Do You Have to Do Probate when Someone Dies?

Probate is a Latin term meaning “to prove.” Legally, a deceased person may not own property, so the moment a person dies, the property they owned while living is in a legal state of limbo. The rightful owners must prove their ownership in court, explains the article “Wills and Probate” from Southlake Style. Probate refers to the legal process that recognizes a person’s death, proves whether or not a valid last will exists and who is entitled to assets the decedent owned while they were living.

The probate court oversees the payment of the decedent’s debts, as well as the distribution of their assets. The court’s role is to facilitate this process and protect the interests of all creditors and beneficiaries of the estate. The process is known as “probate administration.”

Having a last will does not automatically transfer property. The last will must be properly probated first. If there is a last will, the estate is described as “testate.” The last will must contain certain language and have been properly executed by the testator (the decedent) and the witnesses. Every state has its own estate laws. Therefore, to be valid, the last will must follow the rules of the person’s state. A last will that is valid in one state may be invalid in another.

The court must give its approval that the last will is valid and confirm the executor is suited to perform their duties. Texas is one of a few states that allow for independent administration, where the court appoints an administrator who submits an inventory of assets and liabilities. The administration goes on with no need for probate judge’s approval, as long as the last will contains the specific language to qualify.

If there was no last will, the estate is considered to be “intestate” and the laws of the state determine who inherits what assets. The laws rely on the relationship between the decedent and the genetic or bloodline family members. An estranged relative could end up with everything. The estate distribution is more likely to be challenged if there is no last will, causing additional family grief, stress and expenses.

The last will should name an executor or administrator to carry out the terms of the last will. The executor can be a family member or a trusted friend, as long as they are known to be honest and able to manage financial and legal transactions. Administering an estate takes time, depending upon the complexity of the estate and how the person managed the business side of their lives. The executor pays bills, may need to sell a home and also deals with any creditors.

The smart estate plan includes assets that are not transferrable by the last will. These are known as “non-probate” assets and go directly to the heirs, if the beneficiary designation is properly done. They can include life insurance proceeds, pensions, 401(k)s, bank accounts and any asset with a beneficiary designation. If all of the assets in an estate are non-probate assets, assets of the estate are easily and usually quickly distributed. Many people accomplish this through the use of a Living Trust.

Every person’s life is different, and so is their estate plan. Family dynamics, the amount of assets owned and how they are owned will impact how the estate is distributed. Start by meeting with an experienced estate planning attorney to prepare for the future.

Reference: Southlake Style (May 17, 2021) “Wills and Probate”

What Is a Living Trust Estate Plan?

Living trusts are one of the most popular estate planning tools. However, a living trust accomplishes several goals, explains the article “Living trusts allow estates to avoid probate” from The Record Courier. A living trust allows for the management of a beneficiary’s inheritance and may also reduce estate taxes. A person with many heirs or who owns real estate should consider including a living trust in their estate plan.

A trust is a fiduciary relationship, where the person who creates the trust, known as the “grantor,” “settlor,” “trustor” or “trustmaker,” gives the “trustee” the right to hold title to assets to benefit another person. This third person is usually an heir, a beneficiary, or a charity.

With a living trust, the grantor, trustee and beneficiary may be one and the same person. A living trust may be created by one person for that person’s benefit. When the grantor dies, or becomes incapacitated, another person designated by the trust becomes the successor trustee and manages the trust for the benefit of the beneficiary or heir. All of these roles are defined in the trust documents.

The living trust, which is sometimes referred to as an “inter vivos” trust, is created to benefit the grantor while they are living. A grantor can make any and all changes they wish while they are living to their trust (within the law, of course). A testamentary trust is created through a person’s will, and assets are transferred to the trust only when the grantor dies. A testamentary trust is an “irrevocable” trust, and no changes can be made to an irrevocable trust.

There are numerous other trusts used to manage the distribution of wealth and protect assets from taxes. Any trust agreement must identify the name of the trust, the initial trustee and the beneficiaries, as well as the terms of the trust and the name of a successor trustee.

For the trust to achieve its desired outcome, assets must be transferred from the individual to the trust. This is called “funding the trust.” The trust creator typically holds title to assets, but to fund the trust, titled property, like bank and investment accounts, real property or vehicles, are transferred to the trust by changing the name on the title. Personal property that does not have a title is transferred by an assignment of all tangible property to the trustee. An estate planning attorney will be able to help with this process, which can be cumbersome but is completely necessary for the trust to work.

Some assets, like life insurance or retirement accounts, do not need to be transferred to the trust. They use a beneficiary designation, naming a person who will become the owner upon the death of the original owner. These assets do not belong in a trust, unless there are special circumstances.

Reference: The Record Courier (April 3, 2021) “Living trusts allow estates to avoid probate”

Can You Amend a Power of Attorney?

