Common estate planning strategies – Estate Planning – The Realities of Probate, II

February 6th, 2008

Tip! But estate planning is more than a method to avoid or reduce estate taxes. Many young families might be surprised to learn they should think about estate planning now.

The idea of having your will or estate go through “probate” conjures up visions of money that should have gone to your heirs being peeled off and divided up for the state’s administrative services in seeing to your last wishes. In addition, the process of probating a will or estate can be a lengthy one, particularly trying for a spouse or children who have to wait until it is finished to gain clear title to a home or access to bank accounts.

Tip! Meeting estate planning objectives. If an estate is going to be big enough to tax, a will is just the beginning.

Consequently, attorneys and financial planners often encourage people to structure their estates in ways that will avoid probate. That may or may not be beneficial, given that probate court systems in many states have been restructured in recent years and there are only certain types of assets that aren’t required to be probated.

What is probate and how does it work? There are actually two facets to the process commonly referred to as “probate”. When a person dies, his/her will must go through a formal process of being finalized. The probate court, depending on the state, determines that the will is your last statement confirming the disposition of your estate and officially appoints the person or business that you have already chosen to administer the will (your executor). In cases where a person dies intestate (without a will), the state court may appoint an estate executor, generally an attorney or agency that specializes in such matters.

Tip! Many parents use estate planning to try to rein in their out-of-control children. They may provide for a bequest that starts at an age when the child has hopefully matured, say 35.

In addition to the formalities, the term probate is also applied to the whole process of gathering and paying any final bills and taxes that are filed against the estate, as well as distributing the remaining assets to the heirs. The executor is supervised, or at least reports to, the court, and may come under close scrutiny by the will’s beneficiaries. Because the executor performs a number of tasks that can be technically difficult and time consuming, he/she is also entitled to be paid a reasonable amount for services rendered. The actual amount of compensation may be provided for in the will, or could be a percentage established by the particular state’s probate laws. In either case, it does constitute a certain portion of a person’s net assets that subtracts from the amount eventually dispensed to the heir(s).

There are certain assets that are exempt from probate. Those include life insurance or retirement plans that pass to a specific, previously named beneficiary and real estate held jointly by the deceased and the beneficiary. In addition, bank accounts or brokerage accounts that are jointly held and which specify the right of survivorship do not have to be probated.

A living trust, which passes property to your heirs prior to your death is often marketed as a way to avoid probate. However, that assertion may not be entirely true. It is only rarely that some part of a living trust does not have to go through probate, despite the original intentions. Any property that has not been transferred to others prior to your death is generally willed to the trust itself, then transferred to the heirs via a trustee who very probably charges fees, after he or she pays any outstanding taxes from the estate. It is the very process of settling those same taxes and administrative details that can delay and extend the process of probate. Thus, depending on the state where the property is being dispersed and the extent of the estate, the actual time frame and cost of probate can potentially be less than those involved in the distribution of a living trust.

Probate, therefore, is generally a necessary court procedure through which a person’s final will is confirmed and the proceeds from it are distributed. Because states have been working toward simplifying the procedures involved in probate, it is not something that must necessarily be avoided at all costs.

Tip! Another reason for estate planning through a will is to appoint guardians for minor children or disabled relatives you are now caring for. If you are leaving a bequest in your will or the proceeds of an insurance policy (which is generally not part of your estate) to a minor or person unable to look after his own affairs, you also need to appoint someone to manage, conserve, invest and dole out this money for the care of the minor or incapacitated person.

About Ronald E. Hudkins

Ronald Hudkins is a retired U.S. Army Military Police member that was assigned as a staff researcher. He has coordinated with military and criminal investigators, set on court marshals and worked closely with the Staff Judge Advocate Generals Office (JAG). He has a keen sense of legal matters – their interpretation, initiatives and guidelines. For imperative financial planning needs he suggests his book “Asset Protection and Estate Planning for All Ages.” Additionally, he offers a Free Newsletter, Articles and Financial and Tax Newsfeed at his web site: http://www.AssetProtectNow.com

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