PROBATE
Perhaps the most familiar term in handling estates is the term "probate." Probate is the court administered process of carrying out the terms of your will.
- Overview: Although the probate process varies from state to state, in general, the process is the set of state law procedures that your executor follows in gathering your assets, paying the necessary debts and expenses, and distributing the remaining assets to your heirs and beneficiaries.
- Initial Procedures: Admitting your will to probate court is the first step in the probate process.
- Closing the Estate: The probate court must receive certain documents before distributions can be made to beneficiaries.
- Avoiding Probate: Due to delays and privacy issues, you may wish to avoid probate.
Overview
The probate process has procedures that apply to carrying out the terms of a will. It also has procedures that can be used to distribute your property if you have no will and have not used a living trust or other appropriate means of designating who should receive your property. Some states have "short-form" procedures that can be used in certain circumstances.
With a Will...
If you have a will at the time of your death, you are said to have died "testate", and the court administered probate proceedings are known as "testate proceedings." Your will is submitted to the probate court, at the time of your death, and the executor (or personal representative) named in your will is officially designate to act for your estate. Your executor becomes the central figure in the probate process by carrying out the asset gathering, debt paying, and distributing tasks. Thus, your will influences the probate process by naming your executor. Just as important, your will influences the probate process by choosing the beneficiaries who will receive your assets.
Without a Will...
If you do not have a will at the time of your death, probate may still be required. Because you have died without a will, you are said to have died "intestate," and the court administered probate proceedings are known as "intestate proceedings." Without a will, you have not named an executor. Therefore, the probate court appoints an "administrator" who has the same asset gathering, debt paying, and distributing tasks as an executor. However, with no will to explain your intended beneficiaries, the administrator must follow the intestacy laws of your state in distributing your property to your heirs and spouse (if you have one).
Short-Form Probate
Some states have short-form probate procedures that can streamline or modify the probate process if certain requirements are met. These requirements often focus on the size of the estate and to what extent most (or all) of the property will be distributed to a spouse.
Initial Procedures
Upon your death, your will must be "admitted to probate" so that the court can administer the terms of your will. As part of this process, the court appoints the executor (personal representative).
Admitting the Will to Probate
The original copy of your will must be located and delivered to the appropriate court in your state that handles probate administration. Generally, the will must be accompanied by a petition to the court that includes information about you, your death, and your will. Delivery of the will to the probate court transforms your will from a private document into a public document. The will can be reviewed by anyone who is willing to make the effort to go to the courthouse (or similar location) and review the court file that now includes your will.
Appointing an Executor
The petition submitted with your will also includes a request that the executor (personal representative) you’ve chosen be appointed to handle your estate. Although not strictly obligated to do so, the probate court will generally appoint your choice of executor. When appointing the executor, the probate court will also look at whether you have selected a non-resident executor, as well as the bond requirements. These initial proceedings also include providing notice to heirs and creditors, resolving challenges to the will, obtaining a federal identification number, and opening a checking account in the estate’s name.
Executor Duties
- Gathering Assets
Once the executor has been appointed, his/her first substantial task is to collect and inventory the assets that are subject to probate. This includes reviewing records, determining which assets are subject to probate, taking physical custody of probate assets, valuing the property, and filing an inventory listing.
- Payment of Debts and Expenses
Before making distributions to the beneficiaries, the executor must determine what debts and expenses should be paid. The executor is also responsible for resolving claims, paying executor and attorney fees, filing death tax returns, and filing other tax returns. To pay these various costs, the executor may have to liquidate assets.
- Distribution of Assets
After the debts and expenses, including taxes, have been paid, the executor needs to make proper distribution of the remaining assets. This is done through distributions to beneficiaries and establishing trusts.
Closing the Estate
After making final distributions of the assets, and sometimes immediately prior to making final distributions to the beneficiaries, a final report and/or accounting must be filed with the probate court. Generally, the beneficiaries are given the opportunity to object to any items of the report or accounting that they believe are incorrect or inappropriate. It is also their opportunity to raise any final issues they may have regarding the executor’s handling of the estate.
After resolving any issues and making any appropriate adjustments, the court approves the closing of the estate. Generally, the beneficiaries must sign receipts indicating that they have received their distributions. The executor must file these receipts with the court before being discharged as executor.
Avoidance Techniques
While the probate process has certain advantages and is intended to provide for the orderly distribution of the estate under appropriate supervision, there also are disadvantages to this process that cause many individuals to seek methods of avoiding probate, referred to as non-probate transfer methods.
