How high are the probate fees? In some parts of the country the fees your estate will have to pay to the court (probate fees) are very expensive and to be avoided. In other places, they are minimal and may not be worth the trouble of avoiding.
Will the court process prolong the settlement of your estate? In some places it may take weeks, if not months, just to have your executor appointed. In other places, all the court needs is your original Will, your death certificate, and some simple paperwork, and it will appoint your executor the same day.
How daunting is the paperwork? In some places, the probate forms are simple and in others they can appear incomprehensible.
Does the probate process add value? You may feel that having a judge oversee what your executor is doing adds tremendous value in making sure that your wishes, as expressed in your Will, are followed. On the other hand, you may feel that the process is more bureaucratic in nature and adds little value.
Your attorney can help you find these answers and advise you regarding whether avoiding probate is desirable where you live. In Chapter 6, Revocable Living Trusts, I will discuss these factors in greater detail when we talk about avoiding probate by using a revocable living trust.
Many states have small estate proceedings designed to handle estates with a value less than a certain amount (typically some number around $25,000-$40,000 or maybe more). If the probate assets are worth less than the specified amount, then the Will does not have to be probated. Rather, there is a simplified (and usually inexpensive) procedure that allows the probate assets to be distributed in accordance with the Will.
What to Expect When You Meet
With Your Attorney
To help you plan your estate properly, your attorney will need to know what your assets are and how you want them to pass at your death. Typically, before your appointment your attorney will send you a questionnaire about your family and each asset that you own.
Even more important, your attorney needs to know how you own each asset. For example, do you own it in your sole name or with another person? Do you own it in a retirement account such as an IRA or 401(k)? With respect to real estate, how exactly is the ownership stated on the deed?
You’ll probably have to do some homework to answer these questions, and it may seem like an annoyance, but it is crucial to your estate plan. Why? Because the legal form in which you own an asset determines how it passes at death. We’ll discuss this in much more detail in Chapter 2, The Number One Misconception About Wills.
Typically, the next step will be meeting with your attorney to discuss your goals and objectives. It’s okay if you’re not clear about them yet; your attorney can help you define them. Your wishes should be the focus of the discussion. Everything about the estate plan should be designed to achieve your goals and objectives in the simplest and most efficient way possible.
Sometimes clients (and attorneys) want to start discussing specific estate planning techniques, such as types of trusts or other complex techniques that they may have heard about, without knowing how these techniques contribute to the achievement of their goals. That is the cart driving the horse – you should know why any technique is right for you specifically.
Remember
If you’re married with children and die without a Will, your surviving spouse might not inherit all of your assets.
The term “property” doesn’t just mean real estate. In estate planning, “property” means all your assets, both real property (real estate) and personal property.
CHAPTER 2
The Number One Misconception
About Wills
THINKING BACK, YOU REMEMBER that your attorney prepared a Will for you and that you signed it in front of witnesses. You took the Will home and put it in a file cabinet. You seem to remember that your Will says that when you die your estate will pass to your three children in equal shares. You can rest easy, knowing that when you die, all of your assets (after the payment of debts, expenses and taxes) will be divided into three equal shares and paid to your children. Seems like a reasonable assumption, right?
Not so fast. While in the not too distant past that may have been a reasonable assumption, in this day and age the reality is that it is unlikely that all of your property will be distributed in accordance with your Will. This chapter explains why and what you may want to do about it.
What a Will Does
A Will’s most basic functions are:
to specify how your estate shall be distributed at your death,
to name your executor, who is the person who will be responsible for collecting, administering and distributing your estate in accordance with your Will, and
if you have young children, to name a guardian for them.
A typical Will refers to “all property owned by me at my death” or “my property, both real and personal, of whatever kind and nature and wherever situated” or similar words. It would be natural, therefore, to assume that once you had finished making your Will, upon your death all of your property would be transferred according to its terms. For example, if your Will states that all of your property shall pass, in equal shares, to each of three people, it would be reasonable to assume that all of your property will be divided among those three people. After all, it sounds so definite and says “all my property” or something similar to that.
But it often doesn’t work that way. In my experience, the number one misconception about Wills is the belief that all of your property will be distributed as your Will directs.
Some Property Does Not Pass by Will
If the number one misconception regarding Wills is that a Will transfers all your property, then what is the reality? The truth is that certain types of property do not pass by Will, and your Will has no effect on how such property passes upon your death.
This bears repeating: Some Property Does Not Pass by Will. Don’t assume that all of your property will pass to the people named in your Will.
