Is It Better Not to Have a Will?

When a person dies, estate and probate law govern how assets are distributed. If the person who has died has a properly prepared will, they have set up a “testate inheritance.” Their last will and testament will guide the distribution of their assets. If they die without a legitimate will, they have an “intestate estate,” as explained in a recent article titled “Testate vs. Intestate: Estate Planning” from Yahoo! Finance.

In an “intestate estate,” assets are distributed according to the laws of inheritance in the specific legal jurisdiction. The decedent’s wishes, or the wishes of their spouse or children, are not considered. The law is the sole determining power. You have no control over what happens to your assets.

Having a will prepared by an experienced estate planning attorney who is familiar with the law and your family’s situation is the best solution. The will must follow certain guidelines, including how many witnesses must be present for it to be executed property. A probate court reviews the will to ensure that it was prepared properly and if there are any doubts, the will can be deemed invalid.

Having a will drafted by an attorney makes it more likely to be deemed valid and enforced by the probate court. It also minimizes the likelihood of illegal or unenforceable provisions in the will.

Debts become problematic. If you owned a home and had unpaid property taxes or a mortgage and gave the house to someone in your will, they must pay the property taxes and either take over the mortgage or get a new mortgage and pay off the prior mortgage before taking ownership of the property. Otherwise, the executor may sell the home, pay the debts and give any remaining money to the heir.

Liabilities reduce inheritances. If someone has a $50,000 debt and very kindly left you $100,000, you’ll only receive $50,000 because the debt must be satisfied before assets are distributed. If the debt is higher than the value of the estate, heirs receive nothing.

Note that a person may use their will to distribute debts in any way they wish. Family members erroneously believe they are “entitled” by their blood relationship to receive an inheritance. This is not true. Anything you own is yours to give in any manner you wish—if you have a will prepared.

Another common problem: estates having fewer assets than expected. Let’s say someone gives a donation of $500,000 to a local charity, but their entire estate is only worth $100,000. In that case, the $100,000 is distributed in a pro-rata basis according to the terms of the will. The generous gift will not be so generous.

If there is no will, the probate code governs distribution of assets, usually based on kinship. Close relatives inherit before distant relatives. The order is typically (but not always, local laws vary) the spouse, children, parents of the decedent, siblings of the decedent, grandparents of the decedent, then nieces, nephews, aunts, uncles and first cousins.

Another reason to have a will: estranged or unidentified heirs. Settling an estate includes notifying all and any potential heirs of a death and they may have legal rights to an inheritance even if they have never met the decedent. Lacking a will, an estate is more vulnerable to challenges from relatives. Relying on state probate law to distribute assets is hurtful to those you love, since it creates a world of trouble for them.

Reference: Yahoo! Finance (Sep. 22, 2021) “Testate vs. Intestate: Estate Planning”

Do You have to Go through Probate when Someone Dies?

Probate involves assets, debts and distribution. The administration of a probate estate involves gathering all assets owned by the decedent, all claims owed to the decedent and the payments of all liabilities owed by the decedent or the estate of the decedent and the distribution of remaining assets to beneficiaries. If this sounds complicated, that’s because it is, according to the article “The probate talk: Administrators, creditors and beneficiaries need to know” from The Dallas Morning News.

The admission of a decedent’s will to probate may be challenged for up to two years from the date it was admitted to probate. Many people dismiss this concern, because they believe they have done everything they could to avoid probate, from assigning beneficiary designations to creating trusts. Those are necessary steps in estate planning, but there are some possibilities that executors and beneficiaries need to know.

Any creditor can open a probate estate and sue to pull assets back into the estate. A disappointed heir can sue the executor/administrator and claim that designations and transfers were made when the decedent was incapacitated, unduly influenced or the victim of fraud.

It’s very important that the administrator handles estate matters with meticulous attention to detail, documenting every transaction, maintaining scrupulous records and steering clear of anything that might even appear to be self-dealing. The administrator has a fiduciary duty to keep the beneficiaries of the estate reasonably informed of the process, act promptly and diligently administer and settle the estate.

The administrator must also be in a position to account for all revenue received, money spent and assets sold. The estate’s property must not be mixed in any way with the administrator’s own property or funds or business interests.

