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Published: 2008-03-26

How to Avoid Probate, Save Taxes, and More



Common sense answers to the most common questions people ask about leaving their property to their loved ones when they die.

The Agony of Probate --
Avoid the Probate System At All Costs!
Q. I heard that when I die, my property does not automatically pass to my loved ones. It must go through a court proceeding in the Probate Court in the county where I live. Is that true?

A. Yes. The Probate System is designed to be an orderly way of winding up your affairs, making sure that all of your medical, funeral and other bills are paid, and that your property passes to your loved ones according to your wishes. The Probate Court will not permit your assets to go to your loved ones until it has determined that all of your bills have been paid. Although the Probate System does protect your heirs, it can be a time consuming and costly nightmare for everyone concerned.

Q. How much does it cost to go through the Probate System?

A. The Probate System is expensive. According to a recent AARP study, attorney fees, court costs and bond premiums, and fiduciary fees can eat up from 4% to 10% of the entire value of your estate, and these fees must be paid before your assets can be fully distributed to your family and loved ones. For example, if your property is worth $300,000, Probate fees of only 4% would cost your loved ones $12,000!

Q. How long does it take before the Probate Court will permit the transfer of my property to my loved ones?

A. The Probate System is very time consuming. During the probate process your assets are frozen so an accurate inventory of your assets can be taken, your Last Will and Testament validated, and your final medical and funeral bills paid. While every case is unique, it takes, on the average, from one to three years for the administration of the estate to be completed and the assets passed to your loved ones. During this time period your family has very little control over the assets.

Q. Is the Probate System private and confidential? Will everyone know my business?

A. The Probate System provides no privacy or confidentiality. Every detail of your finances will be on file at the Probate Court. Anyone can look at the court file and learn every detail of what property you have, the value of your assets, and who will be inheriting your property. The process "invites" disgruntled family members to contest your Will, and can serve as a source for leads for unscrupulous salespersons.

Q. What if I own property in more than one state?

A. Probate proceedings must take place in each state where you own property. For example, if you live in Ohio and maintain a winter home in Florida, your family must go through the Probate Court process in Ohio and Florida. This means added expense and delay.

Having A Last Will And Testament
Does Not Avoid The Probate System!

Q. I have a Last Will and Testament. Will I have to go through the Probate System?

A. Yes. Having a Last Will and Testament guarantees a trip through the Probate System, with its high costs and delay. A Last Will and Testament is a legal document in which you set forth your wishes as to who will inherit your property when you die. However, it is not binding until validated by the Probate Court. Therefore, you must go through the Probate System before your property passes to your loved ones. And that means court costs, lawyers fees, and delay.

Q. If I die without a Last Will and Testament, will my assets be subject to the Probate System?

A. Yes. Except that without a Last Will and Testament, state law, and not you, will determine who will inherit your property.

Q. Sounds like I should avoid the Probate System.

A. Yes. Your family has no control. The Probate System will determine much it will cost to settle your affairs, how long it will take, and what information is made public.

Joint Ownership Is Not The Answer

Q. My spouse and I jointly own all of our property. When I die, will my spouse have to go through Probate?

A. Owning property jointly with your spouse does not avoid Probate, it merely postpones it. By owning your property jointly with rights of survivorship, you and your spouse will avoid the Probate System when you die. However, your children or other loved ones will have to go through the Probate System upon the death of the surviving spouse.

Q. What if I add my children's names on my house and bank accounts when my spouse dies?

A. Bad idea. When you put your children's names on your property, you are actually giving them an ownership interest in your assets. If your children run into financial problems, your home or bank account can be taken to pay their bills.

Because your child has an ownership interest in your property, if he or she goes through divorce proceedings, you might find yourself in divorce court fighting to keep your property.

If one of your children die before you, his or her interest in your home will pass to his or her spouse or children, or whomever is named in the deceased child's Last Will and Testament. You won't be able to sell or refinance your home without their approval - and they may not be willing to give their consent - or they may insist upon receiving some of the sale proceeds as a price for their consent - or if they are underage or mentally and/or physically incapacitated, they may not be legally able to give their consent.

You could also unintentionally disinherit one of your family members. A Last Will and Testament does not control the disposition of most property held jointly with right of survivorship. When you die, the asset goes to whomever's name you put on the real estate deed or bank account. It does not matter that your Will directs that the property is left to someone else.

Q. Will adding my children names to my house deed cause tax problems?

A. Putting your children's names on your real estate can create quite a tax problem for your children. By giving them an ownership interest in your real estate while you are alive, you may be exposing them to a significant amount of capital gains tax when they sell the home.

