How Can I Minimize My Probate Estate?

Having a properly prepared estate plan is especially important if you have minor children who would need a guardian, are part of a blended family, are unmarried in a committed relationship or have complicated family dynamics—especially those with drama. There are things you can do to protect yourself and your loved ones, as described in the article “Try these steps to minimize your probate estate” from the Indianapolis Business Journal.

Probate is the process through which debts are paid and assets are divided after a person passes away. There will be probate of an estate whether or not a will and estate plan was done, but with no careful planning, there will be added emotional strain, costs and challenges left to your family.

Dying with no will, known as “intestacy,” means the state’s laws will determine who inherits your possessions subject to probate. Depending on where you live, your spouse could inherit everything, or half of everything, with the rest equally divided among your children. If you have no children and no spouse, your parents may inherit everything. If you have no children, spouse or living parents, the next of kin might be your heir. An estate planning attorney can make sure your will directs the distribution of your property.

Probate is the process giving someone you designate in your will—the executor—the authority to inventory your assets, pay debts and taxes and eventually transfer assets to heirs. In an estate, there are two types of assets—probate and non-probate. Only assets subject to the probate process need go through probate. All other assets pass directly to new owners, without involvement of the court or becoming part of the public record.

Many people embark on estate planning to avoid having their assets pass through probate. This may be because they don’t want anyone to know what they own, they don’t want creditors or estranged family members to know what they own, or they simply want to enhance their privacy. An estate plan is used to take assets out of the estate and place them under ownership to retain privacy.

Some of the ways to remove assets from the probate process are:

Living trusts. Assets are moved into the trust, which means the title of ownership must change. There are pros and cons to using a living trust, which your estate planning attorney can review with you.

Beneficiary designations. Retirement accounts, investment accounts and insurance policies are among the assets with a named beneficiary. These assets can go directly to beneficiaries upon your death. Make sure your named beneficiaries are current.

Payable on Death (POD) or Transferable on Death (TOD) accounts. It sounds like a simple solution to own many accounts and assets jointly. However, it has its own challenges. If you wished any of the assets in a POD or TOD account to go to anyone else but the co-owner, there’s no way to enforce your wishes.

An experienced, local estate planning attorney will be the best resource to prepare your estate for probate. If there is no estate plan, an administrator may be appointed by the court and the entire distribution of your assets will be done under court supervision. This takes longer and will include higher court costs.

Reference: Indianapolis Business Journal (Aug. 26,2022) “Try these steps to minimize your probate estate”

Why Does Everyone Need an Estate Plan?

Twenty and thirty-year olds are busy building their lives, starting or growing careers, exploring personal goals, repaying student loans and maybe starting a family. They’re young and healthy and think nothing can happen to them—but that’s not true. A recent article from Kiplinger titled “You’re Not Too Young for an Estate Plan: 7 Essentials for Your 20s and 30s” explains why even a twenty-year old with student loans needs an estate plan.

Student loans. Federal student loans discharge upon death, so no further payments are needed, including any federal Parent PLUS loans parents may have taken out. However, for private student loans, the decision is up to the lender. If the private loan was taken out by the student, the institution may forgive the loan. However, if a parent or another adult co-signed the loan, they might be responsible for paying the entire loan. The exception: if the loan was made after November 20, 2018, the co-signer may be protected by the Economic Growth, Regulatory Relief and Consumer Protection Act. If you took out loans after getting married, the surviving spouse is likely to be required to pay the loan if they co-signed the loan or if you live in a community property state.

Health Care Directive and Health Care Power of Attorney. The Health Care Directive is used to tell your family what you would want if you were near death, whether by injury or illness. Healthcare providers are obligated to follow your directions if they are stated in this document. Without it, you could be kept on life support for many years, regardless of what your family wants.

A Health Care Power of Attorney is used to name someone you trust to act as your “agent,” if you become incapacitated. This document is focused on your care and medical treatments. It also lets your agent speak with your health insurance company, obtain access to medical records and discuss your care with healthcare providers.

Last Will and Testament. This document isn’t just for people with homes, families, and retirement accounts. Young people have property too—your car, your personal possessions, and whatever financial resources you may have accumulated. If you have a will, you can direct who you want to receive what you own. Without one, the court will decide who gets your possessions and your family won’t have any say about it. With a will, you can determine who receives your property, including your digital assets. You’ll also name an executor in the will—the person who is in charge of distributing your property. An estate planning attorney will create a document to comply with your state’s laws. It doesn’t have to be a complicated document, but it is a good way to ensure your loved ones know your wishes.

