guardian for minor children. This should not be done any other way.
In the common case of a married couple with children, upon the death of the first spouse, the Trust can be set up to remain revocable. Usually, the survivor stays in control as sole Trustee. (But it is also important to have an alternate Trustee already in place when the second parent dies. Otherwise, your heirs might have to go to court to have a Trustee appointed.)
When the survivor dies, there are innumerable possible plans for the disposition of Trust assets. Suffice it to say that under a Trust, you can do anything that you can do with a Will, and do it more quickly and less expensively.
CHOOSING THE APPROPRIATE TRUSTEE ARRANGEMENT
This decision deserves more thought than it often receives. Your lawyer can draft a document for you with almost any kind of conditions to guide, dictate or limit the use of Trust funds, but YOU need to find a party willing and competent to be your Trustee. There are two very different aspects to any Trustee’s job – managing the assets wisely from an investment point of view, and applying the funds as called for by the Trust.
In most families with Living Trusts, the parents initially choose to be their own co-Trustees. This can work just fine. Frequently, Trust assets are uncomplicated, or consist largely of a family business. They are long term – not actively bought and sold. Ongoing professional investment advice might be unnecessary. If desired, the parents can consult a financial advisor initially, with periodic reviews. This arrangement gives the parents maximum, “hands on” control over the appropriate use of funds to meet the family’s needs.
In many situations, however, the parents (or the Grantor of any Trust, for that matter) are uninterested or unable to continue managing their assets after transferring them to a Trust. They realize that, with a revocable Living Trust, using another as Trustee does not mean loss of ultimate control. The Grantor can issue orders to, or fire, the Trustee, if necessary.
If the Grantors are not to be their own Trustees, they obviously want a Trustee with a similar investment philosophy, as well as the necessary experience to handle the amount and kind of assets placed in Trust. Of course, the successor Trustee must be equally qualified. (Unless the Grantors live forever, a back-up Trustee will ultimately be needed, even if the Grantors serve that role initially.)
In most situations, an adult child is well suited for the role of Trustee, or alternate. In some situations, the Grantors may want to appoint two persons to work together as co-Trustees. If a child is ruled out, and there are no other appropriate trusted friends or family members, an institutional Trustee should be considered. Generally, these are banks, Trust companies or a law firm. Institutional Trustees do charge a fee for their services.