Questions & Answers

Probate

1. What exactly is probate?
2. Are there assets that are not subject to probate?
3. Why is it better to use a Trust to avoid probate rather than a Survivorship feature?
4. Is there a minimum amount of assets that escape probate?
5. Are there any situations where probate may be desirable?

Titling Assets

1. My home is titled in my name and my spouse’s as “Joint Tenants with Rights of Survivorship”. Does the home have to go through probate upon the death of my spouse or me?
2. Is there an advantage to taking title to our home as “Community Property with Rights of Survivorship” instead of “Joint Tenants with rights of Survivorship”?
3. I own my home and accounts as a single individual. Should I add one of my children to the deed or account as “Joint Tenants with Rights of Survivorship” to avoid probate of the property upon my death?
4. I have a valid Will leaving everything to my children. My spouse and I own our home as Joint Tenants WROS. In addition, I have named my spouse as the beneficiary of my IRA account and my life insurance benefits. What controls the distribution of these assets upon my death?

Creating and Funding a Trust

1. Why do I need to create a trust?
2. What does “funding a trust,” mean?
3. If I put my assets in the trust do I lose control of them?
4. What assets do I need to re-title to my trust?
5. If I create a trust do I have to file a tax return for the trust?

Trust Administration

1. If I have a joint Revocable Trust established with my spouse, and she dies, and everything in the Trust passes to me, do I still need to talk to a lawyer?
2. Why do most estate lawyers require all assets to be appraised and fair market value determined when someone dies?
3. What is the most critical step in a Trust administration process?
4. As a Surviving Spouse, what restrictions, if any, are placed on me if I had a joint Trust with my spouse and that spouse passes away?
5. What are some of the most common mistakes with respect to implementing a Revocable Trust?
6. What if I have a Trust, and accidentally failed to transfer a few of the assets to the Trust?

 

Probate

1. What exactly is probate?

A. Probate is a court proceeding in the county in which the decedent died. It is the legal process by which assets are properly passed from a decedent to the surviving heirs. Assets that have titles must go through probate if they were titled solely in the name of the decedent, without a Trust and without a Survivorship feature or a beneficiary designation. When the decedent dies, the “chain of title” is broken. The chain is reconnected by the probate court and the court issues new titles. Before the probate court passes title of the assets to the heirs, it wants to insure that all creditors have been paid, taxes have been paid and that all disputes are settled. The major drawback to probate is the time involved, usually 6 months to a year, and the expense (mostly attorneys fees.)

2. Are there assets that are not subject to probate?

A. Yes. As mentioned above, probate can be avoided with a Survivorship feature in the deed or title to the assets. Also, many assets allow a beneficiary designation such as life insurance, annuities and retirement assets such as IRAs, 401ks, etc. A Revocable Trust is perhaps the best way to avoid probate.

3. Why is it better to use a Trust to avoid probate rather than a Survivorship feature?

A. A Trust is better than a survivorship feature for many reasons. First, in most cases, it is unwise to create a joint tenancy with your children. Furthermore, you are more likely to get a full step up in cost basis thru a trust whereas you may only get a half step up in basis with a survivorship feature. Furthermore, a survivorship feature gives the assets outright to the heirs, without any restrictions where as a trust allows you greater control of the asset beyond your grave by allowing you to place some restrictions on the heirs.

4. Is there a minimum amount of assets that escape probate?

A. Yes. In most states, there are statutes that allow the executor (personal representative) of the estate to collect the asset without probate by completing an affidavit and perhaps filing it with the probate court. In Arizona, the de minimus amount is $50,000 of personal property (such as cars, bank accounts, stocks, bonds, etc) and $50,000 of net equity in real estate.

5. Are there any situations where probate may be desirable?

A. Yes. In situations where the decedent may have many creditors, especially potentially unknown creditors, the probate allows a process where these creditors may be cut off if they don’t present their claims in a timely matter (usually 4 months.) Absent of probate, potential creditors may come forward and present claims several years after the death of the decedent.

Titling Assets

1. My home is titled in my name and my spouse’s as “Joint Tenants with Rights of Survivorship”. Does the home have to go through probate upon the death of my spouse or me?

A. No. Assets titled as Joint Tenants “with rights of survivorship” will pass automatically to the remaining joint owner upon death. Upon the death of the remaining spouse, who now owns the property as a single individual, a probate will be necessary to transfer title to beneficiaries named in the surviving spouse’s Will.

2. Is there an advantage to taking title to our home as “Community Property with Rights of Survivorship” instead of “Joint Tenants with rights of Survivorship”?

A. Yes. Upon the death of the first spouse, property held as Joint Tenants WROS will receive a “step-up in basis” on ½ of the value of the property. This means that upon the sale of the property by the surviving spouse, capital gains tax will be paid only on the surviving spouse’s 1/2. The deceased spouse’s one-half received a new cost basis reflecting the value upon date of death. If the property is titled as “Community Property WROS”, the entire property will receive a step-up in cost basis as of the date of death of the deceased spouse. This means the surviving spouse can sell the property, eliminating any capital gains.

3. I own my home and accounts as a single individual. Should I add one of my children to the deed or account as “Joint Tenants with Rights of Survivorship” to avoid probate of the property upon my death?