Retirement Accounts and Beneficiaries. These accounts may not be as robust as they will be later in your life. However, they are still yours. Make sure that you have named beneficiaries who you want to receive them if you die. Singles may name a sibling, parents, partner, or another family member to receive these assets.

Digital Assets. A digital life means you need a digital estate plan. Creating an inventory list of all of your digital accounts, usernames and passwords. If an account has two-factor authentication, indicate how another person might gain access to the account. Don’t include any of this information in your will, as it becomes a public document after being submitted to the court for probate. Tell a trusted family member where the inventory is located. If you own cryptocurrency, research how crypto assets are passed if the original owner dies.

Guardianship. Your will is used to name a guardian for minor children. Without it, the court will appoint a guardian, and it may not be the family member you wish it would be.

Don’t Forget Your Furry Friends. You can add a pet guardianship clause to a will to ensure that your pet stays with a trusted friend or family member who has agreed to care for your pet. You can also set up a pet trust to set aside funds for your pet’s care, including food, veterinary visits, toys, training and treats.

Reference: Kiplinger (Aug. 22, 2022) “You’re Not Too Young for an Estate Plan: 7 Essentials for Your 20s and 30s”

How Does a Business Owner Create an Exit Strategy?

Letting go of a business is not easy, says a recent article titled “Estate Planning Strategies for Business Owners Planning an Exit” from CEOWorld Magazine. Where the exit is to sell the business or retire, or the result of an unexpected events, its crucial to have an estate and succession plan.

When should you establish a plan? It should be early, perhaps even when you become a CEO. A long-term strategy is as important as short-term decisions. Not having an estate plan could mean your interest in the business goes through probate, which is both public and time consuming. The business may never recover from the distribution of assets and the exposure. No estate plan also means missed changes to leverage discount gifting or any other tax-reduction strategies.

Consider the following when talking with your estate planning attorney:

What is the exit strategy—to sell, be acquired or merged, have a family member take over, or sell to key employees?

How much money to do you need and want at the exit? Do you want to create a stream of income or a lump sum?

Do you have a charitable giving plan to reap tax advantages and support an organization with meaning to you? Structuring a gift far in advance avoids using a reduced fair market value and have it deemed as a cash gift.

Transferring the business to family members instead of selling to outside parties creates many different planning opportunities. With family members, emotions come into play, even though this is not always productive. If some offspring are not involved in the business, will they receive a share of the business? Do you want to equalize your inheritance? Assets can be divided by the use of trusts, for example.

You’ll want to work with an estate planning attorney with experience in creating a succession plan with a tax model. This is often overlooked in succession planning and can cause significant cash flow management issues as well as lost tax benefits.

Determine if you want to make gifts using business interests or sales proceeds early on and whether these gifts will go to family members or charities. The earlier the succession planning occurs, the more you can maximize the income and estate tax benefits.

Clarify your own retirement needs and goals. Business owners often fail to correctly calculate the expected investment income on after-tax proceeds from the sale of the business. Will it be sustainable enough for the lifestyle you want in retirement? If not, is there a way to structure the sale of the business to achieve your financial goal?

It’s never too late to plan for an exit strategy, and the earlier the planning, the higher the likelihood of a successful transition.

Reference: CEOWorld Magazine (Aug. 16, 2022) “Estate Planning Strategies for Business Owners Planning an Exit”

Can You Leave an IRA to a Beneficiary?

Conversations about death and legacies aren’t always easy. However, defining what matters most to a person is a good way to start estate planning. IRAs can play an important role in estate planning and legacy creation, as discussed in a recent article entitled “IRA Gifts at Death” from The Street.

Let’s say someone has a large portion of their assets in an investment account, a Roth IRA and a traditional IRA. If they want to avoid having their estate go through probate but aren’t in love with the idea of building trusts, they need to be sure their IRAs have beneficiaries. At their passing, the assets will flow directly to the beneficiaries.

Make sure that at least one living beneficiary is on the account. If the primary beneficiary is a spouse, be sure to also have contingent beneficiaries, or designate the beneficiary as “per stirpes,” which means if the named beneficiary passes before the account owner, their share of the assets automatically passes to their lineal descendants.

