You may have heard about the horrors of probate, but in truth, probate has gotten an undeservedly bad reputation, especially in recent years. If you bypass probate, your estate will go to your beneficiaries without any court proceeding, and you may save a certain amount of time and expenses. However, there is usually little reason for most people to avoid probate today. States continue to revise their probate laws, making them more consumer friendly, particularly for small estates. For most modestly sized estates, the probate process now costs little. In fact, there are some good reasons to distribute your property by will. Decisions are binding and have legal finality once your will is probated. Creditors who fail to file claims against your estate within a specific amount of time — usually six months after receiving notice — are out of luck.
However, some major drawbacks to probate do exist, including the time it can take. The process averages six to nine months to complete but may take up to two years or more for some complex estates, tying up the assets that your family may need immediately. Also, for a larger estate, the cost may be as high as 5 percent of the estate’s value.
If you feel that the size and complexity of your estate warrant exploring alternatives to probate, you may want to consider one or more of the following:
A trust is like a basket that holds your assets. A revocable living trust (also known as an inter vivos trust) is flexible enough to include almost any asset that you own. While you are living, you can act as the trustee and can add or remove property as you see fit. You can also terminate or amend the trust at any time. When you die, your successor trustee distributes the trust assets to the trust beneficiaries, according to the trust agreement. Trusts require a significant amount of paperwork, are costly to create and maintain, and usually require a lawyer to draw up the trust documents. Also, a revocable living trust does not shield your estate from your creditors, creditors of your estate, or estate taxes.
Assets owned as joint tenancy with rights of survivorship pass automatically to the surviving joint owner(s) at your death. To establish joint ownership, you may need to record new real estate deeds, titles for your car or boat, stock and bond certificates, statements of account for mutual funds, registration cards for your bank accounts, and other assets. This costs little and usually does not require a lawyer. Some drawbacks are that the joint owner has immediate access to your property, and your joint owner’s creditors may reach the jointly held property.
Assets pass outside of probate if you establish payable-on-death provisions for your savings accounts and CDs. Ask your agent to set up transfer-on-death provisions for brokerage accounts containing stocks, bonds, or mutual funds. Your retirement accounts, such as profit-sharing plans, 401(k)s, and IRAs can also pass along to designated beneficiaries. Finally, life insurance death proceeds will avoid probate, provided you name a beneficiary other than your estate.
Another way to avoid probate is to simply give away your property to your beneficiaries while you are living. Carefully planned gifting can also free those assets from gift and estate taxes. The following are usually nontaxable gifts:
If your estate is small enough to meet state guidelines, your beneficiaries can simply claim your assets by presenting a notarized affidavit. About half of the states set a limit of $10,000 to $20,000 of the qualified estate value; most of the other states allow as much as $100,000. You can generally deduct estate expenses from your qualified estate value, such as taxes, debts, loans, or family allowance payments, plus the value of any other assets that pass outside probate (e.g., a home jointly owned with a spouse). Real estate is usually disqualified from claims by affidavit. Therefore, your estate may qualify even if it is fairly large. Expect the process to take 30 to 45 days. Another method is for your executor to file for summary, or simplified probate. This streamlined process is generally a paper filing only, requiring no attorney. States vary widely regarding the allowable size of an estate for simplified probate.
By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you’ll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you’ll need to use more sophisticated techniques in your estate plan, such as a trust.To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.
Since incapacity can strike anyone at anytime, all adults over 18 should consider having:
If you’re young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don’t, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).
You’ve committed to a life partner but aren’t legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you may consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.
For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. For decedents dying in 2011 and later years, the executor of a deceased spouse’s estate can transfer any unused estate tax exclusion amount to the surviving spouse without such planning.
You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die’s estate tax exclusion, and a credit shelter trust created at the first spouse’s death may still be advantageous for several reasons:
Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $155,000 annual exclusion, for 2019, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.
If you’re married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.
You may also want to consult an attorney about establishing a trust to manage your children’s assets in the event that both you and your spouse die at the same time.
You may also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.
If you’re in your 30s, you may be feeling comfortable. You’ve accumulated some wealth and you’re thinking about retirement. Here’s where estate planning overlaps with retirement planning. It’s just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).
Depending on the size of your estate, you may need to be concerned about estate taxes.
For 2019, $11,400,000 is effectively excluded from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.
Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations). For 2019, the GST tax exemption is also $11,400,000, and the top tax rate is 40 percent.
The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half.
Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.
If you’re elderly or ill, you’ll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.
Wills and trusts are both invaluable estate planning documents but they serve very different functions and are used at different times. Used in combination, they can help provide a comprehensive estate plan and both should be addressed when planning for retirement.
A will goes into effect after an individual has died. It delineates the distribution of assets according to the testator’s wishes and typically designates an executor who will ensure that the distribution is correctly made.
The only sole and separate property can be included in a will; property that is jointly held or held in trust cannot be included in a will. Wills can detail items such as the testator’s funeral arrangements, guardianship of minor children, managers for assets belonging to minors, and debt forgiveness; these items cannot be included in a trust.
A will must pass through probate after the testator’s death. This ensures that:
Some states recognize a holographic will, some don’t, and a will doesn’t have to be notarized in all states. Part of the probate process is determining that the will is valid, particularly if it has been privately kept. Some states allow a will to be filed prior to death but won’t open probate until after the testator has died.
After the will has been probated, it then becomes a matter of public record and can be accessed by anyone. Probate can be expensive and can become a protracted procedure; it isn’t necessary for all estates. Depending on the estate, inheritance taxes can be steep for assets inherited from a will; an estate attorney can provide advice on the best methods to reduce the tax liability from a sizeable estate.
A trust is a legal instrument that enables an entity to hold title to assets that belong to another; title to the assets become the property of the trust. The entity can be an individual, a financial institution, a law firm, or other legal entity and is designated as the trustee for the trust. Some trusts appoint a successor trustee to take over in the event the trustee becomes incapacitated.
A trust has two types of beneficiaries; the primary beneficiaries receive income or benefits during their lifetime, the other receives income or benefits after the death of the first set of beneficiaries.
Unlike a will, a trust becomes effective as soon as it’s created. A trust can be revocable or irrevocable; the type used will depend on the individual estate and circumstances. A revocable trust can be changed until the trustor dies. An irrevocable trust can’t be changed after it’s become finalized, it’s a complex document that needs to be created by an attorney who specializes in them.
Some items that can’t be included in a will can be included in a trust, such as jointly held property and life insurance policies. A trust can provide for physical and/or mental incapacitation or other disability, which can eliminate the need for a court-appointed conservator. A trust is often used as a tax shelter for the beneficiaries, which isn’t possible with a will.
Unlike a will, a trust is a private document, so its contents aren’t available to the general public, either before or after the death of the trustor. Since a Trust doesn’t pass through probate, there are a savings of both time and money.
When planning for retirement, both types of these documents should be included in most estates. Both serve a valuable function and can be most effective when used together.