Does Your Estate Have to Go Through Probate?

Probate is a court-supervised process intended to ensure the validity of a lasts will and to protect the distribution of assets after a person has died. If there is no last will, probate still takes place, according to the article “Probate—Courts protecting you after death” from Pauls Valley Democrat.

Every estate that owns property must be probated, unless the title or ownership of the property has been transferred before the person died by gift, if the property is owned jointly with another person, or if it passes by direct beneficiary designation. If a person died without a last will, probate still takes place, but the guidelines used are those of the state law where the person died.

In all cases, it’s better to have a last will and to decide for yourself how you want your assets distributed. For all you know, your state law may give everything you own to an estranged third cousin and her children, who are perfect strangers to you.

If you don’t have a last will, which is referred to as dying “intestate,” the court decides who is going to serve as your administrator. This person will be in charge of distributing all of your worldly goods and taking care of the business part of settling your estate, like paying taxes, selling your home, etc. Without a last will, the court picks a person, and it might not be the person you would have wanted.

Here are the basic steps in probating an estate, once the probate petition is filed:

Initial hearing. This is where the court affirms its jurisdiction and identifies all known heirs, and the personal representative is identified.

Letters Testamentary. This document is issued to the personal representative. This is a judge signed document proving to others, like banks and investment custodians, that the personal representative is legally permitted to handle your property and act on behalf of your estate. It’s similar to a Power of Attorney.

Probate. This court process collects, identifies, and accounts for all assets of a decedent. The representative must be mindful to document any money going in and out of the estate during the administrative process.

Written notice must be given to all and any known heirs. This can lead to relatives and others believing they have a claim on your estate and to then challenge the provisions of your last will with the court.

Notice is also provided to creditors, who have at least 60 days after notice is provided to make a claim on the estate. This timeframe varies by jurisdiction. In some jurisdictions, these notices are published in local newspapers, once a week for two or more consecutive weeks. Once they receive fair notice, general creditors who fail to file a claim lose their right to ever file a claim on the estate.

An estate plan is created with an eye to minimizing taxes, maximizing privacy for the family and heirs, and transferring ownership of assets with as little red tape as possible. Failing to properly plan can lead to a probate taking months, and in some cases, years.

Reference: Pauls Valley Democrat (July 1, 2021) “Probate—Courts protecting you after death”

What Is Family Business Succession Planning?

Many family-owned businesses have had to scramble to maintain ownership, when owners or heirs were struck by COVID-19. Lacking a succession plan may have led to disastrous results, or at best, less than optimal corporate structures and large tax bills. This difficult lesson is a wake-up call, says the article “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’” from Bloomberg Tax.

Another factor putting family-owned businesses at risk is divorce. Contemplating the best way to transfer ownership to the next generation requires a candid examination of family dynamics and acknowledgment of outsiders (i.e., in-laws) and the possibility of divorce.

Before documents can be created, a number of issues need to be discussed:

Transfer timing. When will the ownership of the business transfer to the next generation? There are some who use life-events as prompts: births, marriages and/or the death of the owners.

How will the transfer take place? Corporate structures and estate planning tools provide many options limited only by the tax liabilities and wishes of the family. Be wary, since each decision for the structure may have unintended consequences. Short and long-term strategic planning is needed.

To whom will the business be transferred? Who will receive an ownership interest and what will be the rights of ownership? Will there be different levels of ownership, and will those levels depend upon the level of activity in the business? Will percentages be used, or shares, or another form?

In drafting a succession plan, it is wise to assume that the future owners will either marry or divorce—perhaps multiple times. The succession plan should address these issues to prevent an ex-spouse from becoming a shareholder, whose interest in the business needs to be bought out.

The operating agreement/partnership agreement should require all future owners to enter into a prenuptial agreement before marriage specifically excluding their interest in the family business from being distributed, valued, or deemed marital property subject to distribution, if there is a divorce.

An owner may even exact a penalty for a subsequent owner who fails to enter into a prenup prior to a marriage. The same corporate document should specifically bar an owner’s spouse from receiving an ownership interest under any circumstance.

A prenup is intended to remove the future value of the owner’s interest from the marital asset pool. This typically requires the owner to buy-out the future spouse’s legal claim to future value. This could be a costly issue, since the value of the future ownership interest cannot be predicted at the time of the marriage.

Many different strategies can be used to develop a succession plan that ideally works alongside the business owner’s estate plan. These are used to ensure that the business remains in the family and the family interests are protected.

Reference: Bloomberg Tax (April 5,2021) “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’”