If there’s no valid beneficiary, the contents of an IRA of any kind could end up in the probate estate, creating a nightmare for heirs.

If an intended beneficiary is a charitable organization, passing an IRA is a powerful giving strategy. The organization must be a 501(c)(3), a tax-exempt organization. When IRAs are passed to the charity, the charity doesn’t pay taxes on the gift.

Individual beneficiaries do have to pay taxes on assets received from traditional IRAs, and when and how much they pay depends upon their relationship to the IRA owner. If the recipient is not the spouse, not a minor and not a disabled adult, the heir will need to take taxable withdrawals from the traditional IRA over the course of ten years from the date of death of the original account owner. Some people take a set amount annually, so they can plan for the taxes due. For others, a low-income year is the time to take withdrawals, since their tax bracket may be lower.

Another IRA distribution strategy is to divide IRAs into separate accounts, allowing for increased control over the amount of assets passing to a specific beneficiary. One IRA could be used for your charitable giving, while another IRA could be used to benefit family members.

Changing beneficiaries on your IRA is relatively easy. Checking on beneficiary names should be done every time you review your estate plan, which should happen every three to five years. Your estate planning attorney will be able to help determine the best strategy for your IRAs. Generally speaking, traditional IRAs are best to gift for charities. Roth IRAs are best to gift to family or loved ones. This is because the money in a Roth IRA is inherited tax free and can remain tax free for a number of years.

Reference: The Street (July 17, 2022) “IRA Gifts at Death”

Who Should Be Your Executor?

While the executor is usually a spouse or close family member, you can name anyone you wish to be your executor. A bank, estate planning attorney, or professional trustee at a trust company may also serve as the executor, according to a recent article from Twin Cities-Pioneer Press titled “Your Money: What you need to know about naming an executor.”

Regardless of who you select, the person has a legal duty to be honest, impartial, financially responsible and to put your interests ahead of their own. This person and one or two backup candidates should be named in your will, just in case the primary executor declines or is unable to serve.

How does someone become an executor? When your will is entered into probate, the court checks to be sure the person you name meets all of your state’s legal requirements. Once the court approves (and usually the court does), then their role is official and you executor can get to work.

The executor has many responsibilities. You can help your executor do a better job by making sure that financial and personal business documents are organized and readily available. Here are some, but not all, of the executor’s tasks:

  • Making an inventory of all assets and liabilities
  • Giving notice to creditors: credit card companies, banks, mortgage companies, etc.
  • Filing a final personal tax return and filing the estate tax return
  • Paying any debts and taxes
  • Distributing assets according to the directions in the will and in compliance with state law
  • Preparing and submitting a detailed report to the court of how the estate was settled

If there is no will, or if no executor is named in the will, or if the executor can’t serve, the court will appoint a professional administrator to settle your estate. It won’t be someone you know. Your family may not like all of the decisions made on your behalf, but there won’t be any options available.

Does an executor get paid? A family member may or may not wish to be paid. However, given how much time it takes to settle an estate, you might feel it’s fair for them to be compensated. The amount varies depending on where you live, but you can leave the person between 1% to 8% of your total estate. A professional administrator will likely cost considerably more.

How do you document your estate to help out the executor? If you think this task is too onerous, imagine how a family member will feel if they have to conduct a scavenger hunt to identify assets and debts. If a professional administrator ends up doing this work, it will take a bigger bite out of your estate and leave loved ones with a smaller inheritance.

Start by making a list of all of your assets and liabilities, plus a list of all advisors who help with the business side of your life. Recent tax returns will be helpful, as will contact information for your estate planning attorney, CPA and financial advisor. You should include retirement accounts, life insurance policies and any assets without beneficiary designations.

Reference: Twin Cities-Pioneer Press (June 25, 2022) “Your Money: What you need to know about naming an executor”

What are the Advantages of a Business Trust?

Business owner’s heads are frequently filled with a steady stream of questions concerning day-to-day activities. Long-range planning questions about how to expand the business, set business priorities, identify vulnerabilities, etc., are lost in the flood of events requiring immediate action. However, business owners need to keep both details and the big picture in mind, according to a recent article “5 Ways Business Owners Can Use Trusts to Benefit Their Company” from Entrepreneur.

