Plan Ahead to Pass Your Wealth to Your Heirs
If you die without a will (called "dying intestate"), the appropriate state will apply its probate laws to determine how your property will be split up. Create a will and estate plan that ensure your assets to go the right people or organizations, and with the most tax advantages.
The subject of how best to pass along your accumulated wealth at death is usually referred to as "estate planning." Even if you presently have only rather modest wealth, you're probably a candidate for at least some basic estate planning. And your ownership of a small business only increases the likelihood that you will have an estate planning need.
Although the estate planning process is primarily concerned with passing along your wealth at death, to be effective, it requires your lifetime participation. You may have the most experienced and savvy probate lawyer and the most competent and trustworthy executor, but the money-saving and tax-saving opportunities that they will be able to use for your heirs' benefit will be limited unless you have done some planning during your lifetime to achieve this result.
What Happens to Property at Death?
Although death is not something that most of us like to think about, the fact is that unless you're willing to face up to this unpleasant thought now, chances are that the people who you wish to receive your property after your passing will end up disappointed. Why? Because if you die without having made out a valid will, the state in which you live, and/or where the property is located, will dispose of it — and the recipients may be radically different from how have in mind. A will can distribute your assets to whom you want.
In addition providing you with the ability to control who receives your wealth, it is advisable for you to have a will. Important reasons include:
- having a well-drafted estate plan (including your will) can minimize probate costs and delays associated with passing along your property to your chosen heirs
- designating a guardian for your children
- designating an executor to carry out your wishes as expressed in your will
- arranging for income to be provided for your family during the period immediately following your death, while probate is occurring
- creating a trust arrangement that may require a will be executed in order to completely fund the trust
States Allocate Assets of Those Dying Intestate
If you die intestate—that is, without a will—the state where you have your permanent residence will apply its probate laws to determine how your property will be split up among your closest relatives. If you have property in another state (or states) there will be ancillary probate in each of those states, applying the laws of those states.
When we say "closest" relatives, we mean closest by legal relationship. Your state's probate court will not be able to consider whether you loved or loathed a particular relative. The question will be limited to the relative's legal relationship to you. Thus, if a person falls within your state's category of closest living relatives entitled to inherit from you, that person will get a share of your wealth at death.
A state's inheritance categories include:
- Spouse gets all assets if there are no children; if any children exist, spouse gets half and children divide the remaining half equally.
- If there are no spouse or children, parents of the deceased divide all assets equally.
- If there are no spouse, children, or parents, then brothers and sisters of the deceased divide all assets equally.
- If there are no spouse, children, parents, or siblings, then grandparents or descendants of grandparents (that is, uncles, aunts, cousins, etc.) divide all assets equally.
- If there are no relatives in the first four classes, great-grandparents, or descendants of great-grandparents divide all assets equally.
- If there are no relatives in the first five classes, relatives more distant than great-grandparents and their descendants divide all assets equally.
- If no relatives can be found, the state gets your assets. If you die without a will and without any relatives, the state steps in to be your long-lost relative. If this happens, lawyers say that your property has escheated to the state. (Believe it or not, the word "escheat" comes from an old English property law concept, not from the word "cheat!")
When Intestacy Applies
Even if you have a will there are two main instances when state intestacy rules must still be applied:
If your will does not effectively dispose of a particular piece of property. This could happen if the will does not specifically dispose of the property and does not have a provision (usually referred to as a "residuary clause") stating how property not specifically mentioned is to be disposed. Another way this could happen is where you die owning a piece of out-of-state real estate and, under this state's law, your will somehow does not effectively transfer the real estate.
If your will is not valid, either in whole or in part. A will may be invalid as a whole if it does not meet certain state requirements for valid will formation. For instance, if the person making the will (called the "testator") is under age (many states require a person to be at least 18 years old to make a will), or if the will does not contain the signatures of necessary witnesses, it may be found invalid by the probate court. A portion of the will, rather than the whole will, may be invalidated if, for instance, a court would not enforce it based on the fact that doing so would clearly violate an established public policy (such as a will provision that would "give my friend Mack-the-Knife $5,000 if he destroys my boss's Mercedes"). If a will provision is held invalid, and if a residuary provision does not apply, the property distribution would be determined by state intestacy rules.