The situation facing one family is all too common. An aunt is now incapacitated with severe Alzheimer’s disease. Her brother has been her agent with a durable power of attorney in place for many years. In the course of preparing his own estate plan, he decided it’s time for one of his own children to take on the responsibility for his sister, in addition to naming his son as executor of his estate. The aunt has no spouse or children of her own.

The answers, as explained in a recent article “Changing the agent under a durable power of attorney” from My San Antonio Life, all hinge on the language used in the aunt’s current durable power of attorney. If she used a form from the internet, the document is probably not going to make the transfer of agency easy. If she worked with an experienced estate planning attorney, chances are better the document includes language that addresses this common situation.

If the durable power of attorney included naming successor agents, then an attorney can prepare a resignation document that is attached to the durable power of attorney. The power of attorney document might read like this: “I appoint my brother Charles as agent. If Charles dies or is incapacitated or resigns, I hereby appoint my nephew, Phillip, to serve as a successor agent.”

If the aunt would make her wishes clear in the actual signed durable power of attorney, the nephew could relatively easily assume authority, when the father resigns the responsibility because the aunt pre-selected him for the role.

If there is a clause that appointed a successor agent, but the successor agent was not the nephew, the nephew does not become the agent and the aunt’s brother can’t transfer the POA. If there is no clause at all, the nephew and the father can’t make any changes.

In September 2017, there was a change to the law that required durable power of attorney documents to specifically grant such power to delegate the role to someone else. The law varies from state to state, so a local estate planning attorney needs to be asked about this issue.

If there is no provision allowing an agent to name a successor agent, the nephew and father cannot make the change.

Another avenue to consider: did the aunt’s estate planning attorney include a provision that allows the durable power of attorney to establish a living trust to benefit the aunt and to transfer assets into the trust? Part of creating a trust is determining who will serve as a trustee, or manager, of the trust. If such a clause exists in the durable power of attorney and the father uses it to establish and fund a trust, he can then name his son, the nephew, as the trustee.

Taking this step would place all of the aunt’s assets under the nephew’s control. He would still not be the aunt’s agent under her power of attorney. Responsibility for certain tasks, like filing the aunt’s income taxes, will still be the responsibility of the durable power of attorney.

If her durable power of attorney does not include establishing a living trust, the most likely course is the father will need to resign as agent and the nephew will need to file in court to become the aunt’s guardian. This is a time-consuming and slow-paced process, where the court will become heavily involved with supervision and regular reporting. It is the worst possible option, but it may also be the only option.

If your family is facing this type of situation, begin by speaking with an experienced estate planning attorney to find out what options exist in your state, and it might be resolved.

Reference: My San Antonio Life (Jan. 25, 2021) “Changing the agent under a durable power of attorney”

Is Transferring House to Children a Good Idea?

Transferring your house to your children while you’re alive may avoid probate. However, gifting a home also can mean a rather large and unnecessary tax bill. It also may place your house at risk, if your children get sued or file for bankruptcy.

You also could be making a mistake, if you hope it will help keep the house from being consumed by nursing home bills.

There are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since died, says Considerable’s recent article entitled “Should you transfer your house to your adult kids?”

If a parent signs a quitclaim to give her son the house and then dies, it can potentially mean a tax bill of thousands of dollars for the son.

Families who see this error in time can undo the damage, by gifting the house back to the parent.

People will also transfer a home to try to qualify for Medicaid, but any gifts or transfers made within five years of applying for Medicaid can result in a penalty period when seniors are disqualified from receiving benefits.

In addition, transferring your home to another person can expose you to their financial problems because their creditors could file liens on your home and, depending on state law, take some or most of its value. If the child divorces, the house could become an asset that must be divided as part of the marital estate.

Section 2036 of the Internal Revenue Code says that if the parent were to retain a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift. However, there are rules for what constitutes a life interest, including the power to determine what happens to the property and liability for its bills.

There are other ways to avoid probate. Many states and DC permit “transfer on death” deeds that let homeowners transfer their homes at death without probate.

Another option is a living trust, which can ensure that all assets avoid probate.

Many states also have simplified probate procedures for smaller estates.

Reference: Considerable (Sep. 18) “Should you transfer your house to your adult kids?”

The Biggest Mistake in Trusts: Funding

Failing to put assets into trusts creates headaches for heirs and probate hassles, says the article “Once You Create a Living Trust, Don’t Forget to Fund It” from Kiplinger. It’s the last step of creating an estate plan that often gets forgotten, much to the dismay of heirs and estate planning attorneys.

Are people so relieved when their estate plan is finished, that they forget to cross the last “t” and dot the last “i”? Could be! Retitling accounts is not something we do on a regular basis, and it does take time to get done. However, without this last step, the entire estate plan can be doomed.

