What is Living Probate?

What is Death Probate?

What are Death Taxes?

Frequently Asked Questions About Living Trusts

What a Living Trust Can Do For You

Estate Planning Alternatives

Estate Shrinkage of Famous People Who Failed to Plan

Most people think “probate” is something that happens when you die. Unfortunately, probate can also happen while you’re alive. It is often referred to as a living probate but technically it is called a conservatorship or guardianship proceeding. If you become mentally disabled before you die, the probate court will appoint someone to take control of all your assets and personal affairs. Court appointed agents must file strict annual accountings with the court. The entire procedure is expensive, time consuming and can be humiliating.

Does Joint Tenancy avoid a Living Probate?

No. Each joint tenant is required to sign documents on all major transactions involving joint property. If one of the owners is mentally disabled and incapable of handling financial matters, everything will have to wait until the probate court takes control. The court, in effect, becomes a joint owner and will continue to have a voice in managing the property until the disabled owner recovers or dies.

Does a Will avoid a Living Probate?

No. A will only takes effect at the time of your death. It has no control over events during your life.

Does a Living Trust avoid a Living Probate?

Yes. One of the most important benefits of a living trust is that it is designed to protect you while you're alive. Part of every well drafted living trust is a section setting forth your instructions in the event you become legally incapacitated. You can plan in advance for management of your affairs during sickness, disability and even old age. The trustees you pick are bound by law to follow your instruction during these difficult times. With a living trust, there will be no need for expensive “help” from the probate court, probate lawyers or conservators.

When you think about it, probate is not difficult to understand. At your death, your assets need to be retitled and distributed to your heirs, your debts need to be paid and any loose ends need to be looked after. You, obviously, can’t sign the deeds, write the checks or handle your business affairs.  The probate court takes over those duties.  Probate is quite simply, an orderly court procedure to change title to solely owned assets.

The probate process is a long, complicated and bureaucratic nightmare for most families.  Five basic steps to settling an estate:

Step One: Filing Petition and Gathering Material

A formal written petition to the court along with a filing fee must be submitted to the court to start the probate process.  One of the probate court’s first jobs is to approve or appoint someone to handle the affairs of the estate.  This person is called the executor, administrator or personal representative depending upon the rules of the state and whether the decedent died with or without a will.

To keep things simple, we’ll call this agent of the estate a “personal representative.”  Generally, the first thing the personal representative does is hire an experienced probate attorney.  Although having an attorney is not always a legal requirement, it has become a practical necessity because probate paperwork and filing procedures can be very complex.

Step Two: Publishing Notice to Creditors

The second major job of the probate court is to order that the decedent’s creditors be notified so that they can present their claims to the court for payment.  This requires the time-consuming task of cataloguing all of the decedent’s liabilities.  The creditors are notified either by notices in the local newspaper or directly by mail.  The law sets a time that the probate proceeding must be left open to allow creditors the chance to present their claims.  In most states, the creditor period is several months long.

Step Three: Inventory and Appraise Assets

During the probate all the assets in the estate are usually frozen so that an accurate inventory and appraisal can be made.  This means that during this period none of the assets can be distributed or sold without written permission from the court.  The court will often require formal written appraisals for many items, such as real estate, antiques, collectibles, automobiles, furniture and other valuable assets.  Appraisal fees can be expensive and, like all expenses, are paid for out of the estate.

Step Four: Payment of Debts, Claims and Taxes

Once all the debts and claims have been submitted and approved, they are presented to the court for approval to pay them from the assets of the estate.  Some estates may also have death tax liability and they must stay open until those taxes are paid.

During the entire probate process, disgruntled heirs or those who disagree with the provisions in the will can bring a lawsuit in the probate court.  These suits are called will contests.  They can hold up the distribution of the estate and are often used to intimidate heirs into settling cases that have no merit.

Step Five: Final Distribution and Closing of Estate

Finally, after the court is satisfied that all legal requirements have been met, it will order all debts, claims, taxes, attorney’s fees and the personal representative’s compensation and any other miscellaneous expenses to be paid.  If there is not enough cash in the estate to pay these substantial claims, the judge can order that assets be sold at public auction or via estate sales.  These transactions are often conducted in a depressed market or under the banner of “distressed sales.”

It is only after all the bills are paid that the probate court will distribute the estate to the beneficiaries named in the will, or, if there is no will, to the designated heirs at law.  The court then closes the file.

How much does Probate cost?

Despite what probate lawyers say, probate is very expensive.  One critic of the system says that the average cost is over seven percent of the gross value of the estate.  A full sixty percent of the costs go to lawyers and forty percent to personal representatives and others.  One legal scholar who urges a reform in the probate system remarked that, “the cost of probate expands to consume the money available.”  Small estates are particularly vulnerable because even reasonable fees can eat up a large percentage of an estate’s assets.  There just isn’t that much to go around.  Remember, every dollar that goes to pay probate costs is a dollar that could otherwise benefit your family.