The administrator may not engage in any self-dealing. No matter how easily it may be to justify making a transaction, buying any of the estate’s assets for their own benefit or using their own accounts to temporarily hold money, is not permitted.

The administrator must obtain a separate tax identification number from the IRS, known as an EIN, for the probate estate. This is the identification number used to open an estate bank account to hold the estate’s cash and any investment grade assets. The account has to be properly named, on behalf of the probate estate. Anything that is cash must pass through the estate account, and every single receipt and disbursement should be documented. There’s no room for fuzzy accounting in an estate administration, as any estate planning lawyer will advise.

Distributions don’t get made, until all creditors are paid. This may not win the administrator any popularity contests, but it is required. No creditors are paid until the taxes are paid—the last year’s taxes for the last year the decedent was alive, and the estate taxes. The administrator may be held personally liable, if money is paid out to creditors or beneficiaries and there’s not enough money in the estate to pay taxes.

If the estate contains multiple properties in different states, probate must be done in all of those different states. If it is a large complex estate, an estate planning attorney will be a valuable resource in helping to avoid pitfalls, minor or major.

Reference: The Dallas Morning News (May 16, 2021) “The probate talk: Administrators, creditors and beneficiaries need to know”

What Paperwork Is Needed after Someone Dies?

Tax return issues, family matters, business associates, partners, trustees, bankers, investment advisors and tax collectors from the IRS to state and local taxing authorities all require attention after someone has died. There is a lot of work, and often a grieving family member finds it helpful to enlist the aid of a professional to lighten the load. A recent article, “Checklist for Working With a Decedent’s Estate” from Accounting Web, contains a list of the tasks to be completed.

General administration and legal tasks. At the very earliest, the executor should create a timetable with the known tasks. If you’ve never done this before, there’s no shame in enlisting help from a qualified professional. Be realistic about your familiarity with tax and legal issues and your organizational skills.

Determine with your estate planning attorney whether probate is necessary. Is the estate small enough for your state’s laws to allow you to expedite the process? Some jurisdictions can do this, others do not.

If an estate plan was created and executed properly, many assets may not need to go through probate. Assets like IRAs, joint tenancies, accounts that are POD, or Payable on Death and any assets with named beneficiaries do not require probate.

Gather information about family owners or others who may have a claim to the estate and who may have useful information about the assets. You’ll need to locate and notify heirs of the decedent’s passing.

Others who need to be notified, include charities named in the will. You’ll need to identify prior transfers to charities that were partial transfers, such as Charitable Remainder Trusts. If there is a charitable remainder trust with a retained lifetime income interest, it will need to be in the estate tax return, albeit with an offsetting estate tax charitable deduction.

Locate the important documents, including the will, any correspondence relating to the will, any letters explaining the decedent’s wishes, deeds, trusts, bank and brokerage statements, partnership agreements, prior tax returns, federal and state tax forms and any gift tax returns.

An estate planning attorney will be able to help determine ownership issues, including identifying assets and liabilities. This includes deeds, vehicle titles, club memberships, personal possessions and business assets, including copyrights and patents.

Social Security will need to be notified, as will Medicare, pension administrators, Department of Veteran Affairs, the post office, trustees, and any service providers.

Filing taxes for the last year of the person’s life and their estate tax filing needs to happen on a timely basis. Even if an estate tax return may not be required, it is useful to file to establish date of death values for assets. It is important to resolve income tax statute of limitation issues and any IRS or state examination issues.

Estate administration is a big job, especially if you’ve never done it before. Having the help of an experienced estate lawyer can alleviate much of the worry that comes with settling an estate.

Reference: Accounting Web (March 19, 2021) “Checklist for Working With a Decedent’s Estate”

What States Make You Pay an Inheritance Tax?

Let’s start with defining “inheritance tax.” The answer depends on the laws of each state, so you’ll need to speak with an estate planning attorney to learn exactly how your inheritance will be taxed, says the article “States with Inheritance Tax” from yahoo! finance. There are six states that still have inheritance taxes: Iowa, Kentucky, Nebraska, New Jersey, Maryland and Pennsylvania.

In Iowa, you’ll need to pay an inheritance tax within nine months after the person dies, and the amount will depend upon how you are related to the decedent.

