Estate Administration is the official process to transfer an estate to your descendants and other family members, friends and charities. Coordinated advance planning can permit savings of income and estate taxes, attorney fees, probate costs, time and “red tape” for your survivors. It may also protect beneficiaries who are minors or may be incapacitated at the time your estate is distributed. A well-prepared estate plan may consist of several documents including a Will and one or more trusts to carry out your goals and objectives.
Your Probate Estate includes everything you own individually in your sole name without any type of beneficiary designation. These are the assets that must be administered through the probate process, described more fully below.
Non-Probate Assets include all tangible and intangible property held jointly with another person with right of survivorship, or that pass directly to a designated beneficiary by contract. Bank or brokerage accounts and real estate are among the types of intangible property that are often held "jointly with right of survivorship." Life insurance or retirement account benefits are two examples of assets that pass outside of probate by contract of the account or policy if you have properly designated beneficiaries. Transfer on Death Deeds also can transfer ownership of real estate to a beneficiary upon the death of the owner.
Probate is the official legal process by which property is distributed to your beneficiaries under the supervision of the court in your local jurisdiction. In Virginia a Commissioner of Accounts oversees the process and audits the accounts of Executors (where there is a Last Will and Testament to guide the disposition of property to beneficiaries) and Administrators of intestate estates (where there is no Will and the property passes according to state law).
The Probate Process
The first step in the probate process is for the executor or, if you do not have a Will, the administrator, of your estate to be sworn in by the court clerk and receive the Certificate of Qualification. For convenience, we will refer to both the executor and the administrator as the executor. The Certificate of Qualification allows the executor to gather the assets of the estate, pay your last bills, and distribute your assets to your beneficiaries. During this process your executor is required to report to the court and beneficiaries or heirs. He or she will have to file inventory of your assets and accountings with the Commissioner of Accounts, documenting every penny that comes into the estate and every penny flows out of it. While this might seem like a simple procedure, it can be complicated and expensive.
Avoiding Probate. Understand the Risks
Many people wish to avoid the probate process for three reasons:
- Probate is public. Anyone can see your Last Will and Testament, the inventory of your assets and who benefited from them.
- Probate can be costly. Your estate will have to pay probate tax and the fees associated with the various reports required by the court.
- Probate can be a slow process. Finalizing an estate, especially a contested estate, can take years.
You can do everyone (especially your executor and beneficiaries) a big favor by taking steps to avoiding probate. However, probate avoidance techniques can have unintended consequences and need to be carefully considered in the context of your overall estate plan.
The key to understanding the techniques used to avoid probate is that the only assets subject to probate (your “probate estate”) are those no one can access after your death. Once you understand this, you can explore ways to pass assets outright to individuals rather than becoming part of your probate estate. You might consider having beneficiary designations, “transfer on death” or “payable upon death” designations, and/or holding assets as joint tenants with right of survivorship. These designations allow those you have designated to take the assets outright upon your death immediately.
“Joint tenants with right of survivorship” or, for the purposes of this article “joint tenants,” means that the surviving joint tenant takes the account or property outright in their sole name following the death of the other joint tenant. This is desirable when everyone involved agrees that each is an equal owner of the asset and/or the entire asset should be passed immediately upon death to the survivor. There are risks involved in this approach.
People often add another person as a joint tenant in bank, brokerage or other accounts so that they can help pay bills in the event of incapacity while living and/or have access to the account after death to pay final bills, particularly funeral expenses. Understand that each joint tenant has an immediate ownership interest in the joint asset and can legally use those assets for their own benefit. Those assets are also vulnerable to the creditors of each joint tenant. Furthermore, a surviving joint tenant legally owns the entire account and has no legal obligation to share the proceeds of the account with anyone, regardless of the deceased joint tenant’s wishes. Finally, any distributions the surviving joint tenant makes from the account to other beneficiaries will be taxable gifts from the surviving joint tenant.
In the case of real estate, “adding” a person to a deed as a joint tenant is an immediate gift of an interest in the real estate. As an owner of the real estate, the joint tenant is entitled to a share of the proceeds of the sale of the property, can force the sale of the property, can block any sale of the property, and their creditors could place a lien on the property. Further, the joint tenant may have increased capital gains tax exposure on appreciated property.
A Transfer on Death Deed can be used to pass real estate to one or more people immediately upon your death. Such a deed does not grant any present right to the real property and is fully revocable. A Transfer on Death Deed is a good tool to avoid probate but may still have unintended consequences in the context of your entire estate plan.
One of the best methods to avoid the unintended consequences of probate avoidance techniques is to use a trust that is established and funded during your lifetime. The assets held by the trust are not part of the probate estate because the trustee can manage them immediately upon the presentation of the death certificate. The trustee does not have an ownership interest in the trust assets and is obligated to use those assets to finalize your affairs and manage or distribute the remaining assets of the trust in accordance with the directions you have included in the trust.
A trust is not recorded in the court, is not a public document and is not subject to court oversight. A trust also allows the trustee to manage assets for you during your lifetime if you become incapacitated. However, the terms of the trust must be carefully designed and implemented to ensure that your goals are met.
At its most basic, a trust is a fiduciary relationship created by an individual, called the “grantor” or “settlor,” who gives to another party, known as the “trustee,” the right to hold and manage certain property or assets of the grantor for the benefit of a “beneficiary.” The trustee is a fiduciary who owes the grantor and beneficiary the duties of good faith and trust and is bound ethically to act in their best interests.
Trusts can provide legal protection for the grantor’s assets, ensure those assets are distributed according to the wishes of the grantor, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes, all while protecting beneficiaries. Comprehensive estate planning increasingly includes trusts that can be revoked or amended during the lifetime of the grantor but also may include trusts that are irrevocable to meet specific purposes, particularly if a beneficiary has special needs or to plan for income or estate tax reduction.
Revocable Living Trusts
A revocable trust is created by an agreement during the lifetime of the grantor for the purpose of managing the grantor’s assets. The trust agreement appoints a trustee to hold title to the trust property and manage the trust and gives them specific powers. The grantor, alone or with another trusted individual, typically serves as trustee of the trust while he or she is competent to do so. Since the trust is revocable, the grantor can change any of the trust terms or revoke the trust during his or her lifetime. At the grantor's death the trust becomes irrevocable, and the successor trustee is appointed according to the terms of the trust agreement.
Many people choose to create living trusts for a variety of reasons. The assets held in the living trust do not pass through probate, which saves time and money. Additionally, having a revocable trust is beneficial if you have real property in various states; if the trust holds title to the property, separate probate proceedings in each state are unnecessary. Further, the terms of the trust and the assets do not become public at the grantor’s death (unlike a Last Will and Testament which recorded with the court). A trust also allows you to protect or hold assets for your beneficiaries. For example, you may wish to protect minor or incapacitated beneficiaries by appointing someone else to manage the funds on their behalf. Finally, a trust allows your successor trustee to manage the assets in your trust for you if you become unable to do so yourself. This can avoid costly and time-consuming conservatorship proceedings and court oversight.
Where a Last Will and Testament contains provisions to create and hold assets in a trust upon your death, it is referred to as a “testamentary trust”. A testamentary trust is like a revocable trust except that it is created upon your death through the terms of your Last Will and Testament. This does require a probate proceeding and may involve court oversight of the trust. However, some filings and accountings can be waived if the terms of the trust waive the requirement. Many couples with minor children have such provisions in their documents to ensure that specific individuals serve as trustees and guardians for their young children.