What are Death Probate Fees?

The way probate fees are calculated is exceedingly unfair to your family.  State law typically sets the probate fees that attorneys and personal representatives can charge.  Many states allow attorneys to charge any fee that the court considers reasonable, without any limitations.  Other states limit the fees to a fixed percentage of the estate.  Under either method, the fees can range from 4% to 10% of your family’s gross estate.

Remember, too, that probate fees are often levied at each spouse’s death.  Depending on how title was held on the date of death, a married couple could pay some form of probate fees on the death of each spouse.

Not only are these fees excessive, but the manner in which they arrive at the size of your estate bears little resemblance to its actual value.  In states that use the percentage of the estate method, probate fees are calculated on your estate’s gross value without deductions for liens or encumbrances.  This means that if you have property worth $100,000 but owe $90,000 to a bank or some other financial institution, your probate fees will be based on the full $100,000, not the $10,000 equity interest you actually own.  As you can see, this valuation method unfairly increases the size of your estate and results in the payment of larger fees.

How long does Probate take?

The slow progress of your estate through probate can be very frustrating for the family.  Although this complex process usually takes at least one and a half years to complete, many estates take even longer.  Most people assume that their estates are simple and will glide through the system.  Regardless of how simple an estate appears, it’s very difficult to close a full probate in less than a year.  That’s because of all the steps that must be completed to the satisfaction of the court.

Are the details of the estate kept private in Probate court?

No.  All probate proceedings are open to the public.  Anyone who has an interest can pull your probate file and examine the details therein.  In a supervised probate proceeding, the file will disclose an inventory and appraisal of every asset you owned at death.  It reveals the names of all your creditors and amount owed to each.  It lays out the names of all your beneficiaries and the amount and conditions of their inheritances.  This information is often compiled and sold to those who use the information to sell products and services to vulnerable surviving family members.  It can be particularly damaging if you owned a business.  Your competitors will have a treasure trove of confidential business information at their fingertips in the probate file.

What happens to the real estate located in another state?

After death a probate must be instituted not only in the state where you lived, but also in every state where you owned real estate.  This is called an ancillary probate.  Each state has probate jurisdiction of the real property located within its borders.  That means that your family will have to file a new probate in each state and hire local counsel to represent the estate.  Of course, this will add to the expenses that must be paid before your family receives its share.

Are there any other problems with a Death Probate?

Yes.  Perhaps the most important disadvantage of death probate is that your family loses control of the estate.  During probate, it may not be able to sell assets without court approval even if it needs the money.  Opportunities can be lost because the cumbersome probate system moves so slowly.

Your family may pay an emotional price in probate, as well.  Because the process takes so long, it can be a constant reminder of the loss of a loved one.  It can also foster arguments among family members who would normally seek support from one another.  It’s common to see family members taking out their frustration about the system on one another, especially if one of the family members has been named the personal representative of the estate.

Does Joint Tenancy avoid a Death Probate?

Well, the answer is yes and no.  In the case of a husband and wife who own their assets in joint tenancy, there’s no death probate when the first spouse dies because title passes automatically to the surviving joint tenant.  However, when the surviving spouse dies, there will be a complete probate on the entire estate.

The fact that joint tenancy ownership avoids death probate at the first spouse’s death is a small reward for the many other disadvantages of joint tenancy ownership.  It can lead to huge unexpected liability when parents and children own assets together.  In community property states it creates capital gains tax problems.  It can create unintended beneficiaries and often causes gift and death tax problems.  For these reasons, estate planning experts agree that joint tenancy may be the poorest estate planning tool.

Does a Will avoid a Death Probate?

No.  In fact, a Will guarantees probate.  The word probate actually comes from Latin and it means “to prove the will.”   All property that is controlled by your Will must go through the probate court.  Once your estate enters the probate process, it’s trapped in the system until the judge releases it.

Does a Living Trust avoid a Death Probate?

Yes.  All assets transferred to a living trust completely avoid the probate process, both during your life and at your death.  Living trusts are not new.  They’ve been successfully used in one form of another since the Middle Ages.  Both then and now, the living trust has required that the owner of assets transfer title from his or her name to the name of the trust.  This means really changing the title to your property.  For real property, it means you will sign a new deed.  For other assets, you sign special transfer documents changing ownership to the name of your trust.  Once the process is complete, all your assets will be owned by the trust.

