Our law firm concentrates in the areas of Estate Planning, Estates, Trusts and Financial Planning. This inevitably brings us into the area of Probate of Estates.
We have often found that clients are under the impression that if they have a Will, they will not have to have their estate probated when they pass away. This is a grave misconception. A will is simply a blueprint which a judge will follow as to how one’s estate is to be handled when one passes away. A Will is an important document, because if we do not tell the courts who we want to handle our estate when we pass away, the law will make the choice for us. If we do not tell the courts that we wish a surety bond to be waived, our Estate will be forced to purchase a bond. If we have young children, the court will decide who is to be the guardians of our children. If we have specific gifts we wish to leave to certain people, we can state that in our Will. Special burial requests can be outlined in one’s Will. Thus, we can see that even though a Will does not avoid probate, it is still an extremely important document. We have only touched upon some of the most basic items that can be included in a Will. We can even adjust the age of inheritance so that a young child would not receive a large sum of money when they reach majority; rather that money can be held in trust and used for that child’s benefit until they reach a more mature age. We often suggest that the money be held back until the child is at least 25 years of age; but in the meantime, that they money can be used for their education, medical and personal needs. In recent years we would estimate that a probate would take no less than nine (9) months. We are now estimating no less than twelve (12) months and up to approximately two years. Generally, the minimum fee for probate is in the area of $6,000.00 and up. The reason for the length of time and the high fees are because of the extensive amount of paperwork which the courts require. Also, time delays occur because families are now generally located all over the United States. When one passes away, notice must be given to all of the relatives. Preferably, we would have the relatives acknowledge the notices and other documentation. Often it takes 30, 60 or 90 days for a relative in another state to respond. Our office, in turn, must send repeated reminders out, which, needless to say, increases the costs. Our office has the most streamlined computer systems and mechanisms for facilitating all sizes of estates, and thus, can accomplish the settlement of an estate more expeditiously.
Often , intentionally or by accident, probate cannot be avoided. We are often asked how can probate be avoided? Very simply, there are ways in which probate can be avoided:
One way of avoiding probate is by having all of one’s property in Joint Tenancy with another party. In that case, the property automatically passes to the surviving joint tenant when the first joint tenant dies. Sometimes it will be necessary to file a death certificate or a short form of affidavit with a bank or land trustee in order to remove the deceased joint tenant, but generally these are simple procedures.
The biggest problem generally arises when the surviving joint tenant does not add another joint tenant to the property prior to their death, which means that at the time of the surviving joint tenant’s death, the property will then have to be probated.
Another problem with Joint Tenancy is that it does not avoid Federal Estate Taxes. Even though the surviving joint tenant may then be in title, it does not mean that there are no taxes to be paid on the property received, especially if the recipient is not the spouse of the deceased.
Also, Joint Tenancy limits the flexibility to liquidate the property when the joint tenant is a child of the remaining spouse. For example, husband and wife are joint tenants on their marital home. Husband passes away and wife now puts their son’s name on title as joint tenant. Should wife decide that the premises are now too large and would like to downsize to a condominium, or even move to a different state, she would have to have the permission of her son to effectuate the sale of the premises in order to make the next purchase. Sometimes children are reluctant to see their family home sold or to have their only surviving parent move to a different state and create blocks for the surviving parent’s wishes.
We have found that a Living Trust is one of the most flexible and successful ways of avoiding probate and also avoiding or minimizing Federal Estate Taxes.
With today’s continuing inflation, it is not unlikely that people will have an estate in excess of $650,000.00 (which is the Federal Exemption Limit for 1999). Thus, every dollar over $650,000.00 will be taxed. The Federal Estate Tax rate begins at 37% or 38% and goes up to 55%.
Our Federal government was somewhat deceptive when they created the new Federal Tax Law. They told us that we have an unlimited marital deduction. This means that a husband could leave millions of dollars to his wife and, likewise, a wife could leave millions of dollars to her husband and there would be no tax due. Thus, people starting putting everything into joint tenancy believing that there would be no taxes. What they forgot was that there would be a tax to their children. This tax to the children can be minimized or avoided totally by the proper use of a Living Trust or a Trust through Will.
LIVING TRUSTS AND TRUST THROUGH WILL
We have previously mentioned how a Will is simply a blueprint for a judge and does not avoid probate. We have also mentioned that joint tenancy and trusts can keep us out of the Probate Court, but we would like to discuss further estate planning for the purposes of avoiding and minimizing Federal Estate Taxes (death taxes).
Shortly after the turn of the century, the Federal government implemented a tax upon the estate of one who had passed away. The exemption at that time was $60,000.00 for the husband and $60,000.00 for the wife. That exemption limit was raised to $600,000.00. The exemption for 1999 was $650,000.000. The exemption has scheduled raises until it tops out at $1,000,000.00 per person in the year 2006. As you can see, our Federal government is not very generous with its exemptions.
In today’s continuing inflationary period, and with the large insurance policies which many people carry, it is not unlikely that one could have an estate in excess of $1,300,000.00. The new tax law speaks of the unlimited marital deduction we discussed earlier on. This unlimited marital deduction lures people into believing that they can have an unlimited amount of money and that there will be no tax. It is true that between husband and wife there will be no tax upon the death of the husband or the wife, but the tax will appear when money passes to their children.
An example would be if a family has $1,300,000.00 of assets when the last of the husband and wife passes away and that property is held in joint tenancy between the husband and wife; it is assumed that the children will inherit $1,300,000.00. But if we exempt the first $650,000.00, we have $650,000.00 remaining. The remaining $650,000.00 will be taxed somewhere in the area of 40%. Therefore, the children would pay a tax of approximately $260,000.00.
This nightmare scenario could be avoided if upon the death of the first to die of the husband and wife, a Trust was established for the benefit of the family and the surviving spouse. This Trust would have approximately $650,000.00 placed into it, the balance of $650,000.00 would be given to the surviving spouse directly or to a Trust for the surviving spouse. In this case scenario, when the second spouse passes away, $650,000.00 is already in the name of the children and family. A deduction of $650,000.00 was taken at the time of the death of the first spouse; the next $650,000.00 now passes tax free to the children and there are no taxes due upon the death of the second spouse. With some basic trust planning, we can avoid giving the Federal government $260,000.00 or more as in the first example.
Sometimes people feel uncomfortable with the concept of putting all of their assets into a mysterious entity known as a Living Trust. There is an alternative to this procedure which will save taxes, but will not avoid probate. That situation is where we would create a Will which states that when we die, a Trust is to be created at that time. The drawback to this procedure is that the assets must be held 50% by the husband and 50% by the wife. These assets will then be taken to Probate Court with the Will, which orders the creation of a tax savings Trust. As you can see, this will save taxes for the family, but will not avoid Probate. This is a procedure we occasionally use in our office, only when people are uncomfortable with a Living Trust.
We strongly suggest consulting an attorney in order to avoid unnecessary hardships for your family and, most importantly, to avoid giving away hard-earned money to the Federal government