Estate Planning
Estate planning involves the formation of wills and trusts when planning for the distribution of assets after death. The execution of an estate plan after someone is deceased is referred to as "probate."
Probate is the process that transfers legal title of property from the estate of the person who has died (the "decedent") to his or her proper beneficiaries. The term "probate" refers to a "proving" of the existence of a valid will, or determining who the legal heirs are if there is no will.
The probate process also provides for the collection of any taxes due by reason of the deceased's death or on the transfer of his or her property. Additionally, it provides a mechanism for payment of outstanding debts owed by the decedent.
Does All Property Have To Go Through Probate?
Real and personal property owned as a joint tenants passes to the surviving co-owner(s) without going through probate.
Other types of benefits, such as life insurance or annuities payable directly to a named beneficiary also bypass probate. Money from IRAs, Keoghs, and 401(k) accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death account (POD for short) or an "in trust for" account with a named beneficiary also pass to that beneficiary without probate.
If a living trust holds legal title to property, that also passes to the beneficiaries without probate. (The trust is a legal entity which survives you after your death.)
How Are Estate Creditors Handled?
As part of the probate process, creditors are notified of the death. They must file a claim for the amounts due. If the claim is approved by the executor, the bill is paid out of the estate. If the claim is rejected, creditors must sue for payment.
If there are insufficient funds to pay debts, states have statutes of one kind or another establishing who gets paid first. Executors most likely will commence selling property to pay off approved creditor claims. Any claims remaining are pro-rated.
How Are Taxes Handled In Probate?
For federal and state tax purposes, death triggers two events:
- It ends the decedent's last tax year for purposes of filing an income tax return, and
- It establishes a new, separate entity for tax purposes, the "estate."
For federal tax purposes, it may be necessary to complete and file one or more of the following, depending on the decedent's income, the size of the estate, and the income of the estate:
- Final Form 1040 Federal Income Tax return
- Form 1041 Federal Fiduciary Income Tax returns for the estate
- Form 709 Federal Gift Tax return(s)
- Form 706 Federal Estate Tax return
For state purposes, an executor must file the appropriate state income tax return plus possible estate tax, inheritance tax and gift tax returns. In many states, gift, estate and inheritance taxes have been eliminated for most small- and medium-sized estates. The requirements for filing and payment vary widely from state-to-state.
What If There Is No Will?
If a person dies without a will, the probate court appoints a personal representative frequently called an "administrator" or "administratix" to receive all claims against the estate, pay creditors, and distribute all remaining property in accordance with the intestacy laws of the state.
Without a valid will, an "intestate" estate is distributed to beneficiaries in accordance with the distribution plan established by state law; a "testate" estate is distributed in accordance with the instructions provided by the decedent in his or her will.
Where Is Probate Handled?
Probate usually occurs in the appropriate court in the state and county where the deceased permanently resided at the time of his or her death. Such courts go by different names in various states. In many states the court is simply called the "Probate Court."
The probate court usually handles the distribution of all the personal property the deceased owned, as well as all of the real estate that the deceased owned that is located in that same state.
Who Is Responsible For Handling The Probate Process?
A personal representative (sometime also referred to as the "executor" or "executrix" if there is a will, or the "administrator" or "administratix" if there is no will) is appointed as part of the probate proceeding. This person has the responsibility for managing the estate through the proceeding, subject to the direction of the court and the probate rules and procedures.
Typically, the probate court has a considerable amount of control over the activities of the personal representative. Often the court will require that she or he obtain prior permission before certain actions may take place (e.g., the sale of property) The court will also typically require an accounting from the personal representative of all transactions.
If you or a loved one needs assistance in planning or handling an estate, call VanDerGinst Law at 1-866-843-7367 or click here for a FREE online case evaluation. Your initial consultation is guaranteed free of charge. During that visit, we will be able to tell you up front what we may be able to do for you, as well as what the attorney fees would be for your case. Our fees are always competitive, so don't hesitate to contact us and learn how we can help.
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