Almost nothing will be owned by you personally.  Your living trust has title to the assets, but don’t worry because you have complete control of the trust while you are alive.  You can amend the trust or even revoke it whenever you like.  When you die, there are no assets in your name, so there’s no need to go through probate.  The trust contains your written instructions and will direct your hand-picked agent, the successor trustee, to distribute your estate.

With a living trust, there is no need for “help” from the probate court or probate lawyers.  Your trust will completely eliminate these unnecessary costs.  Moreover, your estate can be distributed shortly after your death.  There are no judges to consult or bureaucrats to please.  Your trustee merely follows your instructions in distributing your estate according to your wishes.

In addition to the expense and delay of probate, your family may also be liable for death taxes.  There are two types of death taxes: the federal estate tax and the state estate/inheritance tax.  State inheritance taxes vary dramatically from state to state.  The federal estate tax is one of the largest taxes a family will ever have to pay.  It's a tax on your right to transfer property to others at your death.  Currently, the federal estate tax rates on a taxable estate start at 18% and quickly rise to 47% of every dollar in your taxable estate.  The following table is an example for one dying in 2005.

Do all estates pay Federal Estate Taxes?

No.  The federal government has given every person in the United States an exemption for estate tax purposes.  PLEASE NOTE:  Congress, in The Economic Growth and Tax Relief Reconciliation Act of 2001, made changes in the exemption such that the exemption amount, which is currently $1,500,000, will increase in 2006 to $2,000,000 and then in 2009 to $3,500,000; with full repeal of estate taxes in 2010.  However, if no new tax legislation is passed to extend the 2001 Act, the exemption will return to $1,000,000 in the year 2011 and remain the same until new legislation is enacted.  See the table below.  The Act also made changes in the gift and estate tax rates.  That means that if your estate at the time of your death is less than the exemption amount there will be no federal estate taxes due.  In deciding whether your estate is greater than or less than the exemption amount, the government includes everything you own, even the face value of your life insurance policies.

THE 2001 LAW:  The exemption is increased to $3,500,000 over a five year period.  This increase will be phased in as follows:

Is there an Estate Tax Deduction for married people?

Yes.  In addition to the personal exemption that everyone gets, the federal government has exempted all transfers of wealth between a husband and wife.  This is called the Unlimited Marital Deduction and it means that regardless of the size of your estate there will be no federal estate taxes levied when the first spouse dies and leaves the estate to the surviving spouse.

Keep in mind, however, that this is merely a postponement of tax.  There will be a tax on the estate when, at the second death, it passes to the children or other beneficiaries.  Since in all probability the estate will continue to appreciate in value, taxes may be paid at a higher rate.

WARNING:  Recent changes in the tax law have eliminated the unlimited marital deduction for surviving spouses who are not U.S. citizens.  Without special planning, all non-citizen spouses are restricted to the tax-free transfer of the personal exemption amount from their deceased spouses.

What if you have a small estate; do you need to worry about estate planning?

Yes. While an estate under the exemption is free from federal estate taxes, you will probably not avoid a living probate if you become disabled or a death probate when you die.  Remember, probate and federal estate taxes have nothing to do with each other.  Estate taxes are paid to the federal government for the right to transfer property at your death.  Probate fees and costs are paid to the probate court, attorneys and the personal representatives of your estate for supervising the administration of your estate and distributing assets to your beneficiaries.

How can I create a Living Trust? 

The first step is to make an appointment for a free, no obligation meeting with one of our estate planning professionals.  You should be prepared to discuss the following issues:

• How your assets are to be distributed after your death, and
• The names of the people you want to manage your assets if you become mentally disabled and after your death.

What is a Trust?

A trust is a contract between the creator (you) and a trustee.  The trust contract becomes "Living" so to to speak when assets are retitled in the trust name.

Can I act as my own trustee?

Yes.  If you are competent to handle your financial affairs now, there is no legal reason why you can’t be the trustee of your own living trust.  In fact, most living trusts have the people who created them acting as their own trustees.  If you’re married, you and your spouse can act as co-trustees.

What can I do with my assets once they’re in my Living Trust?

If you’re the trustee, you can do anything you want with the assets.  When you set up your living trust, you are transferring the title of all your assets from you as an individual to yourself as the trustee of your trust.  You then must manage the property for the benefit of yourself as the beneficiary.  What this means is that you will have absolute and complete control over all the assets of  your trust.  If you want, you can spend, save, invest or even give the assets away at your discretion.  There are no restrictions on what you can do with the assets  in your living trust.  Moreover, if you don’t like the terms of the trust, you can amend it or revoke it at any time without penalty.

Will my Living Trust avoid income taxes?