A. No. It is not a good idea to add a family member, other than a spouse, as a joint owner simply to avoid probate. By adding a child as a joint owner, you are putting the property at risk to claims by creditors. If the child is involved in a lawsuit, car accident, divorce, etc., your assets may be at risk. A better strategy is to execute a new deed, adding the child(ren) as a beneficiary of the real property. Upon death the property will pass automatically to the beneficiary named on the deed, much like a life insurance policy. Accounts can add a “Paid On Death (P.O.D.)” designation to the account, again automatically transferring the account upon death to the named beneficiary.

4. I have a valid Will leaving everything to my children. My spouse and I own our home as Joint Tenants WROS. In addition, I have named my spouse as the beneficiary of my IRA account and my life insurance benefits. What controls the distribution of these assets upon my death?

A. Upon your death, the real property will pass automatically to your spouse as the joint owner, with rights of survivorship. Also, the beneficiary designation on your IRA and life insurance will trump the Will. In effect, even though the children are named as the beneficiaries of your Will, they will not receive any of the assets. Only assets titled in your name alone, with no named beneficiary, or your “estate” named as the beneficiary, will be covered under the Will and will pass to the beneficiaries named in your Will.

Creating and Funding a Trust

1. Why do I need to create a trust?

A. There are several advantages to creating a trust.

a. A trust avoids probate for assets in the trust.
b. Capital gains tax savings – “stepped up basis” for married couples.
c. Estate tax savings – provides two federal exemptions for married couples.
d. It avoids the necessity of a conservatorship.
e. Gives you greater control over the assets after your death.
f. It gives you complete privacy.

2. What does “funding a trust,” mean?

A. Once a trust is created, you must place your assets into the trust in order for it to control those assets. Changing the title of the asset or designating the trust as a beneficiary puts it into the trust.

3. If I put my assets in the trust do I lose control of them?

A. No. The assets that are placed inside a trust are controlled by the Trustee of the trust. Typically the creators of the trust are Trustees.

4. What assets do I need to re-title to my trust?

A. What assets go into a trust is determined by the particular circumstances of each client. Typically Non-Qualified assets will be put in the trust and Qualified assets are not. Some Non qualified assets are real estate, bank accounts, brokerage accounts and life insurance policies. Some qualified assets are 401k’s, 403b’s and IRA’s.

5. If I create a trust do I have to file a tax return for the trust?

A. No. A Revocable living trust does not file a tax return, as long as the Trustor(s) serve as Trustee. It is an extension of the trustors in that any income produced by trust assets is reported on the trustor’s personal tax returns.

Trust Administration

1. If I have a joint Revocable Trust established with my spouse, and she dies, and everything in the Trust passes to me, do I still need to talk to a lawyer?

A. Generally yes. Even though the assets in the Trust will automatically pass to the Surviving Spouse without a Probate, there are still several issues that should be discussed with the lawyer. Some of these issues may include IRA rollover, capital gain issues and stepped up cost basis, creditor claims, changes to the estate plan that should be considered, etc. An hour or so with the estate lawyer could save thousands of tax dollars and possibly some headache.

2. Why do most estate lawyers require all assets to be appraised and fair market value determined when someone dies?

A. There is a huge advantage to have assets appraised when someone passes. The Surviving Spouse is entitled to a “stepped up” cost basis in all of the assets. The cost basis in an asset is usually the purchase price. However, when someone dies, the IRS allows the surviving heirs to receive a new cost basis equal to the fair market value of the asset at the time of the death of the decedent. Second, there is also a need to determine the fair market value of the entire estate to see if Federal Estate Taxes will be an issue. Because of a rising Estate Tax Exemption, in most cases the estate will be well below these thresholds and an estate tax return will not be required.

3. What is the most critical step in a Trust administration process?

A. Probably the most critical step in the Trust administration process is to prepare a complete inventory of the estate to determine the fair market value of all assets and to determine exactly how each asset was titled. Fair market value must be determined for the tax reasons discussed above. The titles must be determined to see if a probate will be required. Assets held inside the Trust, under a Right of Survivorship feature or with a Beneficiary Designation will not be required to go thru probate. However, assets in the name of the decedent alone may trigger a probate if the total value of such assets is over $50,000.

4. As a Surviving Spouse, what restrictions, if any, are placed on me if I had a joint Trust with my spouse and that spouse passes away?

A. That depends on how the Trust was drafted. In most cases, especially when all of the children are common to both spouses, there are no restrictions placed on the Survivor. This means that the estate plan continues to be revocable and amendable in the hands of the Survivor. However, it is possible to draft a Trust to put some restrictions on the Surviving Spouse. This is particularly common in situations where each spouse had children from a prior marriage. In such cases, the Trust can be drafted to provide some benefit to the Surviving Spouse, yet protect the estate for the children of the prior marriage.

5. What are some of the most common mistakes with respect to implementing a Revocable Trust?

A. Probably the most common mistake is the failure to properly “fund” the Trust. That means that the clients failed to retitle the assets in the name of the Trust. Another common mistake is the failure to properly consider the role and responsibility of the Successor Trustee and choosing someone who is not properly trained. Another common mistake is to have a Trust that may fit the needs of someone else, but not your situation. It is very dangerous to have “one Trust fit all”. That is why it is important that your Trust be properly drafted to fit your own situation.

6. What if I have a Trust, and accidentally failed to transfer a few of the assets to the Trust?

A. In most cases, the client has a Pour-Over Will as a companion document to the
Trust. This means that the assets not inside the Trust, will end up there.
However, the real question is whether or not those assets will go thru probate.
Most states have statutes to cover a “small administration”. This means, that if the total assets left out were below a certain threshold, they can still be transferred to the Trust without a Probate.