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Posted by: Kim_Hamilton on 11/12/2008 04:20 PM Updated by: Kim_Hamilton on 11/12/2008 04:22 PM
Expires: 01/01/2013 12:00 AM
:



Legal Issues with Estates~By Alan Horvath, Attorney at Law

November 11, 2008 – Passing On an Inheritance....My goal with this article is to review the ways in which an individual can leave an inheritance. In the process I hope to give readers some insight into the benefits and disadvantages of the different approaches....

Click to Visit Alan Horvath, Attorney at Law


Wills
The simplest model we can look at is that in which you have your assets in your own name at the time of death. Your bank account is in your name, your house is in your name, and you die. What happens? Unless you are married and your spouse survives you, or unless your estate is less than $100,000 in value, your estate will have to go through probate. This is a court procedure. Its purpose is to first pay off your creditors, and then to distribute any balance to your heirs. This process of paying off creditors and distributing the balance is known as administration. An individual will be appointed by the court to conduct this administration. He will be expected to have an attorney to handle the significant court interface required in conducting this administration. Both the administrator and his attorney will be entitled to statutory fees that are set on a declining scale based on the value of the estate. Fees are computed at 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000, and so on. For a $300,000 estate, the fees amount to $9,000 times two. By default, the court will expect a probate to be open for at least 120 days to allow for creditors to make their claims.

If your assets are in your name at the time of death, then all of the above statements with regard to probate will hold. The specifics of the distribution to heirs will depend on whether or not you have a will, and what it says. If you have no will, state law sets a default distribution scheme which leaves property first to a surviving spouse, then to children, then parents, etc. It is a scheme very similar to what many people would do even if they wrote a will.

If you want to alter that scheme, then you need a will. If you have one, then you can decide who gets what. You can disinherit a child, make distributions straight to the grandkids, leave it all to charity, or whatever else you might decide. Whatever your wishes, if the property is in your name at death, and you want to control its distribution to be other than the statutory default, you need a will.

You might want a will, even if you intend to have distributions identical to the statutory scheme. As noted above, in this simple scheme where the property is in your name at death, there will be a probate, and the court will appoint someone to administer your estate. If you write a will, you can name your own administrator. If this person is named in the will they are called an executor, and the court must use your appointed individual. The person could be removed later by the court for failure to perform his duties, but the court must at least give him a chance.

The executor who administers your estate may be handling a significant amount of assets. He or she will have significant responsibilities. The executor will decide what assets need to be liquidated, and will decide at what price. If items are distributed in kind, the executor will determine their comparable worth. If you care about leaving an estate, you should care about who your executor is. If you appoint no one yourself, then any relative, or even a creditor could petition for appointment.

Will Substitutes
The principal characteristic of the above model, which forced us in to probate, is that your assets were in your name at death. Can we get a different result by changing that characteristic?

The answer is yes, and there are a variety of vehicles, collectively called will substitutes that allow us to completely avoid the necessity for either a will or probate. The most common of these would be life insurance.

A life insurance policy may or may not avoid probate. If the insurance proceeds are left to your estate, then probate will still be needed. However, if the life insurance policy designates a particular beneficiary, that is who gets it. What the will says is irrelevant, and no probate is necessary. It is also worth noting that the insurance proceeds are not subject to the claims of creditors when left directly to a particular beneficiary.

Other financial instruments that directly provide for payment to a beneficiary at death also avoid probate. Thus an IRA will not go through probate, again unless you have named your estate as the beneficiary.

Finally, joint tenancy deeds serve as will substitutes. With a joint tenancy deed, the remaining joint tenants automatically become the owners on your death. Again, this is independent of anything the will says, and avoids probate.

Immediate Impacts of Will Substitutes
While will substitutes avoid probate, they generally do so at the cost of some impact that occurs immediately, rather than being deferred until death. If you leave your house to your children in your will, that action has no legal significance until you actually die. You may decide to sell the house in the meantime to fund care in an alternate manner. You may decide to reverse mortgage it to provide funds for your care. You may decide that you want to change the individuals who you leave it to. With a will, any of these things are possible since the house is still yours and your will has no impact until your death. On the other hand, if you put your house in joint tenancy with your kids, that change happens immediately and is irrevocable. You can’t get a reverse mortgage at that point. You can only sell it with their consent, and you will only get part of the proceeds. And you can no longer decide to leave it to anyone else.

Trusts
The disadvantage of a will is that it generally has to go through probate. The disadvantage of most will substitutes is that they generally take away some part of your options immediately. A trust is a vehicle that allows you to get the best of both of the above alternatives. With a trust, you transfer ownership of your assets to a trustee and the trustee is defined with one or more successors in case of death. This means that the assets are no longer in your name at death, thus avoiding probate.

The trust document requires the trustee to make the assets available to you as you specify during your life, and requires that they be disposed of according to your written instructions at death. Hence, while you have transferred ownership, unlike with a deed, the new owner is legally required to treat the assets as reserved for your personal benefit during your life. You do not own them, but the owner is required to act as if you did. As an additional safeguard, you may, but need not be your own trustee.

Because a trust comes with instructions about the use of its assets, it has an additional benefit that neither wills nor will substitutes provide. That is to insure that your assets are used according to your desires during your life if you should become incapacitated.

While a trust is significantly more expensive to create than wills or will substitutes, it combines multiple benefits that the other alternatives can not match.


Copyright Alan R. Horvath 2008. All rights reserved.




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