VIII Probate and Estate Planning by Levone


									                                                               Part Eight --
                                                Probate and Estate Planning
Probate and Estate Planning

The Probate Process
Probate is the formal, court-supervised process, which validates one's will and distributes
assets to the heirs. There are three important advantages to avoiding probate:

        !   One's estate is not forced to pay probate costs, which can be significant. The
            national average for probate fees is 7.4 percent of the value of the gross estate. If
            the gross value of one's estate is $250,000, probate costs alone could consume
            $18,500 or more.

        !   Probate proceedings typically range from nine months to two years. Usually, the
            heirs do not have ready access to the assets during this time. If funds are needed,
            even for living expenses, heirs cannot access them without approval from the
            probate court. Avoiding probate skips these delays.

        !   Once in probate, the details of one's estate become a matter of public record.
            Avoiding probate generally protects one's privacy and that of the heirs.

Contrary to what many people believe, a will does not avoid probate. In fact, probate is the
process by which a will is verified. A will carries other disadvantages, as well. Since it does
not take effect until one dies, one cannot use a will to make provisions for the daily
management of the estate or for the care of the estate owner and his/her dependents in the
event that one becomes mentally or physically incapacitated. A living trust, however, allows
one to make those provisions.

Some states have adopted simplified probate procedures that reduce costs and time delays
for small estates. However, regardless of the size of the estate, probate applies to all wills.
Probate is also required when an individual dies without a will or intestate.

If an individual owns property jointly, it can pass from one owner to another without going
through probate. However, when the surviving owner dies, or if both owners die at the
same time, the estate will have to go through probate. Joint ownership also reduces the
degree of control one has over the assets. For example, jointly owned property cannot be
sold without the signature of both owners. If one's co-owner becomes incapacitated and
cannot sign, the probate court may have to get involved. Joint ownership also does not take
advantage of the Federal Estate Tax Exemption.

Probate is an administrative process to prove that a will is valid and that the person who
created and signed it was mentally competent and not acting under undue influence when it
was created and executed.

                                                               Part Eight --
                                                Probate and Estate Planning

An individual's will is simply a set of written or dictated instructions stating how and to
whom one's assets are to be distributed. If one has children who are minors, the will should
also indicate who should assume the responsibility of caring for them. All the assets
controlled by the will must be placed under the jurisdiction of the Probate Court. In some
states, probate is required only if one's gross estate exceeds $100,000 and the assets were not
held in one of the following ways:

            !   In joint tenancy
            !   As community property with one's surviving spouse
            !   In a living trust
            !   In a contractual arrangement, such as a life insurance policy which pays
                policy proceeds to a named beneficiary

There are a number of disadvantages and advantages to the probate process. Often, people
decide to develop an estate plan that avoids the probate process because of the
disadvantages. However, one should study both sides of the equation to determine how
probate may affect the estate planning goals and objectives.

Disadvantages of Probate
Probate can be Costly

The law sets one's estate's attorney's fees, but they only cover ordinary services. If the
attorney has to do "extraordinary" work, the fees may be greater. Also, one's executor is
entitled to charge fees to administer one's estate. The courts also set the executor's fees and
the rate schedule is the same as that for the estate's attorney. The attorney and executor's
fees are based on the gross value, not net value, of the estate. These fees do not include
other fees fixed by law or assessed by courts or other agencies, such as appraisal fees, title
search costs to determine title to property, or any publication costs set by the publisher.

Probating an Estate can be Time Consuming

The settlement of an estate often takes between one and two years. Moreover, assets in
probate often suffer from lack of management or overly conservative management during
the settlement process. It can often take a month or more to obtain the probate court's
permission to sell an asset. Because of these delays, the executor may not be able to respond
quickly enough to changing market conditions. Executors must be conservative during the
probate process because they can be held personally and financially liable if their actions with
regard to assets in the estate are deemed to be less than prudent.

Probate is a Public Process

The public nature of probate gives unknown creditors an opportunity to make claims against
the estate. Therefore, the will must be a matter of public record.

                                                               Part Eight --
                                                Probate and Estate Planning

Advantages of Probate
Protection From Creditors

Once an estate has been "probated" and all of the estate assets have been distributed to the
beneficiaries, no creditor can make a claim on the assets.

Court Supervision

Another main advantage of probate is that there is court supervision over the entire process.
If the estate's debts have not been paid or assets distributed within 18 months of death, the
executor must answer to the court and explain the reasons for the delay. The executor must
also prepare an accounting for the court, detailing the executor's actions with regard to
receipts and disbursements from the estate.

Possibility of Lower Taxes

If the beneficiaries believe the court-appointed appraiser (also known as a probate referee)
has overvalued the property, the potential estate tax that will be assessed on that property
will be higher than necessary. The lawyer or executor can hire an independent appraiser to
appear before the judge and present a second property appraisal. The judge may approve of
the new appraisal or split the difference between the appraisals, thereby lowering the estate

Generally, it costs more to have one's attorney draft a revocable living trust than to draft a
will. However, the overall savings to the estate due to the avoidance of probate and the other
related costs often easily outweigh the upfront costs involved with establishing a trust. More
often than not, the avoidance of probate will be an important consideration in the
development of any estate plan.

