Navigating the Probate Process

Transcription

1 Wealth Management Portfolio Management Investment Research Navigating the Probate Process An original article authored by the advisors of Wescott Financial Advisory Group LLC April South 17th Street Philadelphia, PA Boca Center Tower II 5100 Town Center Circle, Suite 650 Boca Raton, FL University Drive Suite 500 Coral Gables, FL Pennsylvania Avenue Suite 323 Fort Washington, PA One Market Plaza, Spear Tower Suite 2200, San Francisco, CA Achieving Client Goals

2 Navigating the Probate Process What is probate? Essentially, it is the process of identifying, gathering and distributing a decedent s assets. The details of the process are controlled by state and local rules, and can be further influenced by other factors such as the size and composition of the estate, the terms (or lack of) the estate documents, and the age and relation of the decedent s heirs. The most common questions people have when faced with probate center around: where to file the will, what documents to bring, what to do if there is no will, and what the distinction is between probate and non-probate assets. Other issues that can come into play are the use of living trusts, the federal estate tax exemption, and state-level estate and inheritance taxes. For many, the probate process can be confusing and daunting. Below we share with you the specifics of the process so you are better prepared when probating an estate. What and Where to File? The probate process begins when the executor (sometimes referred to as a personal representative) files the necessary paperwork with the appropriate county officer where the deceased legally resided at the time of death. Each jurisdiction will have its own rules and nuances, however, the basic principles are generally similar. For example, in Pennsylvania, an estate is opened by filing a petition for grant of letters with the county s Register of Wills; while Florida requires a request for letters of administration from the clerk of the county s circuit court. Other items typically required to open the estate include: An original version of the will along with any codicils (i.e., supplements to the will) Signed and notarized oaths of witnesses if the will does not have a self-proving affidavit (which is a sworn statement attached to a will, signed by the will maker and his or her witnesses, that attests to the validity of the will) A check for the filing fee Identification for each individual intending to serve as an executor or a signed renunciation from anyone named in the will who does not wish to serve Typically, a will includes the appointment of an executor and successor executors who replace the primary executor in the event that person is unwilling or unable to serve. Many wills also include provisions that allow the named executor to hire a professional assistant (typically a law firm) at the estate s expense. What if There is No Will? Who Gets What? A person who dies without a valid will is said to have died intestate. Each state has an intestate succession statute that provides a default estate distribution plan for these situations. The default plan also applies to any assets which are not effectively disposed of by a valid will. While states differ on the details, intestate succession laws generally grant priority to the deceased s surviving spouse (if any) followed by surviving children, grandchildren, and other lineal descendants. If the decedent leaves no surviving spouse or descen- Copyright 2015 Wescott Financial Advisory Group LLC All Rights Reserved 1

3 dants, the statute will look up the family tree, first to parents, followed by brothers and sisters, grandparents, aunts, uncles and other more distant relatives. These default provisions typically limit eligible beneficiaries to spouses and blood relatives. Friends, nonspouse partners, favorite charities, etc. are not entitled to any proceeds. In the rare instance that no eligible relatives can be identified, the decedent s estate passes to the state in a process known as escheat. Who Serves as Executor? If there is no will, or if a will fails to name an eligible executor (e.g., the named executor and successor executors are unable or unwilling to serve), the court will appoint someone to serve. Preference is generally given in the same order in which assets are distributed to adults who have not been determined to be incompetent. Which Assets are Subject to Probate? The General Distinction. Assets subject to the probate process are those which were owned solely by the decedent at the time of his or her death, and which are not disposed of by other means. Examples include: Checking and savings accounts Non-retirement investment accounts Solely held real estate Personal property such as jewelry, collectibles, automobiles, etc. Life insurance proceeds payable to the insured s estate On the contrary, assets that are jointly titled with rights of survivorship along with any assets controlled by a beneficiary designation pass directly to the selected beneficiary outside of the probate process. Examples include: IRAs and 401(k) accounts with properly executed beneficiary designation forms Real estate owned in a joint tenancy with rights of survivorship Joint bank accounts that automatically transfer title to the surviving owner upon the death of the deceased owner Life insurance proceeds payable to a specific beneficiary Property held in a trust that names beneficiaries It is important to note that assets not subject to probate may be subject to estate or inheritance taxes. Non-probate assets are simply those that are free to pass to the appropriate beneficiaries outside of the judicially supervised probate process. How Long Does The Process Take? The length of the probate process will depend on the amount, type and titling of the assets involved. The need to sell assets, disputes between beneficiaries or creditors of the estate, and other complications can all extend the amount of time it takes to close the estate. Even the simplest estates must remain open for the state s required creditor notice period (which is the time during which creditors are required to file claims for debts owed by the deceased, typically six to 12 months). The executor must also be aware of federal and state tax filing deadlines. If the estate is required to file a federal estate tax return, IRS form 706 is due nine months after the date of the decedent s death, although a six-month extension is available if requested. States that impose an estate or inheritance tax typically follow this same schedule. However, because the process is administered, it is important to check local and state rules for addi- Copyright 2015 Wescott Financial Advisory Group LLC All Rights Reserved 2