In Kentucky, spouse, parents, children, siblings and half-siblings do not have to pay inheritance taxes. Others need to act within 18 months after death but may be eligible for a 5% discount, if they make the payment within 9 months.

Timeframes are different county-by-county in Maryland, and the Registrar of Wills of the county where the decedent lived, or owned property determines when the taxes are due.

Only a spouse is exempt from inheritance taxes in Nebraska, and it has to be paid with a year of the decedent’s passing.

New Jersey gets very complicated, with a large number of people being exempted, as well as qualified religious institutions and charitable organizations.

In Pennsylvania, rates range from 4.5% to 15%, depending upon the relationship to the decedent. There’s a 5% discount if the tax is paid within three months of the death, otherwise the tax must be paid within nine months of the death.

As you can tell, there are many variations, from who is exempt to how much is paid. Pennsylvania exempts transfers to spouses and charities, but also to children under 21 years old. If one sibling is 20 and the other is 22, the older sibling would have to pay inheritance tax, but the younger sibling does not.

There’s also a difference as to which property is subject to inheritance taxes. In Nebraska, the first $40,000 inherited is exempt. Pennsylvania exempts certain transfers of farmland and agricultural property. All six exempt life insurance proceeds when they are paid to a named beneficiary, but if the policies are paid to the estate in Iowa, the proceeds are subject to inheritance tax.

Note that an inheritance tax is different than an estate tax. Both taxes are paid upon death, but the difference is in who pays the tax. For an inheritance tax, the tax is paid by heirs and the tax rate is determined by the beneficiary’s relationship to the deceased.

Estate tax is paid by the estate itself before any assets are distributed to beneficiaries. Estate taxes are the same, regardless of who the heirs are.

There are twelve states and the District of Columbia (Washington D.C.) that have their own estate taxes (in addition to the federal estate tax). Note that Maryland has an inheritance, state and federal estate taxes. The rest of the states with an estate tax are Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Washington and Vermont.

The large variations on estate and inheritance taxes are another reason why it is so important to work with an experienced estate planning lawyer who knows the estate laws in your state.

Reference: yahoo! finance (Jan. 6, 2021) “States with Inheritance Tax”

How to Protect Your Estate from Unintended Heirs

Disinheriting a child as an heir happens for a variety of reasons. There may have been a long-running dispute, estrangement over a lifestyle choice, or not wanting to give assets to a child who squanders money. What happens when a will or trust has left a child without an inheritance is examined in an article from Lake County News, “Estate Planning: Disinherited and omitted children.”

Circumstances matter. Was the child born or adopted after the decedent’s estate planning documents were already created and executed? In certain states, like California, a child who was born or adopted after documents were executed, is by law entitled to a share in the estate. There are exceptions. Was it the decedent’s intent to omit the child, and is there language in the will making that clear? Did the decedent give most or all of the estate to the other parent? Did the decedent otherwise provide for the omitted child and was there language to that effect in the will? For example, if a child was the named beneficiary of a $1 million life insurance policy, it is likely this was the desired outcome.

Another question is whether the decedent knew of the existence of the child, or if they thought the child was deceased. In certain states, the law is more likely to grant the child a share of the estate.

Actor Hugh O’Brien did not provide for his children, who were living when his trust was executed. His children argued that he did not know of their existence, and had he known, he would have provided for them. His will included a general disinheritance provision that read “I am intentionally not providing for … any other person who claims to be a descendant or heir of mine under any circumstances and without regard to the nature of any evidence which may indicate status as a descendant or heir.”

The Appellate Court ruled against the children’s appeal for two reasons. One, the decedent must have been unaware of the child’s birth or mistaken about the child’s death, and two, must have failed to have provided for the unknown child solely because of a lack of awareness. The court found that his reason to omit them from his will was not “solely” because he did not know of their existence, but because he had no intention of giving them a share of his estate.

In this case, the general disinheritance provision defeated the claim by the children, since their claim did not meet the two standards that would have supported their claim.

This is another example of how an experienced estate planning attorney creates documents to withstand challenges from unintended outcomes. A last will and testament is created to defend the estate and the decedent’s wishes.

Reference: Lake County News (Aug. 22, 2020) “Estate Planning: Disinherited and omitted children”