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Preparing for probate

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Anyone with property has an estate. The point of probate is to legally clarify the ownership of that property in order to distribute the title of the property when you die. Any asset that has a document to establish the identity of the owner (title to a car, deed to a house, account ownership papers for bank accounts, application for life insurance policies etc.), but does not establish who should inherit the asset upon death of the owner of the asset is defined as a probate asset.  A title to a car; a bank account without a payable on death designation; or a deed to a house naming the husband and wife as owners are all examples of probate assets.

In contrast, a life insurance policy with a beneficiary designation, a deed with survivorship language, and a bank account with payable on death designation are all good examples of non-probate assets.

Why is it important to understand what an estate is? Because, if an estate exists, when someone dies—with some exceptions—their estate will have to go through probate regardless of whether or not you have a Will.

Categories of property:

• The probate estate includes items named in a Will or if the person dies intestate (without a Will) according to state law.
• A trust estate includes all the property placed in a trust through a living trust.
• A taxable estate includes those assets that can be taxed by the state and federal government.

Most states allow a certain amount of property to either go free of probate or through a simplified probate procedure. Whether or not probate is necessary depends on the property: what property is owned and the laws of the state where the decedent held property and/or died. For instance, in Washington, estates generally do not need to go through probate if they are worth less than $100,000.  One way to avoid probate then is to create a trust, which is recognized as a legal entity under law.  The next thing to do is to transfer all probate assets out to the trust.  This way, when a person dies it can be said that the person died with less than $100,000 to his/her name and therefore a probate is not necessary.

Probate is required if no other name is attached to property or to remove the decedent’s name from a property and transfer his or her ownership into the names of the beneficiary.  Most people find the idea of probate scary, but it’s really just an orderly way to pay off your debts and taxes before distributing your remaining assets to your heirs.  Still there are some situations when you will want to avoid probate, for instance:

  • When the cost of probate is a percentage of your gross estate.  The cost of probate in California is 5 percent of the gross value of the estate.  Even a modest estate can end up paying tens of thousands of dollars in California, whereas in the state of Washington, most estates settle for somewhere between $3,000 and $5,000.
  • When the estate is valued at more than $2.012 million (in the state of Washington).  Some level of planning is required for estates that exceed $2.012 million to avoid any incidence of state estate taxes.
  • If you own property in more than one state.  For each state that you own property in, your heirs will have to pay estate taxes.  The costs in time and resources associated with multiple probate processes may make it worthwhile to avoid probate.
  • Having a trust-based plan.   A trust-based plan rather than one based on a Will is a good way to title assets you do not wish to co-mingle with the assets of a spouse if you are in a second (or more) marriage situation.
  • If privacy is paramount.  You may want privacy if your heirs are likely to feud or if you wish to avoid letting others know who the members of your family are or who you loved.  One way that a Will differs from a Trust is that a Will is made public (and therefore available to dispute) and a Trust is not.

There are times when the complications that come with trusts limits the benefits.  Here are some complications with trusts:

  • They must be maintained.  What many people do not understand is that a trust must be funded. Funding a trust is taking the time to transfer each probate asset (bank account, car title, deed to the house and other real property etc.) and getting the ownership changed to the trust.  If the trust is created but not funded, you will not only have to deal with the trust at the end of the day, but also have to go through a probate process if you died owning more than $100,000 in probate assets.  It costs time and money to get the trust funded.  You can always fund the trust yourself and save costs, but it will still cost you time.
  • Refinancing can add additional costs.  Refinancing companies require you to first take the property out of the trust before they will refinance the house.  Homeowners sometimes aren’t even aware that it happened as the paperwork is included with all the refinancing paperwork.  After a refinance, if you want to keep your trust current you will then have to have a new deed prepared to put the house back in the trust.
  • Safe Harbor Trusts in Living Trusts can be disallowed.  A Safe Harbor Trust provides a means to protect your assets from uncovered medical and long term care costs by accessing Medicaid benefits.  But, federal and state statutes that enable the creation of the trust require that the Safe Harbor Trust be created inside of a ‘Will.’  This means that Safe Harbor Trusts created inside Living Trusts could theoretically be set aside by Medicaid (although this has not happened yet).
  • They are expensive to create.  Finally, if a trust is created by competent counsel and not a trust mill, it will be more expensive than creating a Will-based plan.  Essentially, you will be prepaying part of the probate costs. 

If your loved one’s property must go through probate, these are the steps for doing so:

  • Inventory the assets-It makes sense that if assets are to be distributed, first someone must know what assets exist. A list must be made of everything owned by the decedent. Everything means things like bank accounts, personal property, debts, credit cards, medical bills, funeral expenses investments, etc. The inventory must also include how that property was owned. Then the assets must be categorized as to whether they are in the probate estate or distributed outside the probate estate. Property in a trust is not part of the probate estate but still must be managed.
    • Locate the Will if it exists.
    • Go to court-The probate court determines the validity of the Will, who will be in charge of settling the affairs, identifies heirs, inventories the probate assets, determines claims against the estate, distributes the remaining assets and appoints the executor.
    • The executor must inventory the assets, have them appraised, pay taxes and bills, publish notices, prepare the final income tax return, document any major financial gifts and file inventories and accountings with the court.
    • Follow a letter of instruction-This informal document may be attached to at Will and will provide information about the funeral. The second part of the letter involves how to divide items with little to no monetary value such as collections, pictures, jewelry or items passed down from a previous generation.
    • Transfer probate assets to beneficiaries.
  • Document major financial gifts. Gifts are taxable unless they are:
    • Not more than the annual exclusion for the calendar year ($14,000 in 2014).
    • Tuition or medical expenses you pay for someone (the educational and medical exclusions).
    • Gifts to your spouse.
    • Gifts to a political organization for its use.
  • Hire a lawyer. The major expenses in settling an estate are for lawyer, real estate agent, appraiser, and accountant fees. In the state of Washington, if the value of decedent’s entire estate does not exceed $100,000, then personal property in the estate may pass to its successors by Affidavit or Declaration. In such a case, a lawyer isn’t needed but even some small estates may benefit from consulting with an experienced attorney.

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