Advantages of Probate
The main advantage of the probate process is that it is supervised. The court’s monitoring of the executor’s activities provides some assurance that the estate is properly administered by the executor. The probate court's procedures for handling will challenges and claims of creditors provide a means for resolving disputes. Challenges and claims that are not timely filed during the specified notice period (or not raised at all) are barred. Challenges and claims that are raised are resolved. Thus, the beneficiaries have more assurance that they have received clear title to the property that is distributed to them.
Disadvantages of Probate
The probate process is criticized as costing too much, taking too long, and for the loss of privacy.
With a living trust as the central document in your estate plan, the trust assets are transferred in a fashion similar to a will.
- Overview: A living trust is administered without the supervision of a court.
- Initial procedures: Your successor trustee carries out the terms of your living trust.
- Trustee duties: A trustee collects assets, pays debts, and makes distributions to beneficiaries.
- Termination of the trust: After the trust assets are distributed, the trust is terminated.
Overview
If you have a living trust, your successor trustee will need to take certain steps in carrying out your wishes. In general, the trustee has duties that are similar to an executor who is carrying out the terms of a will. However, the trustee’s duties are handled without supervision from the court administered probate process. The trustee is guided by the terms of your trust and the general terms of your state’s laws regarding trusts. Usually, these state laws provide only general requirements regarding trusts and trustees, and do not set forth specific requirements that must be followed at the time of your death.
Initial Procedures
Upon your death, the successor trustee begins the process of carrying out the terms of your living trust that provide for distributions to your beneficiaries. This process includes appointing the successor trustee, resolving challenges to the trust, obtaining a federal identification number, and opening a checking account in the trust’s name. Unlike wills, there is no requirement to provide notice to heirs, beneficiaries, and creditors for living trusts.
Trustee Duties
- Gathering Assets
The first substantial task of the successor trustee is to review the assets owned by the trust and collect any additional assets that may flow into the trust. This process includes reviewing records, submitting your pour over will to probate (if necessary), taking physical custody of trust assets, and valuing the property. Unlike the probate process used in carrying out the terms of a will, it is not necessary to file an inventory listing for a living trust.
- Payment of Debts and Expenses
Before making distributions to the beneficiaries, the successor trustee must also determine what debts and expenses should be paid. The successor trustee is also responsible for resolving claims, successor trustee fees, attorney fees, filing death tax returns, and filing other tax returns. To pay these costs, it may be necessary for the successor trustee to liquidate assets. This authority is generally given to the trustee in the living trust.
- Distribution of Assets
After the debts and expenses, including taxes, have been paid, the successor trustee needs to make proper distribution of the remaining assets. This is done through distributions to beneficiaries and establishing trust shares.
Terminating the Trust
After the successor trustee has completed distributions of the trust assets in accordance with the terms of the living trust, the trust can be terminated. Unlike the probate process, the successor trustee is not required to file a final report with the probate court. However, it is appropriate for the successor trustee to provide a final accounting to the trust beneficiaries to show that the trust assets were distributed properly.
Many living trusts have trust shares that continue beyond the grantor’s death to provide for spouses, children, and others. If that is the case, the termination of the trust will not occur at the time of the grantor’s death. Rather, the termination will occur in accordance with the provisions of the trust shares. For example, the trust may continue until the death of a spouse or until children reach a specified age.
OTHER ASSETS
Some assets are distributed by means other than a will or a living trust.
- Joint Property: Property that is owned jointly passes automatically to the surviving owner.
- Collecting Benefits: Life insurance, retirement plans, and annuities are distributed according to their beneficiary designations.
Joint Property
Property that is owned jointly with rights of survivorship passes automatically to the survivor at your death. While the probate process is not needed to transfer title to the survivor, there are several points to remember. The joint property is part of the estate for federal estate tax purposes. In most states, joint property is subject to the estate tax and inheritance tax requirements. Although the joint property may be free from tax under the applicable tax law because it passes to a spouse or because the estate is small, it cannot be assumed that the “avoidance of probate” also means the “avoidance of taxes.”
In some states, it may be important to file a document with the local county recorder or in the register of deeds to show that the joint owner has died and is no longer one of the joint owners of the property. This requirement can be handled by an executor, successor trustee, or surviving joint owner of the property.
Collecting Benefits
Upon your death, there may be life insurance proceeds to collect, or proceeds from retirement plans, IRA accounts, and annuities.
Applications for these proceeds should be completed by the beneficiaries. Often the executor or a successor trustee of a living trust will help with this process. In addition to collecting the proceeds, there may be important elections for the beneficiary to make. For example, whether to take the benefits as a lump sum or as fixed payments over a period of time.