No.  The purpose of creating your Revocable Living Trust is to avoid living probate, death probate, and reduce or eliminate federal estate taxes.  It’s not a vehicle for reducing income taxes.  In fact, if you’re the trustee of your living trust, you will file your income tax returns in exactly the same way you filed them before the trust existed.  There are no new returns to file and no new liabilities are created.

If I transfer real estate into my Living Trust, will my property taxes go up?

No.  Transfers into your living trust have no effect on your property taxes.

If I’m only a part owner of property, can I transfer my share into a Living Trust?

Yes.  Your share can go into the trust without changing the interests owned by others.

Can I name Trustees and Beneficiaries who live out of state?

Yes.  There is no limitation on where your trustees or beneficiaries must reside.

Will I have to consult an attorney every time I buy new assets? 

No.  Once your current assets are transferred to your living trust, you take title to all new assets in the name of the trust and they will automatically be owned by your trust.

Does my Living Trust need to be registered or recorded anywhere?

No. Your living trust is a private document which is not recorded.  However, if you own interest in real estate, the new deeds showing trust ownership will be recorded.

Can I sell assets owned by my Living Trust without complications? 

Yes.  You sell assets in the same way you currently do.  You will, however, add the word "Trustee" after your signature.

Can I change the terms of my Living Trust?

Yes.  While you're alive and competent, you can alter your living trust or even revoke it without penalty at any time.

Can I transfer real estate into my Living Trust?

Yes.  Generally, real estate should be transferred into your living trust.  Otherwise, upon your death, there will be a death probate in every state where you own real property.  When it's owned by your living trust, there is no probate anywhere.

Is my Living Trust just a tax loophole that the government will close down?

No.  Your living trust has been authorized by the law for centuries.  The government has no interest in making you go through a living probate or a death probate.  Those proceedings only clog up the court system.  The only portion of your trust that will be affected is the amount in excess of the allowable federal estate tax exemption.

Can any attorney create a Living Trust?

No.  The drafting of your living trust should only be done by an attorney trained in the area of tax and trust law.  It's important that you seek out a law firm which limits its practice to the creation and administration of living trusts.  After all, your trust will be the document which manages and disposes of all your hard earned wealth.  Make certain you choose a law firm that is both qualified and experienced.

What if I move to another state, is my Living Trust still valid?

Yes.  Your living trust is valid in all 50 states, regardless of the state where it was originally created.

Is a Living Trust only for the rich?

No.  A living trust can help anyone who wants to protect his or her family from unnecessary probate fees, attorney's fees, court costs and federal estate taxes.

Is a Living Trust a good idea for a single person?

Yes.  If you're widowed, divorced, or unmarried, a living trust offers protection for your estate, as well.  It will completely eliminate a living probate, a death probate and you can pass up to the federal exemption amount free of federal estate taxes.

Are there any major disadvantages to a Living Trust?

No.  Because YOU HAVE COMPLETE CONTROL OF ALL ASSETS IN YOUR TRUST, you're free to manage your living trust in any way you want.  Also, because your living trust is revocable, you have the right to make any changes to it while you're alive and competent.

A Living Trust Eliminates a Living Probate 

If you become disabled or are unable to manage your estate, your living trust avoids the need for a court mandated conservatorship.  The successor trustee you've named will step in and manage your affairs without government interference and expense.

 A Living Trust Avoids Death Probate 

With a living trust your assets will go directly to your beneficiaries after your death.  There will be no probate attorney's fees or court costs.  There will be no delay in distributing your assets, and all your estate planning goals will be completely private.

 A Living Trust Can Reduce or Eliminate Federal Estate Taxes 

At the present time, an individual using a properly funded living trust can, upon death, pass $1,500,000 estate tax free to his heirs.  In 2006 this amount increases to $2,000,000, and in 2009, to $3,500,000.  The Estate Tax law is scheduled for full repeal in 2010, and will revert to a $1,000,000 individual exemption in 2011, barring action by Congress in the meantime.  Keep in mind that for a married couple with living trusts, the above figures are respectively doubled.

 A Living Trust Allows You to Control How Your Estate is Managed and Spent Even After Your Death 

A living trust can provide for the care, support and education of your children by turning over assets to them at an age chosen by you.  Even insurance proceeds can be paid to the trust so your successor trustee can manage them for the benefit of your family.

 A Living Trust Can Protect Children From Earlier Marriages

Both the surviving spouse and the children from a previous marriage can receive fair treatment and protection under the terms of your living trust.

 A Living Trust Can Ensure That Your Wishes Are Carried Out and Are Not Subject to Attack

Most living trusts contain a "No Contest Clause" which prevents greedy beneficiaries and their lawyers from successfully attacking your estate plan.

 A Living Trust Gives You Peace of Mind

When your living trust is completed, you and your family will relax knowing that your estate will be managed and distributed by someone you have selected and trust.