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The estate settlement process takes the capital you've built during your lifetime and distributes it to the people you want to enjoy it. There are four general ways your property could be distributed when you die: through the probate process; through ownership designations; through contract designations; and with a trust(s). These methods are very important because the way your assets are distributed affects how and when others receive their share of your estate.

 

Probate

Property you own alone is distributed through probate. Probate is a court supervised process in which your personal representative — or executor — gathers all your property, pays outstanding debts and claims, and distributes the remaining assets. Who receives the leftover property? That depends on whether or not you have a valid will. If you do not have a will, your state's intestacy laws determine who gets your property and when they receive it.

The major drawback to intestacy is that the estate's distribution plan will probably not direct your property to those you want to receive it. Intestacy can be described as "one size fits all." Because you cannot mold the state laws to meet your needs, intestacy has some important disadvantages:

Probate has several disadvantages, however….

You can avoid probate in three ways: through certain property ownership such as jointly owned property; through a contractual arrangement like life insurance that is paid to a named beneficiary; and through a trust such as a revocable living trust.

 

Property Ownership

Assets which you own with another may be titled as joint tenancy with right of survivorship. This means that upon the death of either of you, the survivor becomes the sole owner of the property through this right of survivorship. These assets never enter the probate process.

Joint tenancy is an effective way to avoid the costs and delays of probate. However, most legal experts agree that it is not a substitute for a will. Because joint tenancy does not reduce taxes, it may not make sense for all your property, and since it does not name a personal representative, you still need a will to provide a complete estate plan.

Contractual Payments

Some of your assets will pass to your family by contract and are not subject to probate. A life insurance death benefit is an example of an asset that passes in this way. Annuities, IRA's, 401(k)'s, SEP's. and SIMPLE's also avoid probate when you name a beneficiary other than your estate. This method of distribution has three advantages.

On the other hand, if federal estate taxes are a concern, you may need to review these beneficiary arrangements and update them.

 

Trusts

You can also control the distribution of your property by creating trusts which manage your assets and distribute them at times you designate. A separate legal entity, a trust is created by a legal document — the trust agreement — which is drafted by an attorney and signed by you. This agreement transfers certain assets to your trustee who holds and manages them as you direct in the agreement. At a specific time, or upon the happening of an event, the trustee distributes the assets to the beneficiaries you have named in the agreement.

Trusts are created for a variety of reasons: to save income and/or estate taxes, to avoid probate, to provide professional management of assets, and to delay the distribution of assets until the beneficiaries can effectively manage the assets themselves. The trustee must handle the property in accordance with your directions, as spelled out in the trust agreement, and must use his/her best judgment to protect the beneficiaries' interests.

You can create a trust while you are alive or at your death through your will. There are a variety of trusts available to meet your needs. Some trusts can't be changed once they've been created. Others can be changed while you are still alive — a popular trust today used by many to avoid probate is the revocable living trust. At your death, such trusts become fixed and the assets in them are removed from the probate process. In this way, you can retain privacy and efficiency in finalizing your affairs.

 

Minimizing Death Taxes

The federal estate tax is levied on property transferred at death. For many people, this is the largest single expense of dying. Recent changes in the federal estate tax laws allow many Americans to avoid this tax, if they plan properly. The law allows each person to transfer a certain amount of property — the "exemption amount" — estate tax-free. The federal estate tax has another tax saving feature: you do not have to pay federal estate tax on property left to your spouse. This so-called "marital deduction" allows you to postpone the estate tax until your spouse's death. The remaining assets over the exemption amount will be taxed at that time. You can save a great deal of taxes if you take advantage of these two tax breaks. Many states also have state death taxes. Ask us to determine whether these estate taxes apply to you.

 

What a Personal Representative (Executor) Does

Your personal representative — formerly referred to as the executor of your estate — will collect and protect your assets, pay the debts of your estate, and distribute what's left to your heirs. This sounds simple, but the entire process can entail a number of separate steps. The first thing your personal representative must do is locate and read your will. This should be easy if you've completed the Document Locater in this Legacy Locater. Next your personal representative will take your will to the Probate Court and attempt to prove the will valid.