These proceeds are generally subject to federal estate taxes and may be subject to estate or inheritance taxes under the applicable state laws. Therefore, information regarding the proceeds will need to be provided to the executor, successor trustee, or other person handling the tax returns for the estate.
WILL ADMINISTRATION CHECKLIST
- Initial Procedures.
- Obtain and review wills and codicils.
- Select and hire an attorney to assist the executor.
- Gather information.
- Obtain Death Certificate.
- Collect personal information and papers (including financial information).
- Obtain names, addresses, and telephone numbers of beneficiaries and heirs.
- Probate the will.
- Give notice of probate proceedings.
- Admit the will to probate court by applying to the court that handles probate matters.
- Apply to the court to appoint the executor.
- Gathering Assets.
- Open a checking account for the estate.
- Obtain a Federal Identification Number from the IRS. (Form SS -4)
- Notify the IRS of the authority of the executor to act for the decedent. (Form 54)
- Contact employer to obtain final paycheck and any insurance.
- Contact life insurance provider.
- Determine which assets are subject to probate and which pass automatically.
- Joint property passes to the surviving joint tenant.
- Life insurance and retirement benefits pass to their specified beneficiaries.
- Totten trusts ("payable-on-death" accounts) go to their specified beneficiaries.
- Take physical custody or control of the probate assets and safeguard them.
- Obtain valuations and appraisals of assets, as necessary.
- Payment of Debts and Expenses
- Pay decedent’s current debts such as utilities, medical expenses, credit cards, etc.
- Estate expenses, such as court costs, executor and attorney fees should be paid.
- File appropriate tax returns.
- Federal estate tax return.
- State inheritance or estate tax return.
- Decedent's final income tax returns (federal Form 1040 and applicable state return).
- Gift tax return (if decedent made substantial gifts - Form 709).
- Estate fiduciary income tax returns (federal Form 1041 and state).
- Trust fiduciary income tax returns (federal Form 1041 and state).
- Business and/or employment tax returns (for business interests)
- Closing the Estate.
- Distribute assets.
- Specific bequests of cash and/or property should be distributed.
- Sell property which must be liquidated.
- Establish any trusts provided in the will.
- Distribute any remaining estate assets.
- Obtain tax clearances from appropriate government agencies.
- File final report/accounting of all receipts, disbursements, and activities of estate and executor.
- Close estate account and pay any final expenses.
TRUST ADMINISTRATION CHECKLIST
- Initial Procedures.
- Obtain and review living trust and pour over will.
- Select and hire an attorney to assist the trustee.
- Gather information.
- Obtain Death Certificate.
- Collect personal information and papers (including financial information).
- Obtain names, addresses, and telephone numbers of beneficiaries and heirs.
- Determine whether it is necessary to use the pour over will (consult an attorney).
- If it is necessary to use the pour over will, consult the Will Administration Checklist.
- Gathering Assets.
- Open a checking account for the estate.
- Obtain a Federal Identification Number from the IRS. (Form SS -4)
- Notify the IRS of the authority of the executor to act for the decedent. (Form 54)
- Contact employer to obtain final paycheck and any insurance.
- Contact life insurance provider.
- Determine which assets pass automatically.
- Joint property passes to the surviving joint tenant.
- Life insurance and retirement benefits pass to their specified beneficiaries.
- Totten trusts and other "payable-on-death" accounts go to their specified beneficiaries.
- Take physical custody or control of the trust assets and safeguard them.
- Obtain valuations and appraisals of assets, as necessary.
- Payment of Debts and Expenses
- Pay decedent’s current debts such as utilities, medical expenses, credit cards, etc.
- Estate expenses, such as trustee and attorney fees should be paid.
- File appropriate tax returns.
- Federal estate tax return.
- State inheritance or estate tax return.
- Decedent's final income tax returns (federal Form 1040 and applicable state return).
- Gift tax return (if decedent made substantial gifts - Form 709).
- Estate fiduciary income tax returns (federal Form 1041 and state).
- Trust fiduciary income tax returns (federal Form 1041 and state).
- Business and/or employment tax returns (for business interests).
- Closing the Estate.
- Distribute assets.
- Specific bequests of cash and/or property should be distributed.
- Sell property which must be liquidated.
- Establish any trusts provided in the living trust.
- Distribute any remaining estate assets.
- Obtain tax clearances from appropriate government agencies.
- File final report/accounting of all receipts,disbursements, and activities of estate and trustee.
- Close estate account and pay any final expenses.
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