Julia McVey, Esq.
Steve TeSelle, CFA, CFP ™
March 2003
The Connection Between A Will and the Probate Process
Disclaimer: This article is not intended as legal advice. We recommend that you consult with an estate planning attorney for advice regarding your particular situation. Usually, such an initial consultation is free of charge.
Estate planning is a fancy term for figuring out what to do with your stuff. Unless you're a Pharaoh, you don't expect to take everything with you when you die, so you might want to have a plan that involves something more than a pyramid. There are really two reasons to give this topic some thought. One reason is because you should decide who gets what and when, not the state in which you live. Second, if you have a taxable estate (this year, your estate will be subject to estate tax if your assets exceed $1 million), a proper estate plan can reduce or eliminate this tax burden.
Most of us would rather not deal with death, especially our own. It's just
that you make life easier for those who survive you if you put some thought
into what happens when you die.
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For many people, all that is needed to distribute your assets at death is a will. A will describes how assets are divided among heirs, charities, or whomever. If you have minor children, you need a will to appoint a guardian to care for them in case you die. You may want to establish a trust for those minor children so they do not receive a large sum of money at one time. Your will can and should appoint a Personal Representative (sometimes known as an Executor) who is in charge of gathering your assets and distributing them according to your plan. Also, if a trust is established for beneficiaries, you need to appoint a Trustee who is in charge of managing, investing and distributing the trust assets to the right beneficiaries.
If you have a will, you also need to coordinate titling of your assets. For example, your will may direct that your retirement account goes to cousin Fred. However, if the account lists cousin Susie as the beneficiary, Susie gets the money.
State law determines the requirements for a valid will. Exercise caution with
computer programs where you can prepare your will yourself. Oftentimes these
self-directed programs do not address the particular needs of each individual
and necessary provisions are unknowingly left out. Since most estate planning
attorneys do not charge for the initial consultation, you might as well spend
an hour of your time with an expert to get educated about this sometimes complicated
topic.
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Probate is the process of gathering assets owned by an individual and distributing those assets according to your will or trust. If you die without a will (intestate), the state in which you live has a statute which spells out who is to get what. For instance, in Colorado, if you die intestate and leave behind a surviving spouse but no children, your spouse will receive the first $200,000 + 3/4 of the balance of your estate. The remaining ¼ of your estate will go to your surviving parent. This is one example of how Colorado distributes your assets for you at your death if you do not have a will. Other scenarios are dealt with, such as if your surviving spouse has minor children from a previous marriage, the surviving spouse receives the first $150,000 + ½ of the balance, then your descendants receive the other one-half. Bottom line: most people would not be happy with how the state of Colorado distributes assets for you if you die without a will.
In Colorado, the probate process is fairly straight forward, unlike some states
such as California and Florida. Probate is open to the public and will take
a minimum of 6 months before your assets are distributed to your heirs. Usually,
probate takes 9 months to 1 year to complete. To avoid probate, there are other
planning tools you can use and again, we suggest consulting with an expert to
determine what estate planning method is best for your situation.
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One way to avoid probate is to create and fund a living or revocable trust prior to your death. Such a trust is really just a management contract. Once you establish this type of trust, probate will be avoided only if you have retitled your assets into the name of your trust. There are good reasons to have a revocable trust as the estate planning tool that distributes your assets at death. Revocable trusts are private and not subject to public scrutiny. As mentioned earlier, if you do own an asset in another state, the probate process of that state can be a nightmare. However, having your revocable trust own that asset means that your heirs will not have to open probate in that state to retrieve the asset (this is called ancillary probate) and thus you will save your heirs much money and time.
Living or revocable trusts are just the tip of the trust iceberg. Lots of folks
have thought about their death, and attorneys have responded to a whole variety
of wishes and wants with a whole variety of trusts. You can set up the elegantly
named grantor retained income trust (GRIT), or maybe the charitable remainder
unit trust (CRUT). You can even set up an intentionally defective trust, which
doesn't sound like anything you'd want to buy, but goes to show that shopping
for trusts requires professional assistance. The specific names aren't really
important. What's important is that the trust accomplishes your objectives.
A good estate planning attorney should help you identify and prioritize your
objectives, and then use the appropriate tools to get you what you need.
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No discussion of estate planning is complete without a discussion on taxes. The two types of taxes most individuals face are estate and income. Both are subject to frequent and dramatic revision by Congress. The point to that statement is that taxes should generally be a less important part of the estate planning process than achieving goals such as the care of a young child. However, a proper estate plan should both distribute your assets as you want and also be drafted to save estate taxes in the most flexible way if you have a taxable estate.
It is a shame when people fail to do legitimate estate planning and cause their
heirs to incur a huge estate tax. If an estate tax is owed, it is due 9 months
after you die. Depending upon the liquidity of your assets, this can be an onerous
burden resulting in a fire-sale of not so liquid assets in order to come up
with the cash. Again, if you have assets that exceed the tax-free "exemption"
amount (currently $1 million), you should seek advice on tools to reduce and
potentially eliminate an estate tax. In determining whether you have $1 million
in assets, add up all of your stuff, including death benefits on life insurance
policies, 401k or IRA balances, the equity in your house, etc… People are
often surprised at the value of their estate when they go through this exercise.
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Approximately 70% of Americans do not have a will. This could mean that there are a lot of people who don't expect to die, or they think that their death won't affect anyone. But probably not. If you're one of those 70%, we encourage you to take a few moments to consider whether you want a pyramid, or something a little more realistic and effective. Even if you have a will or trust in place, we recommend that you review these documents every 3-5 years as circumstances change. What once might have adequately met your estate planning goals may no longer be inappropriate.
Other documents that are important to have with your estate plan are the following: a financial power of attorney, a medical power of attorney and a living will. Again, the estate planning attorney should provide these important documents as part of your overall estate plan.
"Speaking as a potential beneficiary, this pyramid project
worries me."
[To contactJulie, please call her at (303) 436-9121, or email her at JSMJGM@aol.com.]
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