Having a Will Puts You in Charge
If you execute a will during your lifetime, you exercise control over
what happens to your property—including your business—after your death.
Specifically, you can control:
- who will get what portions of your property
- how the property will be transferred
If you don't execute a will, the state in which you live in effect will
write one for you. Unless you have no interest at all about what will
happen to your property after your death, this is something that should
Determining Who Will Get Your Property
Generally speaking, you can give your property to whomever you wish.
With a few exceptions, you can't be forced to give your property to
The most important exception to this rule involves spouses. In one
form or another, almost all of the states provide that a spouse can
insist on receiving a specified minimum amount from the estate (often
1/3 to 1/2, depending on whether there are children from the marriage).
Thus, if a deceased person's will doesn't give the spouse this minimum
amount, the spouse can elect to receive what is known as his or her
"forced" or "statutory" share. If this happens, the will remains valid,
but the spouse gets the specified share and the amounts received by all
other beneficiaries are reduced according the state's applicable probate
Another exception involves contractual wills. If two people execute a
joint and mutual will (a single will that is effective to dispose the
property of both people), as long as both are living they can make
changes to the will anytime they want to. However, once one of them
dies, the will becomes irrevocable and unchangeable with respect to the
survivor. If this is the case, it generally will not matter that
circumstances have changed such that the decedent would have changed the
will if he or she were still around to do so.
Because a joint and mutual will—or any other form of contractual
will—can lock you into a plan for distributing your wealth that is
outdated in light of changed circumstances, you may want to avoid such
arrangements. If you want to exercise some degree of continuing control
over property that you transfer after death, a trust arrangement usually
Further, although some people who opt for joint and mutual wills may
do so in hope of saving money, such savings will be minimal, if anything
at all. The will document will still have to be probated twice (once at
the death of each testator), and the cost of preparing such a document
will not be materially less than other types of wills.
You Can Tailor Bequests to Meet Individual Needs
If you don't have a will, your home state will distribute your wealth
equally to your closest relatives, even if one is the richest person in
the world and another is a pauper. A will gives you the ability to
consider how much someone needs your property and/or how generous you
want to be to a specific person. A will also gives you the power to
clearly direct the distribution of specific items of your property to
the specific persons or organizations that you choose.
Relying on state law isn't the best even with money and other easily
divisible property, but, as a practical matter, some items (such as
furniture or jewelry) can't be split up among multiple recipients. If
this is the case, your heirs can agree to who gets what, and the probate
court will probably go along with their wishes. If no agreement can be
reached, however, the administrator of the estate will probably decide
that there is no alternative other than to seek the probate court's
blessing to sell the property and distribute the proceeds to the heirs.
This "solution" will usually be to everyone's disadvantage, since such
tangible personal items may be hard to sell at a price that reflects
their value to family members. You can avoid these problems by having a
will that specifies "who gets what."
A will also allows you to give away property in other than the
fractional shares that would be dictated by your state's probate rules.
In fact, you don't have to divide by fractional shares at all. You can
give specific dollar amounts, make specific bequests ("2,000,000 shares
of GM stock, " or "my collection of silver-plated spoons from the
Millard Filmore memorial"), or set the amount of the transfer by a
mathematical formula. (Such formula bequests are often used in
connection with plans to minimize federal estate taxes.)
Exceptions to Property That Can Be Passed Down
In relatively few situations, your directions will not be honored by
the probate court. Some of these situations might include the following.
Marital and Community Property
As an additional protection for spouses, some states limit your
ability to transfer property that was acquired during the marriage.
Depending on state law, you may be able to transfer only a one-half
interest in such property, even if only your name appears on the
documents of title. Besides this protection with respect to specific
properties, your spouse may elect to claim a forced share of your estate
if this amount is more that what is provided in your will.
Jointly Owned Property
Joint tenancies and tenancies by the entirety have survivorship
features (that is, the surviving tenants automatically get ownership
rights to the whole property). Therefore, your will cannot effectively
transfer these interests.
They are said to "pass outside of the will." However, you can
transfer your interest in a tenancy in common, but you can't transfer
the property subject to the tenancy, since the other tenants in common
also have ownership rights in the property.