Q. So, joint ownership of property is not the answer?

A. Right.

Living Probate - A True Nightmare

Q. What happens if I am unable to conduct my financial affairs due to a mental or physical problem such as Alzheimer's, stroke, heart attack and the like?

A. If you are unable to handle your own affairs, the Probate System takes control. By law the court must, even if you are married, take control of your assets and appoint someone to handle your financial affairs and otherwise act for you. This court appointed person is known as a Guardian, and the Probate proceeding is known as a Guardianship proceeding. While the court may very well appoint your spouse, it does not have to appoint him or her.

The Guardianship process is embarrassing and humiliating. The Probate Court will want a complete disclosure of your mental or physical disability, an inventory of your assets, and thereafter will take control of how your assets are used to take care of you. Your Guardian, even if it is your spouse, must file periodic reports with court containing an inventory of your remaining assets and a list of all of the money spent onyour behalf.YourGuardianmay also have to obtain the prior consent of the court before making certain expenditures on your behalf.

Q. How long will the Probate Court stay involved?

A. Once the Probate Court gets involved, it stays involved until you recover or die. The court, not you or your family, controls how your assets are used to care for you. Because it is a court proceeding, your family will have to retain an attorney. In short, the Guardianship process can be very costly, humiliating, and time consuming. And, it does not replace a probate proceeding at death - your family will have to go through the Probate System a second time! More delay and legal fees.

Q. I gave my spouse and children my power of attorney. Won't that prevent the Probate Court becoming involved if I become disabled?

A. A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. The problem is, many banks and other financial institutions won't honor a power of attorney unless it is on their form. And, if accepted, it may work too well - the person holding the power of attorney can do whatever he or she wants with your assets. A durable power of attorney can be very useful when part of a proper estate plan, but very risky when used alone.

Q. I have a Last Will and Testament. Will it prevent the Probate Court from getting involved in my affairs if I become disabled?

A. No. Remember, a Last Will and Testament takes effect only when you die.

The Revocable Living Trust - The Best Of All Worlds

How To Avoid Probate And Save Taxes

Q. Ok. So if having a Last Will and Testament does not adequately protect my family and I from the agony of the Probate System, what should I do?

A. Fortunately, there is a better way - a properly prepared estate plan, including a Revocable Living Trust, will enable you and family to totally avoid the Probate System, and permits you, and not the courts, to take control.

Q. What is a Revocable Living Trust?

A. A Revocable Living Trust is a legal document that has been used for centuries as a way of holding title to assets. It is binding and enforceable in all 50 states.

It has been estimated that more than 3,000,000 Revocable Living Trusts have been established in the United States. It is quickly replacing a Last Will and Testament as the document of choice for individuals who wish to avoid court interference with their affairs and large legal bills when they die or become incapacitated.

A Revocable Living Trust, like a Last Will and Testament, contains instructions about what should happen to your assets when you die. But that is where the similarity ends.

Unlike a Will, a properly funded Revocable Living Trust avoids the Probate System, with its high legal costs and delay, when you die, and prevents the Probate System from controlling your assets at incapacity. No Living Probate or Guardianship proceedings.

Q. How does it work?

A. After your Revocable Living Trust is created you must change the name on your assets to the name of the Revocable Living Trust. For example, after John Jones creates his Revocable Living Trust, he would change the name on his assets from "John Jones" to "John Jones, Trustee of the John Jones Trust dated ________." Because you do not own anything at death (it is all titled in the name of the Revocable Living Trust), nothing exists for the court to control when you die or become incapacitated.

Once your assets are in your Trust, you and your spouse (if named as a co-trustee of your Revocable Living Trust) have, at all times,access toyour property and investments. If you die or become incapacitated, your spouse retains control over your assets.

If, because of mental or physical problems, you and your spouse are unable to manage your affairs, your chosen successor will, without court interference, manage your financial affairs until you recover.

If you die without a living spouse, your chosen successor will pay your debts and distribute your property to your loved ones according to your wishes, quickly, privately, and without court interference and its attendant lawyers fees and delay.

Q. If I already have a Last Will and Testament, do I need a Revocable Living Trust?

A. Yes. Your Will only takes effect when you die. It offers no protection if you become mentally or physically disabled. Having just a Will ensures Guardianship proceedings in the Probate Court if you cannot take care of yourself. It is also a ticket to a second Probate proceeding when you die.