Three key questions for any business owner are: how can I minimize taxes, protect assets and what kind of legacy do I want to leave with my business? All three questions can be answered with two words: estate planning. Within estate planning, trusts are a well-known tool to tackle and solve these three issues.

A trust is a legal entity created when one party (grantor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiaries). Trusts are used to provide protection for assets for individuals and businesses. For business owners, trusts protect beneficiaries and thwart potential creditors (including previous spouses) from gaining direct access to assets held within the trust.

All future growth of assets transferred to an irrevocable trust occurs outside of the estate. It will apply to your lifetime exemption, but all future growth occurs estate tax free. Let’s say a business owner transfers a business worth $3 million into an irrevocable trust and years later, the company is sold for $17 million. The increased value is not subject to estate taxes, saving family members a significant amount of money.

It should be noted these types of trusts needs to be created with an experienced estate planning attorney to achieve the desired goals.

Assets in a trust maintain privacy. For companies and individuals who live in the public eye, placing assets in trust means only the grantor and trustee need to know about the assets. A person who lives in a small city and owns a few restaurants may not want their personal financial matters to become known when they die. Wills become public documents when the estate is probated; trusts remain private.

Litigation arising from sales of small businesses are among the most common legal actions filed against business owners. By removing assets from ownership, the business owner receives another layer of protection. You can’t be sued for assets you don’t own.

Trusts are used in succession planning and should be created to align with business legacy objectives, whether the plan is to sell the company to outsiders, key employees or keep it in the family. Succession plans must be properly documented. This is done with the estate planning attorney, CPA and financial advisor working in tandem. A succession plan should also address the goals for the business owner’s life after the business is sold or transferred. Do they want to remain on the board of directors, do they require income from the business to maintain their costs of living?

Minimizing taxes. Preparing for a liquidity event is an excellent reason to consider creating a trust. Depending upon its structure and the laws of the estate, a business owned by a trust may minimize or avoid state income taxes on a substantial portion of the estate income tax.

A succession plan, like an estate plan, needs to be created long before it is needed. Ideally, a succession plan is created not long after a business is established and revised as time goes on. When the company attains certain milestones, the plan should be updated.

Reference: Entrepreneur (June 17, 2022) “5 Ways Business Owners Can Use Trusts to Benefit Their Company”

Does Estate Administration Need to Be Supervised?

Probate is the legal process where the court approves the will and the executor so the estate may be distributed after a person dies. Probate is a familiar term to many, but supervised or unsupervised administration is less well known. The article “Estate Planning: Supervised and unsupervised probate administrations” from nwi.com explains how estate administration works.

Generally speaking, there are two different types of probate administration, as inferred by the article’s title: supervised and unsupervised. Depending on who you ask, there may also be a third, known as “informal probate.”

Not all assets are passed through probate. Bank accounts owned jointly pass directly to the other owner. A home owned with a Transfer on Death (TOD) deed is also considered a non-probate asset. This is not to say that non-probate assets cannot be brought into probate. There are instances where they can. However, it takes a bit of an effort and is pretty unlikely to occur.

Probate assets are assets with no surviving joint owner and no beneficiary designation. These types of assets require a proceeding to ensure that the correct person or entity receives it after the original owner dies.

A supervised probate administration requires extensive court involvement. Every action taken by the executor has to be approved. If the home is to be sold or a distribution made to beneficiaries, the executor has to obtain a court order authorizing it.

An unsupervised probate administration, just as it sounds, involves far less court involvement. The personal representative or executor is recognized as valid, creates an inventory of the assets and files the inventory with the court. Once the inventory is reviewed, the executor is told to administer the distribution of assets according to the terms of the will.

Beneficiaries have 90 days to object to the executor’s actions; although this may vary by state. Check with your estate planning attorney. If no one objects, the final account is approved and the executor is done.

With less court involvement, asset distribution proceeds at a faster rate, which is why many wills provide for it.

The “informal probate” mentioned earlier is an outlier. Its use varies by state and by jurisdiction. There’s no court involvement at all. This is mostly used for very, very small estates. Some argue it’s still probate, even if it’s informal, while others maintain it exists solely to avoid probate.

The nature of probate depends on many factors, including where the decedent lives, the size and complexity of the estate and whether or not there are many family members or others who might challenge the estate’s distribution. In some communities, probate is a quick and painless process. In others, it is long, expensive and stressful. Your estate planning attorney will know what your situation will be and help you and your family plan accordingly.