Life Insurance Proceeds
The proceeds of insurance policies on your life will be paid at your
death to whomever you named as beneficiaries of the policies. Unless you
have specified your estate as the beneficiary—and this usually is not a
good idea, since it subjects the proceeds to probate costs and
delays—your will does not control the pay-out of the life insurance
Many states limit the amounts that may be transferred to charity at the expense of close family relatives.
If you have a trust that is set up to continue operation after your
death, property placed in the trust before your death will be governed
by the trust document, rather than your will.
Transfers Against Public Policy
Regardless of the type of property that you are giving away at death,
a probate court will not enforce a condition that is against public
policy. If you include such a provision in your will ("I give John the
right to live in my mansion provided that each Valentine's day, he
throws a rock through Mary's window") the probate court will either void
the transfer altogether, or transfer the property without enforcing the
Your Options for Tailoring Bequests
A will provides you with the ability to distribute property with
conditional ownership or limited ownership. For example, you may want to
let a close friend use a certain property for the remainder of his or
her lifetime, but at this person's death, you want the property to come
back to your heirs(rather than your friend's).
Can you do this? The answer is "yes." You can do this, and other
things that will restrict or condition the recipient's use or ownership
of the property. Some of the more common methods of doing so are listed
These are general discussions—designed to alert you to what may be
possible. As will be noted in our discussions that follow, you will need
to be particularly careful when restricting property use by will, and
you are well advised to seek the advice of an attorney who regularly
deals with wills and trusts.
Split Property Interests Divide Ownership by Time
The right to use property that you transfer by your will can be split
among different people, based on the passage of time. One person (or
group of people) can be given the right to use the property currently,
while another person (or group of people) can be given the right to use
the property at some future date. A person having the current use is
said to have a "present" interest, while the second person is said to
have a "future interest."
Within the context of split interests in property, there are two main types of present interests:
- Life interests. The person having the interest has full use and benefit of the property while he or she is living.
- Term for years. The person having the interest has full use and benefit of the property, but only for a specified time (for example, for 10 years).
There are two main types of future interests that are relevant to our discussion here: remainder interests and reversions.
Remainder interests. These are the interests that follow
the expiration of the present interests (life interests, or terms for
years). The persons receiving remainder interests will ultimately own
the property outright (or their heirs will own it, if they die before
the expiration of the present interests).
Reversions. A reversion is a special form of remainder
interest. It's created when the person who creates the life interest or
term for years provides that he or she will get the property back once
the present interests expire. (Within the context of a will, you would
create a reversion if you provide that the property is to be returned to
your estate once the present interests expire.)
Uses of Split-Interest Bequests
Although split interest bequests can still be made by a will, it's
often advantageous to have such interests structured within a trust arrangement.
Doing so will normally reduce estate settlement costs, since a
long-term continuing involvement of a probate court can be avoided.
The above discussion of split interest bequests is meant to show, in
broad terms, the possible uses of split interest bequests. However,
because a detailed discussion of this subject is beyond our scope here,
and because the rules that apply to such interests vary from state to
state, it is strongly advised that you consult an attorney if you want
to use a split-interest bequest.
Bequests Can Provide for Shared Ownership
Your will can transfer property to others in shared ownership (either
in a tenancy in common or joint tenancy). You might want to consider
such a bequest if you have a property that cannot be easily divided and
there are two or more people you would want to benefit equally. Keep in
mind that such an arrangement should only be considered if you're
reasonably sure that these people can use and enjoy the property in
harmony. If this is the case, shared ownership may be okay, but a
tenancy in common might be more fair to the heirs of the beneficiaries,
since the survivorship feature of a joint tenancy means that only the
beneficiaries of the surviving tenant will ultimately get the property
(unless the joint tenants agree to a partition of the property during
You might be tempted to use shared ownership to influence the
behavior of one of your heirs. For instance, you would like one of your
nephews to have a certain property, but aren't so sure that he is ready
to handle it on his own. If you transfer it by will to the nephew in
shared ownership with another heir—an older niece whom you trust more—your nephew may be reined in somewhat by the other owner. While such a
transfer might work as you want, this situation could be handled much better by a transfer into a trust.
Wills May Restrict Property Use Provide for Powers of Appointment
When you create a will that substantially restricts your heirs' ability to use the property (or to pass it along to their heirs at death), two conflicting legal principles are involved:
- Property owners should be allowed to dispose of their property as they wish.