Mechanics of Probate
The main purposes of probate are to ensure that:

           !   The property of a decedent is distributed to the rightful heirs
           !   The decedent's debts are paid
           !   Disputes arising from beneficiaries

In general, probate proceedings must be filed within one year after the decedent's death.

Full Administration

There are various mechanisms for avoiding the probate of a decedent's estate. However, if
those mechanisms have not been used, or for some reason are not effective, and a decedent
leaves property and/or money worth more than $40,000, the decedent's estate will be subject

                                                               Part Eight --
                                                Probate and Estate Planning

to what is known as "full administration" in the Probate Division. This process typically
requires a minimum of 13 months from the date of death. In general, a full administration
involves the following steps:

           !   Filing initial paperwork in the Probate Division

           !   Appointment of a personal representative or an "executor", whose
               responsibility is to administer the estate under court supervision

           !   A full administration can be simpler and less costly if the personal
               representative is authorized to act as an "independent personal
               representative." This is permitted if authorized by the decedent's will or if all
               beneficiaries agree.

           !   Publication of a legal notice of the opening of the estate and the appointment
               of the personal representative (the notice gives creditors a deadline to file
               claims against the estate)

           !   Collection of the decedent's assets

           !   Filing an inventory of the decedent's assets with the court

           !   Dealing with claims against the estate – debts owed by the decedent (if a
               claim is disputed, the Probate Division will conduct a hearing to determine if
               the debt is owed, and, if so, what amount should be paid)

           !   Filing a final report with the Probate Division showing assets, claims and
               other expenses paid, and proposed distribution of the remainder to heirs
               and/or designated beneficiaries

           !   Distributing the remainder of the estate to the heirs and/or designated
               beneficiaries, obtaining receipts from them, and filing the receipts with the

The differences are:

           !   In a supervised administration, the Probate Division must approve many
               actions of the personal representative, who must also file annual accountings,
               which are fully reviewed and audited by the Probate Division.

           !   An independent administration is more informal and eliminates the need for
               most supervision by the Probate as well as the annual accountings.

                                                               Part Eight --
                                                Probate and Estate Planning

Other Probate Procedures

If the value of the decedent's property subject to probate does not exceed $40,000, a simpler,
less expensive and quicker procedure, which does not require the appointment of a personal
representative, is available. The main steps in this process are:

           !   A beneficiary of the estate files an affidavit in the Probate Division. The
               affidavit must describe the decedent's property, set out the names and
               addresses of the persons entitled to receive the property, and state that all
               unpaid debts of the decedent have been or will be paid.

           !   If there are no complications, approximately seven months after the filing of
               the affidavit, the Probate Division clerk will enter a certificate on the affidavit
               authorizing distribution of the decedent's property to the heirs and/or

Some even quicker and more summary probate proceedings are available in small estates.

Petition to Determine Heir-Ship

If a probate proceeding has not been filed within one year after the decedent's death, and it
is later discovered that the decedent owned property to which heirs and/or beneficiaries
named in a will are entitled, the statutes permit filing a "petition to determine heir ship."

After a hearing on the petition, the Probate Division will issue a judgment determining
ownership of the decedent's property and ordering its distribution to the appropriate person
or persons.

Statutory Fees

Only attorneys are authorized by law to represent a personal representative in a decedent's
estate. The probate statutes set out a fee schedule for the personal representative and the
attorney. Sometimes the personal representative is also an attorney, in which case only one
statutory fee is allowed. The statutory fees are based on the value of personal property,
including cash, inventoried in the estate. The fee schedule is:

           !   On the first $5,000 in the estate – 5%
           !   On the next $20,000 – 4%
           !   On the next $75,000 – 3%
           !   On the next $300,000 – 2.75%
           !   On the next $600,000 – 2.5%
           !   On all over $1 million – 2%

                                                               Part Eight --
                                                Probate and Estate Planning

Other Probate Expenses

In addition to the personal representative and attorney's fees, a decedent's estate subject to
full administration will typically incur the following additional types of expenses:

        Bond premiums: The personal representative may be required to provide a bond to the
           Probate Division to guarantee faithful performance of duties. However, a bond
           can be waived by the will of the deceased person, and in some cases, a bond can
           be waived if the court and/or all beneficiaries agree. The cost of the bond, which
           is obtained from an insurance agent, is paid out of the estate and varies according
           to the value of property inventoried in the estate.

        Publication costs: In general, at least two notices must be published during
            administration of an estate to protect the rights of all persons who may have an
            interest in the estate. The first notice informs potential heirs and the public that
            the estate has been opened and also notifies creditors to submit claims against
            the estate by a specified deadline. The second notice is published at the end of
            the process before an estate is closed and is called a "Notice of Intention to File
            Final Settlement" or "Notice of Intention to File Statement of Account." The
            cost of publishing these notices varies depending on the length of the notices
            and the charges made by particular newspapers.

        Court costs: The Probate Division, although a part of state government, is not entirely
           supported by tax revenues. Therefore, every estate is required to pay a share of
           the expenses of the Probate Division. These costs are generally based on the
           value of the estate.

        Appraisal fees: if appraisals are necessary to determine the value of property in the
           estate, the estate must pay appraisers' fees.


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