Q. Who should have a Revocable Living Trust?

A. Just about everyone owning property. Your age, marital status, and level of wealth really doesn't matter. If you own property and want your family and loved ones to avoid court interference at your death or incapacity, you should have a Revocable Living Trust.

You Maintain Control Over Your Property

Q. Will I lose control over my assets if I put them into a Revocable Living Trust?

Absolutely not. As the Trustmaker, you retain the right to manage the trust assets, change the terms of the Trust, or even revoke it. You manage your property and investments in the same manner as you did before you created the Revocable Living Trust. Nothing changes but the names on the assets.

Q. What about income taxes? If I create a Revocable Living Trust, will I pay more taxes?

A. No. So long as you are alive your Revocable Living Trust will have no effect on the amount of income tax that you will pay. You do not have to file any special tax returns. You file the same tax returns as always.

Saving or Eliminating Federal Estate Tax

Q. What is the "federal estate tax"?

A. Estate tax is really an inheritance tax. It is a special tax imposed by the Internal Revenue Service on property left by a deceased person to someone other than that person's spouse.

Q. How much of my money and other assets must be paid in estate taxes before my loved ones receive their inheritance?

A. Depending on how much you own when you die, quite a lot.

Under current law you can leave everything that you own to your spouse and not have to worry about paying federal estate taxes. The problem arises, however, when you leave your assets to your children or anyone other than your spouse.

You may leave property to your children or loved ones valued in an amount up to the "exempt" amount contained in the Tax Code without any federal estate tax being owed. However, if you die leaving property over the "exempt" amount to anyone other than your spouse, your heirs will pay a tax on the value of your property exceeding the "exempt" amount.

This tax is known as the federal estate tax. It begins at 37% and quickly goes up to 55%. This tax must be paid in cash, usually within nine months after you die. The chart below lists the "exempt" amount:

  • Year of Death
  • Exempt Amount
  • 2000 and 2001
  • $675,000
  • 2002 and 2003
  • $700,000
  • 2004
  • $850,000
  • 2005
  • $950,000
  • 2006 and after
  • $1,000,000

As you can see, without proper planning your biggest heir might be Uncle Sam.

Q. Can a Revocable Living Trust reduce or eliminate federal estate taxes?

A. Yes. If you are married, a properly prepared Revocable Living Trusts incorporating special tax saving clauses may reduce or eliminate federal estate tax. You can actually double the amount of property that can be passed to your loved ones before federal estate taxes must be paid. The chart below shows how much a married couple can leave their children or other heirs if your have a Revocable Living Trust:

  • Year of Death
  • Exempt Amount
  • 2000 and 2001
  • $1,350,000
  • 2002 and 2003
  • $1,400,000
  • 2004
  • $1,700,000
  • 2005
  • $1,950,000
  • 2006 and after
  • $2,000,000

A Revocable Living Trust Provides Peace Of Mind

A Revocable Living Trust provides peace of mind because you have done everything legally possible to take care of your family and loved ones:

  • Your affairs will be managed and and your assets distributed by someone that you have selected and whom you trust.
  • You have avoided the Probate Process, with its continual court interference, high legal fees and delay. Your affairs can be settled in a matter of days, and not years.
  • Your wishes as to who will inherit your property will be honored. Your loved ones will get their entire inheritance quickly and without much of it going pay lawyers. Furthermore, a Revocable Living Trust is much harder to contest in court than a Last Will and Testament.
  • You have taken full advantage of the tax laws to minimize or eliminate federal estate taxes.
  • You have protected your privacy. Because a Revocable Living Trust enables you to by-pass the Probate Process, your property passes directly to your heirs while keeping details of your private affairs private. No one will ever learn what property you had and who inherited it.
  • You have maintained complete control over your affairs. You, and only you, have the right to change or modify the terms of your Revocable Living Trust. You, and only you, decide who will manage your financial affairs when you cannot, and who will inherit your property.
  • You will avoid court interference if you become incapacitated. Your spouse and children will be able to take care of you without the large legal bills, humiliation, and embarrassment that go with Probate Court Guardianship proceedings.

More Information About Revocable Trusts

Q. How do I learn more about how a Revocable Living Trust can benefit me and my family?

A. Our firm is dedicated to providing quality legal services at reasonable rates. For a free, confidential consultation to find out the whole story about how a Revocable Living Trust can benefit you, please call my office at (800) 420-4746, or at (216) 696-7449 in the greater Cleveland, Ohio, area. No cost or obligation.