- Property should not be unduly "controlled from the grave."
What do these principles mean to you?
Primarily, that you can dispose of your property at death as you
wish, but if you attach certain types of restrictions on the bequest,
you run the risk that the bequest (or at least the restriction) will not
be given effect by the probate court. Most states have specific rules
limiting the time, or the number of generations, that a property
restriction will remain effective. If you insist on using such
restrictions in a will, consult an attorney, who can steer you clear of
the type of restrictions that may lead to problems in your state.
Here we will consider two specialized forms of future interests that
you can create in real property by way of a will. They are known as:
- a possibility of reverter, and
- a right of entry
Simply stated, these provisions enable a person to provide that
property given to a beneficiary will come back to the giver if a
specified event or property use occurs. For example, a property could be
given to "X, on the condition that alcoholic beverages are never sold
on the premises."
The main difference between a possibility of reverter and a right of
entry is that the possibility of reverter is automatically deemed to
transfer ownership upon the happening of the specified event, while with
a right of entry, your heirs would have to take legal action to get the
property back after the event occurred.
The courts strongly disfavor both the possibility of reverter and the
right of entry. Although each can still be used, if you're looking to
use will bequests to change or control someone's behavior, you'll
probably have a much easier time of it by bequeathing your property to a
trust that can achieve the same result by use of different means.
Powers of Appointment
A power of appointment is created when you give a person the right to
determine who will receive specified property that you own. You can
create such a power that is effective while you are alive, or one that
only arises by way of your will (called a testamentary power). While a
power of appointment can be created by a will, as a practical matter,
it's usually granted to the trustee or beneficiary of a trust.
A power is classified as a "general power of appointment" if the
person holding the power can exercise it in favor of himself or his
estate. If the power holder does not have the authority to do this, the
power is called a "special power of appointment." Special powers receive
favorable treatment under the federal estate tax.
Powers of appointment can be used as a means of influencing a
beneficiary's behavior: you can give a trusted friend or family member
the power to appoint property held in trust among a specified group of
people, or the world at large. After your passing, this power holder can
use the "power of the purse-strings" to nudge along your heirs to move
in the direction that you would like. Certainly, you would have to have
great trust in the person you name as holder of the power, but you could
protect your heirs by specifying the small group of individuals that
property could be given to, and by providing that, if any of the
property has not been appointed at the power holder's death, such
property is to be distributed to named individuals (whom you specify).
Powers of appointment can also be used in conjunction with a life
estate where you want to give someone broad ownership rights in the
property, but for federal estate tax
or other reasons, you don't want to give full rights of ownership. To
do this, you give the person a life estate plus a special power of
appointment over the same property, exercisable by will. The power
holder/life tenant gets the full use and enjoyment of the property
during his or her lifetime, and the right to choose—from the group of
appointees that you specify—who will receive the property at his or her death.
Using Trusts in a Conjunction Will
Sometimes the main function of a will is to give your executor the
authority to collect your assets and cause them to be distributed to a
trust that you have set up to receive them. This type of will (sometimes
called a "pour-over" will) is often used when a trust is set up for
estate tax savings, or to preserve family privacy.
A trust is a legal arrangement in which one person agrees to hold and
manage the property of another person for the benefit of someone else.
With a trust, three parties are involved:
- the one who transfers the property to the trust (the grantor)
- the one who has the responsibility for managing the property (the trustee)
- the one for whose benefit the trust is established (the beneficiary)
Because of the historical development of trusts and the state law
rules that govern them, the courts are much more likely to give effect
to the transfer of broad powers to a trustee than they would to an
executor. This means that trusts can be extremely flexible estate
And unlike your will, which becomes a public document when admitted
to probate, trust arrangements—even those that are closely tied into
an asset transfer from a will—can be kept from the public eye.
You might want to consider using a trust to:
Give a beneficiary a lifetime interest in property (such as the
income generated by the property, or the right to reside in residential
property), while arranging for the property to go to another person
after the first beneficiary's death. This is often done to ensure that,
if a grantor's spouse remarries, the grantor's children—rather than the
spouse's second husband or wife—will ultimately receive the property.