Here are the steps that need to be competed:

Check the deeds on all real estate property. If the intention of your estate plan is to place your primary residence, vacation home, timeshare or rental properties into the trust, all deeds need to be updated. The property is being moved from your ownership to the ownership of the trust, and the title must reflect that. If at some point you refinanced a home, the lender may have asked you to remove the name of the trust for purposes of financing the loan. In that case, you need to change the deed back into the name of the trust. If your estate planning attorney wasn’t part of that transaction, they won’t know about this extra step. Check all deeds to be certain.

Review financial statements. Gather bank statements, brokerage statements and any financial accounts. Confirm that any of the accounts you want to be owned by the trust are titled correctly. You may need to contact the institutions to make sure that the titles on the statements are correct. If there is no reference to the trust at all, then the account has not been recorded correctly and changes need to be made.

It’s also a good idea to review any accounts with named beneficiaries. Talk with your estate planning attorney about whether these accounts should be retitled. The rules regarding beneficiaries for annuities changed a few years ago, so naming the trust as a beneficiary might not work for your estate plan or your tax planning goals as it did in the past.

IRAs and other retirement accounts. These accounts need to be treated on an individual basis when deciding if they should have a trust listed as a primary or contingent beneficiary. Listing a trust as a beneficiary can, in some cases, accelerate income tax due on the account. If the trust is listed as the beneficiary, the ability to distribute assets to trust beneficiaries may be impacted.

The main reason to list a trust as a beneficiary to an IRA or retirement plan is to protect the asset from creditors, financially reckless heirs, or a beneficiary with special needs. An estate planning attorney will know the correct way to handle this.

Making sure that your assets are in the trust takes a little time, but it is up to the owner of the trust to take care of this final detail. The estate planning attorney may provide you with written directions, but unless you make specific arrangements with the office, they will expect you to take care of this. The assets don’t move themselves – you’ll need to make it happen.

Reference: Kiplinger (Oct. 26, 2020) “Once You Create a Living Trust, Don’t Forget to Fund It”

Should I Give My Kid the House Now or Leave It to Him in My Will?

Transferring your house to your children while you’re alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

Living Together Isn’t as Simple as You Think

One reason for the popularity of living together without marriage, is that many in this generation have experienced one or more difficult divorces, so they’re not always willing to remarry, says Next Avenue in the article “The Legal Dangers of Living Together.” However, like many aspects of estate planning, what seems like a simple solution can become quite complex. Unmarried couples can face a variety of problematic and emotionally challenging issues, because estate planning laws are written to favor married couples.

Consider what happens when an unmarried couple does not plan for the possibility of one partner losing the ability to manage his or her health care because of a serious health issue.

If a spouse is rushed to the hospital unconscious and there is no health care power of attorney giving the other spouse the right to make medical decisions on his or her behalf, a husband or wife will likely be permitted to make them anyway.

However, an unmarried couple will not have any right to make medical decisions on behalf of their partner. The hospital is not likely to bend the rules, because if a blood relative of the person challenged the medical facility’s decision, they are wide open to liability issues.

Money is also a problem in the absence of marriage. If one partner becomes incapacitated and estate planning has not been done, without both partners having power of attorney, an illness could upend their life together. If one partner became incapacitated, bank accounts will be frozen, and the well partner will have no right to access any assets. A court action might be required, but what if a family member objects?

Without appropriate advance planning, courts are generally forced to rely on blood kin to take both financial and medical decision-making roles. An unmarried partner would have no rights. If the home was owned by the ill partner, the unmarried partner may find themselves having to find new housing. If the well partner depended upon the ill partner for their support, then they will have also lost their financial security.

Unmarried couples need to execute key estate planning documents, while both are healthy and competent. These documents include a durable power of attorney, a medical power of attorney and a living will, which applies to end of life decisions. A living trust could be used to avoid the problem of finances for the well partner.

Another document needed for unmarried couples: a HIPAA release. HIPAA is a federal health privacy law that prevents medical facilities and health care professionals from sharing a patient’s medical information with anyone not designated on the person’s HIPAA release form. Unmarried couples should ask an estate planning attorney for these forms to be sure they are the most current.

If one of the partners dies, and if there is no will, the estate is known as intestate. Assets are distributed according to the laws of the state, and there is no legal recognition of an unmarried partner. They won’t be legally entitled to inherit any of the assets.

If a married partner dies without a will in a community property state, the surviving spouse is automatically entitled to inherit as much as half the value of the deceased assets.

Beneficiary designations usually control the distribution of assets including life insurance policies, retirement accounts and employer-sponsored group life insurance policies. If the partners have not named each other as beneficiary designations, then the surviving partner will be left with nothing.

The lesson for couples hoping to avoid any legal complications by not getting married, is that they may be creating far more problems than are solved as they age together. An experienced estate planning attorney will be able to make sure that all the correct planning is in place to protect both partners, even without the benefit of marriage.

Reference: Next Avenue (Aug. 28, 2019) “The Legal Dangers of Living Together.”