Your personal representative's most challenging duties will involve collecting and preserving your assets in order to locate and inventory all your assets. His or her job will be easier if you've filled out the asset information in this Legacy Locater. Your personal representative will take title of all bank accounts and securities in the name of your estate. Your personal representative will also have to set up a checking account and record system. All money due your estate must be collected. This will include making insurance claims, filing claims for veteran benefits and Social Security benefits, and similar items. The Sample Letters in this Legacy Locater will help your personal representative with this process. Responsible for protecting your assets, your personal representative also must obtain adequate insurance coverage and maintain your property.

Your personal representative must also pay off all estate debts. Your creditors will have from three to 12 months to make their claims depending on your state's law. If your estate is large enough, a federal estate tax will be payable. Many states also have an inheritance or state death tax. The expenses of probating and administering your estate must also be paid. Your personal representative will also have to file income tax returns for both you and your estate. All of this will cost money. It may be necessary to liquidate estate assets to pay for all of these items. After all the debts have been paid, your personal representative will distribute whatever remains and make a final accounting to the court. At this point, if everything is in order, your personal representative will be discharged. Since probate can be a long, complex, and demanding process, you should think carefully about naming a qualified personal representative.

 

Choosing a Personal Representative

First decide whether to use a corporate personal representative or an individual. A corporate personal representative is familiar with the probate process, can handle the many complexities of the probate process properly and has perpetual existence. That is, unlike an individual, it won't get sick; it won't die; it won't be on vacation when a death occurs. If an individual personal representative dies or becomes seriously ill during probate, the process could be seriously disrupted. Finally, don't forget that a personal representative can be held liable to the heirs for mistakes. It may be inadvisable to subject your family members to liability.

But before naming a corporate personal representative, be sure the particular trust company or bank is willing to administer your estate. For example, some trust departments will not administer an estate unless it exceeds a certain size. In addition, your will might contain a provision, such as retaining a family business during the probate process, that a particular corporate trustee would not be willing to administer. Also, check out the corporate personal representative's fee structure and investment track record. Finally, try to determine how sensitive the trust company will be to your family's needs.

Despite the many advantages of choosing a corporate personal representative, many people still name family members as personal representatives. Some people feel that a family member may be more sensitive to the needs of the family than a corporate trustee and family members often serve without compensation. A family member, though, will almost certainly have to hire an attorney to handle the probate process, so the actual savings may be less than expected. Before naming a family member as your personal representative, ask yourself: Is the family member in good health? Is the family member responsible? Does the family member have sufficient time to handle estate affairs? Will other family members be offended that they were not named?

Sometimes attorneys are named as personal representatives. To avoid misunderstandings, decide beforehand whether the attorney or accountant will receive compensation both for being the personal representative and as the attorney or accountant for the estate.

Planning for Business Interests

If you have an interest in a sole-proprietorship, partnership, limited liability company, or closely held corporation, you have an immediate need for estate planning. Your business interest is probably the largest, most important asset you own. If you want your family to continue the business, three conditions should be met. First, there must be someone with experience who can profitably run the business. Second, your family must be able to get a steady income out of the business. Third, your surviving partners and employees must be willing to cooperate with your family. Advance planning, while you are alive, is the best way to meet these requirements. If you are concerned about treating your children equally, planning can help you accomplish this objective even though one or more of them is not active in the business.

If even one of these three conditions can't be met, your family may be better off with cash instead of the business. Unfortunately, if they decide to sell after you're gone, they may have difficulty getting a fair price.  The business may not be as valuable without you. In addition, potential buyers may know your family has to sell; thus, they may offer less than the business' real worth.

If you think your family will be better off without the business, planning during your lifetime can help them get the most out of it. A buy-sell agreement, which you can make during your lifetime with a key employee, your business partners, or outsiders, is the best way to guarantee your family gets a fair price for what you've worked so hard to build. Such an agreement establishes the price and terms on which your business interest could be sold at your death or retirement. We can help you structure such an agreement to best meet your needs.

Flexibility

Estate plans must be flexible. Your plan should carry out your wishes for the property you own today. As time passes, however, your personal circumstances and objectives will probably change. Your children will grow up and have children of their own. You may have different needs than you had when your plans were first drafted. State and federal laws affecting your estate plan may change. You may move to another state which has different laws. Thus, you must regularly review your estate plan and update it to keep pace with your changing needs and changing laws. Contact us to make sure your estate plan is up-to-date.

Please consult an advisor for legal advice or contact us if you would like to find out more information about relevant estate planning for you and your family.

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