Delay the distribution of trust assets to a beneficiary beyond
the age of majority. Generally speaking, once a minor who acquires
property by a will reaches the age of majority (18 or 21 in most
states), he or she will have full, unrestricted use of the property.
Maybe you think that a particular beneficiary will not be ready to
assume responsibility for property ownership at this age. Restrictions
on property use made by will may be difficult or impossible to enforce
and may increase probate costs. A trust, however, can provide for
partial distributions, and can delay the ultimate distribution of trust
assets to the beneficiary well beyond his or her 21st birthday. For
instance, you could set up a trust to pay a beneficiary the income of
the trust immediately, but defer the payment of the principal in equal
installments at ages 25, 30, and 35.
Protect a person "from himself." This type of trust (commonly
called a "spendthrift trust") gives the trustee the power to withhold
payments to a beneficiary in case the beneficiary has legal judgments or
claims against him or her. While the assets remain in the trust, they
generally cannot be reached by the beneficiary's creditors. The idea
here is to withhold payments to the beneficiary until his or her credit
problems have been cleaned up, or until the claims have become
Influence a person's behavior. You can create a trust that gives
your trustee broad discretionary powers to decide when distributions of
income and principal are to be made to the beneficiaries. In this way,
the trustee can hold out the carrot of distributions to the
beneficiaries to nudge them in the direction that you want them to go
(such as providing for a distribution of property when the beneficiary
has been drug- or alcohol-free for a specified time). Although the
courts generally will give you more latitude in setting conditions in a
trust document than they would in a will or a document of title, a court
can still refuse to enforce a trust provision that it finds to be
against public policy. Further, because a trustee may be held personally
liable if a court finds that the trustee has breached a fiduciary duty
regarding the trust property — such as paying or failing to pay
distributions — you may find it difficult to get a qualified individual
or corporate fiduciary willing to serve as trustee for a trust having
such discretionary powers. And if you do find such a trustee, you can
expect the fee charged to be larger than for some other types of trusts.
Remember, trust arrangements cost money. Money for an attorney to
draft them, and yearly fiduciary fees to the trustee for managing the
trust property. Be sure that you have good reasons to incur these
additional costs before you decide to use a trust.
Choose Your Executor Carefully
If you die without a will, the probate court will appoint a person
called an administrator, who will act as a fiduciary to collect your
assets and pay your debts (including taxes). Then, after the time period
set by state law, the administrator will distribute your assets to
those people entitled to receive them.
If you have a will, you get to choose the person (or a professional
fiduciary, such as an attorney or bank) to handle these duties. A
fiduciary that is nominated under a will is referred to as an "executor"
or sometimes as a "personal representative."
Your choice of an executor will be an important factor in how
smoothly your estate is handled. You'll want an executor who will be
able to deal with all estate beneficiaries in a way that will avoid
friction, and foster any needed compromises and agreements among them.
You'll want an executor who will work hard and work efficiently, so that
everything is done on time; thus avoiding court delays and
continuances. In probate matters, time is money, and attorneys' time
spent in court is big money.
State law will gives great latitude if you choose to waive the
requirement that the executor post bonds. It also will allow you to give
your executor the power to enter into transactions, and make
investments that a court would consider to be too risky for an
Deciding Between a Corporate or Individual Executor?
You can choose an individual or a corporate fiduciary to serve as
your executor. You can also have more than one executor. In this case,
they will be called "co-executors." Regardless of the number of
executors, and whether they are individuals or corporate fiduciaries,
they will be entitled to reasonable fees—set by the probate court—for
performing their duties.
Because it is in the business of performing fiduciary services, you
can expect that a corporate fiduciary would have the advantage of having
a staff of people who are experienced in handling estate work. Such a
fiduciary can be expected to be more knowledgeable of probate rules and
deadlines than would most individuals serving as executor.
Some of your relatives may think that it's an honor to be named as
executor of your will—although they may change their mind once they see
how much work is involved. And other family members may feel that a
corporate fiduciary would give much more impersonal service when compare
with another family member.
The possible disadvantages of the corporate fiduciary are the following:
- A corporate fiduciary will definitely charge a fee.
- It's much less likely that a corporate fiduciary would want to
hold on to, or manage, any risky investments (like a small business),
even if the fiduciary has the authority to do so under the will.