Reference: nwi.com (April 10, 2022) “Estate Planning: Supervised and unsupervised probate administrations”

Why Is Beneficiary Designation Important?

The beneficiary designation will always supersede language of your will. Neglecting to know which assets have beneficiary designations and failing to update the designations can undo even the best estate plan.

The beneficiary designation for your life insurance or retirement account custodian provides an opportunity to tell the company who is to receive life insurance proceeds or retirement savings upon your death, explains a recent article titled “This Important Estate Planning Step is Often Missed” from Coeur d’Alene/Post Falls Press. If these are not coordinated with a last will and testament, the results are problematic at best, and worse, financially, and emotionally devastating.

This epic fail comes in many different forms, but the most common is when a life insurance policy has never been updated and an ex-spouse receives the policy proceeds. The rules differ between retirement accounts and life insurance and can be impacted by various state and federal laws (and the divorce decree, if the life insurance policy was included). However, for the most part, the ex will receive the proceeds and litigation will not succeed.

Another common beneficiary designation mistake is when a person has created a living trust or revocable trust to prevent assets from going through probate when they die. Probate can take many months to complete and there are several strategies used to take assets out of the probate estate.

When the living trust is established and assets are transferred into the trust, those assets do not pass through probate.

However, if a person (or married couple) established a living trust and fails to list both primary and secondary beneficiaries for life insurance and/or retirement accounts, it is entirely possible that the assets will go through probate.

Take the time to make an inventory of all assets and accounts. Determine which ones have a beneficiary designation and find out who is named as the beneficiary. If your retirement accounts and life insurance policies were established decades ago, this is especially important.

Failing to coordinate beneficiary designations with your estate plan could undermine your wishes. Review these items with your estate planning attorney to avoid these and many other potential pitfalls.

Reference: Coeur d’Alene/Post Falls Press (May 23, 2022) “This Important Estate Planning Step is Often Missed”

How Do I Plan for Taxes after Death?

Let’s get this out of the way: preparing for death doesn’t mean it will come sooner. Quite the opposite is true. Most people find preparing and completing their estate plan leads to a sense of relief. They know if and when any of life’s unexpected events occur, like incapacity or death, they have done what was necessary to prepare, for themselves and their loved ones.

It’s a worthwhile task, says the recent article titled “Preparing for the certainties in life: death and taxes” from Cleveland Jewish News and doesn’t need to be overwhelming. Some attorneys use questionnaires to gather information to be brought into the office for the first meeting, while others use secure online portals to gather information. Then, the estate planning attorney and you will have a friendly, candid discussion of your wishes and what decisions need to be made.

Several roles need to be filled. The executor carries out the instructions in the will. A guardian is in charge of minor children, in the event both parents die. A person named as your attorney in fact (or agent) in your Power of Attorney (POA) will be in charge of the business side of your life. A POA can be as broad or limited as you wish, from managing one bank account to pay household expenses to handling everything. A Health Care Proxy is used to appoint your health care agent to have access to your medical information and speak with your health care providers, if you are unable to.

Your estate plan can be designed to minimize probate. Probate is the process where the court reviews your will to ensure its validity, approves the person you appoint to be executor and allows the administration of your estate to go forward.

Depending on your jurisdiction, probate can be a long, costly and stressful process. In Ohio, the law requires probate to be open for at least six months after the date of death, even if your estate dots every “i” and crosses every “t.”

Part of the estate planning process is reviewing assets to see how and if they might be taken out of your probate estate. This may involve creating trusts, legal entities to own property and allow for easier distribution to heirs. Charitable donations might become part of your plan, using other types of trusts to make donations, while preserving assets or creating an income stream for loved ones.

Minimizing taxes should be a part of your estate plan. While the federal estate tax exemption right now is historically high $12.06 million per person, on January 1, 2025, it drops to $5.49 million adjusted for inflation. While 2025 may seem like a long way off, if your estate plan is being done now, you might not see it again for three or five years. Planning for this lowered number makes sense.

Reviewing an estate plan should take place every three to five years to keep up with changes in the law, including the lowered estate tax. Large events in your family also need to prompt a review—trigger events like marriage, death, birth, divorce and the sale of a business or a home.

Reference: Cleveland Jewish News (May 13, 2022) “Preparing for the certainties in life: death and taxes”