Property That Passes by
Beneficiary Designation
Certain types of property, notably life insurance, IRAs, 401(k)s, annuities, pensions and the like, do not pass by Will. Rather they pass to a beneficiary you named on the account when you filled out something called a beneficiary designation. When you die, the property is transferred to the beneficiary named in the beneficiary designation regardless of what your Will says. In other words, the beneficiary designation overrides the Will.
Example:
Your Will states that upon your death your entire estate passes to your three children, Tom, Dick and Harry, in equal shares. You have a $1,000,000 life insurance policy. The life insurance company’s records show that the beneficiary of the policy is Tom. You die. The insurance company pays the entire $1,000,000 to Tom.
In many cases, you filled out the beneficiary designation many years ago or in a casual way and have long since forgotten about it. As part of the estate planning process it’s a good idea to request, for each account that you own, a written statement of the beneficiaries from the insurance company or financial institution.
In addition to life insurance, IRAs, 401(k)s, annuities, pensions and the like, it’s also now possible to name beneficiaries on financial accounts, by a method known as a POD (payable on death) or TOD (transfer on death) designation. You may have placed such a designation on all kinds of bank accounts and brokerage accounts when you opened the account or at any time after you opened the account. POD and TOD designations are fairly recent developments, so you may have beneficiaries on accounts which you would ordinarily not think of as having a beneficiary.
Property That Passes by Law
Certain types of property, notably property you own with another person, may pass by law and not by Will. For instance, some types of joint ownership mean that upon the death of one of the joint owners, the deceased person’s share of the property passes automatically to the other joint owner(s) regardless of what the decedent’s Will says. These types of ownership are usually, but
not always, created when the property is first acquired, perhaps many years ago.
Keep an eye out for bank or brokerage accounts that may be owned jointly. Joint ownership is different from a POD or TOD designation, discussed above. You may need to go back to the financial institution’s records-perhaps the original signature cards-to see how the account was legally opened. Do not confuse legal ownership with the mailing address on the account, which may have no legal significance. Read “Putting Someone’s Name” on Your Accounts in Chapter 4, which discusses some of the consequences of joint ownership of bank accounts.
Deeds to real estate are particularly tricky. Even if you know that there are two people listed as the owners on a deed, you still won’t know how the property passes upon the death of one of the owners without:
further examining the deed, and
knowing the law in the state where the real estate is located.
There are many ways for property to pass by deed depending on state law. Here are two of the main ways:
Joint tenancy with right of survivorship. The deceased person’s share of the property passes automatically to the surviving owner(s) by law, regardless of what the deceased person’s Will says.
Tenancy in common. The deceased person’s share of the property passes according to his or her Will.
Example:
We know from looking at a real estate deed that “Janet and Dean” own the property. But we still need more information. Do Janet and Dean own the property as “joint tenants with right of survivorship,” or a similar designation? If so, then when Janet dies, her share of the property passes to Dean automatically by law, and vice versa. However, it could also be that Janet and Dean own the property as “tenants in common,” or a similar designation, which means that when Janet dies, her share of the property passes by Will to the beneficiaries named in her Will, and vice versa.
So which is it? The answer is determined by the exact wording of the deed and by state law, which defines how the different types of joint ownership are created.
Property That Passes by Will
Now you can see why, even though your Will may say that “all” your property should be distributed in a certain way, that is unlikely to happen. Only property that does not pass by beneficiary designation or by law is subject to the provisions of your Will. Property that passes by Will is usually limited to such things as tangible personal property, real estate or bank accounts that are solely-owned and have no beneficiary designation.
Example:
Tom owns a house and is named as the sole owner on the deed. He also owns a bank account and a brokerage account in his sole name. During his life, he does not create any other rights in any other person; that is, there is no joint owner or beneficiary for any of these assets. It appears that all of Tom’s property passes by Will at his death.
Spousal and Contractual Rights and the Like
In this chapter we have explained that how you own your property, that is, the way you hold legal title, has a big impact on your estate plan. But we are not considering any legal rights that someone (other than a named co-owner or named beneficiary) may have to inherit something from your estate. For example, if you are married, your surviving spouse may have the legal right to inherit a portion of your property, regardless of what your Will says. This is particularly true if you live in a community property state. Likewise, you may be contractually obligated to leave a portion of your estate to someone else, for example, under a separation agreement or divorce decree.
These and other situations could, of course, cause your property to be distributed other than as stated in your Will, but are beyond the scope of this book. You should be advised by your attorney as to whether a similar situation could apply to you.