An individual, such as your spouse or another family member, serving
as executor will presumably be more likely to have the heirs' trust than
would a corporate fiduciary. The individual's strong suit usually is
his or her knowledge of the deceased person, his family and financial
set-up. Also, individuals serving as executors often elect not to accept
fees for their services, to the benefit of the persons receiving
property under the will.
Possible disadvantages to an individual serving as an executor include:
- Little or no knowledge of estate matters. Although the
executor will normally engage the services of an attorney to help with
the settlement of the estate, the executor's inexperience may result in
difficulty both for the executor and for the estate beneficiaries.
- Bias, or pressure from family members. While an
individual executor's knowledge of family members may be a great
advantage, it may also prove detrimental as well. The individual may
come to the office with allegiance to some of the family members, at the
expense of others. Further, even though the individual serving as
executor — like all executors — has the duty of treating all estate
beneficiaries fairly, the executor may feel pressure from some family
members to take an action that would help them. This would be
particularly likely if the executor were a close family relative.
You may be able to get the benefits associated with both a corporate
fiduciary and an individual executor by naming one of each as
co-executors. State law will normally give you the right to determine
the categories of estate decisions that require both their consents,
those that only the corporate co-executor can decide (such as dealing
with investments), and those that only the individual co-executor can
decide (such as more personal matters, like determining which pieces of
personal property goes to which beneficiaries).
Guardianship and Running Your Business During Probate
If you have minor children, this fact should be reason enough to have
a will. While a court will not absolutely be bound to appoint the
guardian that you have named in the will, your wishes normally will be
respected. After all, you care about, and know, your children much
better than any judge who will appoint their guardian, so why shouldn't
he or she go along with your selection?
Types of Guardians
There are two types of guardians that your children will need: a
guardian of the person and a guardian of the estate. The guardian of the
person is the one with whom your child will live; this person will
stand in your shoes to make the typical decisions that are made by a
parent for his or her child. The guardian of the estate is the person
who has the responsibility of managing your child's wealth (which came
to the child from your estate, or from other sources) while the child is
The same person can—and usually does—serve both as guardian of the
person and guardian of the estate. But, this does not have to be the
case. You might have the situation where there is a family member who
you would want to raise your children in your absence, but who you think
is not able or willing to take on the task of managing the children's
assets. In this case, you could designate someone else (or a corporate
fiduciary) to handle only the money matters.
Agreeing on the Guardian
Make sure that you and your spouse agree on the same guardian and
that this agreement is reflected by having the same person (or persons)
designated in each of your wills. You might think that this would not be
a big deal, since only the guardianship provision in the second-to-die
parent's will would normally be utilized (guardianship automatically
falling to the surviving spouse after the first spouse's death), but
there are at least two situations where a failure to agree on a guardian
could cause a problem. First, if both spouses die in a common disaster,
the judge is faced with each of the wills nominating a different
guardian. Second, if anyone contests the appointment of the person
nominated in the surviving spouse's will, the fact that the other spouse
died wanting another person appointed might add fuel to this action.
Requirement for Bonds
If you truly trust the person who you nominate as your children's
guardian, you should normally have your will give this person the
greatest possible authority to deal with your child's property, and
should consider waiving the requirement that the guardian be required to
post bonds with respect to the property subject to the guardianship.
Doing this should cut down on the number of times that the guardian
(or the guardian's attorney) has to go to court for permission to enter
into transactions necessary for management of the property. If you
really don't trust the guardian all that much, then by all means don't
give him or her such wide powers to deal with the property and don't
waive the bonding requirements, or consider appointing a separate
guardian of the estate.
Running the Business During Probate
If you want your executor to continue to have your business run as a
going concern once it becomes an asset of the estate, you'll need to
give the executor the authority to do so. But, because the law looks at
small businesses as among the most risky investments to keep in your
estate, you may find that your executor will not agree to serve unless
you include in the will a provision that will exonerate it for losses to
business profits or value that occur during the period when it stays in
Even with such an exoneration clause, an executor may not be willing
to accept the office if taking control of an ongoing business is part of
the job. As a fiduciary, the executor can't share in any of the profits
if it does a bang-up job of running the company; it can only be exposed
to the time requirements and the difficulties of operating it under
difficult circumstances (and possibly the hostility or threatened
lawsuits from heirs). This makes it all the more important that you have
a concrete and workable plan for the succession of your business's
management and ownership.