4 tional deadlines, extensions, options and exceptions that may be applicable. For example, Pennsylvania offers a 5% discount on inheritance tax if payment is made within three months of the decedent s death. Using a Living Trust to Avoid Probate There are many reasons people wish to keep assets out of probate, although in some states the incentive is stronger than others. General reasons for avoiding probate include cost, privacy and speed. Depending on the jurisdiction, assets passing outside of probate can reach the intended beneficiary much faster and avoid becoming part of publicly available records. Furthermore, in some states, the cost of the probate proceeding increases with the size of the estate. Florida (among other states) has established statutory reasonable attorney s fees that begin with set dollar values and increase to include a percentage of the total probate estate for estates valued at over $100,000. To avoid the costs and inconveniences of probate, many people choose to transfer their assets into a revocable living trust. Individuals or married couples serve as the trustees of their own trusts, granting them full access to any assets transferred into the trust for the duration of their lives. The trusts are revocable during the settlors lives, allowing any necessary alterations to be made. At the death of the settlor (or second spouse in the case of married couples) the trust operates much like a will. First, a successor trustee, named in the trust document, is appointed. The successor trustee then serves the same general purpose as the executor of a will. The trustee identifies the beneficiaries named in the trust and either distributes assets outright or continues to hold the assets in trust as directed by the terms of the document. The courts do not need to be involved and no public record is created. Other Factors Affecting Probate Assets Community vs. Separate Property. In community property states, in general, all assets that are acquired or earned during a marriage are owned equally by both spouses. Assets brought into the marriage can be kept separate or commingled to create community property, however, classifying assets as community property does not avoid probate. The deceased spouse is free to leave his or her half of community property (along with any separate property) to whomever he or she chooses. Because community property does not automatically carry a right of survivorship, a will (or intestate succession) is necessary to determine who is entitled to the assets and therefore probate is required to transfer assets, regardless of community or separate status. Rights of Survivorship. Most frequently used in real estate, forms of joint tenancies with rights of survivorship are a common way to avoid probate. A right of survivorship simply means that when one joint owner dies, title automatically vests in the remaining owner or owners. As far as avoiding probate is concerned, however, this is only a temporary solution. Without other planning in place, the property will be included in the probate estate of the last surviving owner. Real Property Held in Multiple States. As previously mentioned, real property titled solely to the deceased is subject to probate. This creates additional complications when the property in question is located outside of the decedent s home state. Real estate, like probate, is primarily governed by state law. As a result, when a decedent owns property in a second state, a second probate estate will usually need to be opened as well. This process, known as ancillary probate, takes place in the state in which the property is located and is subject to that state s probate laws. Fortunately, many states have recognized this issue and have implemented procedures to ease the ancillary process. Once a will has been deemed valid and an executor appointed in the primary probate process, those decisions will typically be accepted by other jurisdictions without a second formal proceeding. Take for example, Copyright 2015 Wescott Financial Advisory Group LLC All Rights Reserved 3

5 a Pennsylvania resident who dies as the sole owner of a vacation home in New Jersey. To transfer title to the property, the executor would need to provide the county in which the property is located with: An exemplified copy of the will and probate proceedings from Pennsylvania A certified copy of the death certificate A copy of the deed of real estate In many cases including the one above the transfer process is made easier by eliminating the requirement for a second formal probate proceeding. There are issues beyond the simple transfer that need to be accounted for, however. First, the real estate will be subject to any inheritance and other transfer taxes applicable in the state where the property is located. A person who dies in a state without death or inheritance tax may still owe taxes based on where he or she owns property. The executor of an intestate estate must also be especially careful. Because real estate is governed by state law, real estate in another state may be subject to succession rules that produce a different outcome than those being applied to the decedent s other assets. Taxes Before an estate can be closed and all beneficiaries and creditors satisfied, state and federal revenue departments must be satisfied as well. Federal Estate Tax. The federal estate tax is only an issue for relatively large estates or for those estates which would have been large without a substantial amount of lifetime giving. In 2015, federal law provides a $5.43 million lifetime estate and gift tax exclusion per person. The effect of this exclusion is that each person may give away, during their life or at their death, $5.43 million before they are subject to any federal transfer taxes. Amounts beyond the exclusion are subject to an estate tax up to 40%. State Estate and Inheritance Taxes. In addition to federal taxes, some states also collect their own transfer taxes. Currently, 19 states have either an estate tax, inheritance tax, or combination of both. State-level estate taxes operate similarly to the federal estate tax: a percentage of assets above a certain threshold are taxed at the time of the decedent s death. On the contrary, inheritance tax rates depend on the beneficiary receiving the property. For example, Pennsylvania imposes a 0% tax on transfers to the decedent s spouse, 4.5% on transfers to children and grandchildren, 12% to siblings and 15% to all other non-charitable heirs. Other states, including Florida and California, do not impose a tax on assets passing at death. Wescott Services and Solutions Wescott Trust Services provides trust solutions both as a professional trustee and as an agent that assists trustees with the administration of trusts and estates. As a trustee, Wescott Trust Services performs trust administration duties as detailed in trust documents and provides principal and income trust accounting. As an agent for a trustee, Wescott Trust Services provides asset custody and support to the trustee. Using Wescott Trust Services ensures that your heirs will have the professional advice and support they need to navigate the probate process in a quick and cost-effective manner. Heirs benefit greatly from the continuity of investment management and advice in what can be a difficult and confusing time. Copyright 2015 Wescott Financial Advisory Group LLC All Rights Reserved 4