Let’s Illustrate These Concepts
The following quizzes illustrate the concepts discussed in this chapter. The answers appear at the end of the chapter.
Quiz #1
Brenda has three children. Her Will provides that her estate is to be divided equally among them. Her primary assets are a house worth $300,000, a brokerage account worth $200,000, and a checking account worth $100,000. She has “put her daughter’s name” on her checking account for convenience, so that the daughter may write checks and so forth.
At her death, how does her estate pass?
How do you think she wanted it to pass?
Quiz #2
David gets a divorce and dies a few months later. His Will provides that his estate is to be evenly divided among his three children. David has a sizable 401(k) plan, the named beneficiary of which is still his ex-wife because he never got around to changing the beneficiary designation after his divorce.
Who gets the proceeds of the 401(k)?
How do you think he wanted it to pass?
Quiz #3
Jane has been working at the same company for many years. Her employer provides the employees with group life insurance coverage. On Jane’s first day of work, she filled out all the employee benefit forms and named her mother as the beneficiary of her life insurance. Since then, she has married and had three children. Her Will provides that her estate passes to her spouse.
If Jane dies, who gets the proceeds of the life insurance?
How do you think she wanted it to pass?
Probate Property and Non-Probate Property
As you plan your estate, you will want to keep in mind the difference between “probate” and “non-probate” property.
If you own property that passes by Will it is typically called probate property and the total of all your probate property is called your probate estate. A probate court process will be required in order for your probate property to be transferred to the people named in your Will. If you don’t have any probate property, then your Will may not have to be probated (that is, you might “avoid probate”).
If you own property that does not pass by Will, such as property that passes by beneficiary designation and property that passes by law, it is called non-probate property. In order for this kind of property to be transferred to your beneficiaries, there does not need to be a probate court process. For example, a life insurance company can pay the proceeds of a life insurance policy directly to your named beneficiary without court involvement.
An Estate Plan Is Like a Puzzle
In recent years there has been a proliferation of new, legally created methods for passing property at death by beneficiary designation and by law. While these methods are useful for some purposes, they make estate planning much more complicated because you can’t simply assume that your property will pass in accordance with the provisions of your Will.
It’s important, therefore, that as part of the estate planning process, you and your attorney know precisely how you own each asset. Otherwise, you can’t be sure that all the pieces of your plan will fit together. I have had clients tell me that they were positive that an asset (for example, a piece of real estate) was owned jointly, but then when I took a look at the paperwork (the deed) it was, in fact, owned solely, and vice versa.
It may take a bit of detective work to obtain the information required to make these determinations, but it is well worth the effort. Share the information with your attorney so that he or she can make sure that the legal consequences are what you think they are. You’ll also want to have that information in your files when it comes time for your executor to settle your estate.
Answer to Quiz #1
It appears that Brenda’s total estate is worth about $600,000 and that she wants it divided equally among her three children, so that each would receive property worth about $200,000.
However, when she “put her daughter’s name” on her checking account she may have created a joint account with her daughter. That would mean that upon her death, the daughter would receive the entire $100,000 checking account.
The remaining $500,000 (house and brokerage account) would be the probate estate, which would be divided into thirds (roughly $166,667 e
ach) in accordance with the Will.
Therefore the daughter would receive $266,667 (the $100,000 checking account plus her 1/3 of the probate estate), and each of the other two children would receive $166,667.
This is likely not the result Brenda wanted.
Moral of the story: Know the legal consequences of your actions. Let your attorney know how you own your assets and if you change the manner of ownership later.
Answer to Quiz #2
David’s ex-wife receives the proceeds of his 401(k). His beneficiary designation overrides the Will. This is probably not what David wanted.
This example is based on a similar case that was decided by the United States Supreme Court in 2001. The Court decided that the beneficiary was entitled to the account despite the fact that the state in question had passed a law which said that, upon divorce, any beneficiary designations to the ex-spouse were null and void. (Egelhoff v. Egelhoff, 121 S. Ct. 1322 (2001)).
Moral of the story: Make sure your beneficiary designations are up to date. Doing so should be as much a part of the estate planning process as writing a Will.
Answer to Quiz #3
Jane’s mother receives the proceeds of the life insurance policy. Jane’s beneficiary designation overrides the Will. This is probably not what Jane wanted. It’s possible that she still wanted to leave the life insurance proceeds to her mother (and everything else to her spouse), but without an up-to-date beneficiary designation, we can’t know for sure.
Estate Planning for the Savvy Client Page 2