Providing Income During Probate
Your will should provide your executor with the authority to pay your
family amounts needed for support during the period of estate
administration. Although your executor (or even your administrator, if
you died without a will) could get a court order allowing this even
without a will provision, including such a provision may speed up the
process and cut down attorney expenses and court fees.
Minimizing Probate Costs and Delays
Probate. Utter the word to almost anyone and be prepared for
exclamations of hostility and disgust. But, what is probate? Can it—and
should it—be avoided?
State probate courts have vital and necessary duties to perform:
- collect a deceased person's assets
- see to it that his or her legal obligations are paid out from these assets
- distribute the remaining assets to those people who are entitled to receive them
The system is meant to protect the decedent's creditors, the decedent's
heirs, and the interests of the taxing authorities. But these
protections, even if they are necessary, create significant costs
(mostly attorney and executor fees) and may also delay and complicate
distributions of the assets to the heirs.
Many states have created expedited systems for dealing with smaller
estates (for example, estates under $50,000), or those that contain no
real estate. But even if you believe that the value of your estate will
far exceed the amount that would qualify for these provisions, there are
things that you can do to reduce some of the costs and delays
associated with probate. Some of the major strategies for doing so are
discussed below, along with possible drawbacks that may be associated
Lowering Probate Costs
Having a will not only helps ensure that the people whom you want to
have your property will in fact get it, but will also help reduce
expenses and delays. When you have a will, you name an executor.
Although an executor has basically the same duties as an
administrator (which you would have in the absence of a will), the law
gives much wider powers and authority to the executor.
One effect of this is that an executor often will not need to get
prior court approval for the same kinds of actions that an administrator
would. This usually means less delay, and smaller court and attorneys'
Evaluate Whether to Hold Assets in Joint Tenancy
It seems that everyone has heard about joint tenancies as the magical
probate-avoiding device. And while it's true that probate will be
avoided on the death of the first joint tenant, this doesn't apply at
the survivor's death. Further, although many types of assets may be held
in joint tenancy (homes, cars, bank accounts, investments), some items,
such as furniture, collectibles, and other personal effects, do not
lend themselves to ownership by way of a joint tenancy.
Life Insurance Not Paid to the Estate Is Not Subject to Probate
Under the laws of most states, life insurance proceeds that are paid
to a named beneficiary (rather than paid to the estate) are not subject
to probate. This means that the proceeds are normally quickly paid out
to the beneficiaries of the insurance policy. This is often the best
source of liquidity when other assets are held in probate.
If you are concerned that there won't be enough liquid assets in your
estate unless you name your estate as beneficiary, consider this
instead: name a trusted family member or the trustee of a testamentary
trust as beneficiary of the policy (if the trustee is also the executor,
make sure this person is designated in the insurance policy in his
capacity as trustee, rather than as executor). Provide directions
outside of your will that you would like the recipient of the proceeds
to make them available as loans, to the executor, as needed.
Property in Living Trusts Are Not Subject to Probate
Property contained in trusts created during your lifetime (living)
trusts are not subject to probate. In contrast, trusts created at death,
by means of your will, must go through probate. There are two general
kinds of lifetime trusts that will avoid probate: irrevocable trusts
(trusts in which you give up the right to change the terms of the trust
or get the property back) and revocable trusts.
Although an irrevocable trust can successfully be used for reducing
both federal and state income and death taxes, as well as avoiding
probate, it's not a device that should be entered into without a lot of
thought, planning, and competent professional advice. "Irrevocable" is a
long time. Although it's true that you may be able to get a court to
set aside your irrevocable trust because of changed circumstances, this
requires a court action, legal fees, and the results are not certain.
When you read an article or hear an interview with someone talking
about the use of a living trust to avoid probate, the discussion is
probably referring to revocable living trusts. So what's the problem?
There are some negative factors about revocable trusts that you should
keep in mind:
- They won't save income or estate taxes (since you haven't parted with the property).
- They require fees to set up, and yearly fees to administer.
- It's often not practical to retitle all assets in the trust. And
if you don't go through the required formalities with respect to a
particular property, at least for that property, your estate may be into
probate after all.
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