Probate and Trusts
PROBATE: When you die someone must take care of your assets and someone must distribute the assets to you heirs. This usually takes years and can cost up to 10% or more of everything you have.
WHAT IS PROBATE?
When you die, if you have a will or you do not have a will, and you have made no other provision, someone must take your will to the Probate Court to have it proved valid. Your property is distributed to your heirs and your bills are paid. All this is done under the Probate Judge's supervision.
IF I HAVE A WILL, DO I STILL HAVE TO GO THROUGH PROBATE?
Yes. If you have a will, it is guaranteed that you will go through probate.
HOW MUCH DOES PROBATE COST?
Generally, Probate will cost between 5% and 10% of your gross estate. Your gross estate is everything you own. When you die, you will have Probate cost. When your spouse dies, she will have her own separate probate cost. Most of the cost will go towards:
- ATTORNEY FEES
Attorneys have a fee schedule as set out by state statute. If the attorney has to do additional work, such as a will contest, he will probably be allowed more than the fee schedule states. In addition, the attorney fee is based on the gross value of the property, not the net value. For example, if you buy a home for $100,000 and still owe $60,000 on it, the fee is based on the $100,000 value not the $40,000 equity you have in the house. The fee schedule is as follows:
Five percent of the first $5,000, 4% of the next $20,000, 3% of the next $75,000, 2 and 3/4% of the next $300,000 and 2 and 1/2% of the next $600,000, and 2% of the rest.
Sample Attorney Fees Based On Above Formula:
- COURT FEES
Generally, court fees will range from approximately $250 to $350. This includes the cost of filling the will and other documents in the Probate Court and the cost of publishing the Notice of Death in a newspaper. However, the cost can be more.
- APPRAISAL FEES
Generally, these could range from free to $400 or more for a certified appraisal for a residential building.
- EXECUTOR FEES
The executor is the person you name in your will to take care of your property during the probate process. If you do not have a will, the judge will name someone called an administrator to fill this position. The executor or administrator is entitled to be paid for their work. The person you name as executor of your will is usually a close family friend or family member who stands to inherit from you. Often, they do not charge a fee. However, they do have a right to be paid for their work.
If there is no person whom you trust to fulfill your wishes, you may appoint a Bank or Investment Company's Trust Department as executor. They will follow the same fee schedule as all other executors.
Similar to the attorney's fee schedule, there is a fee schedule for executors and administrators. Unlike the attorney's schedule, this one is based on the amount of "personal property" passing through probate. Personal property is all property other than real estate. Below is the fee schedule:
10% of the first $1,000, 5% of the next $4,000, and 3% of the balance.
Sample Executor and Administrator Fees (based on 50% personal property)
HOW LONG DOES PROBATE TAKE?
State law mandates that the probate process remain open for a minimum of six months. This is to allow any creditors you may have time to file claims against your estate. In some situations, such as where there has been an auto accident, the estate will need to remain open for nine months. However, even simple estates can easily take up to a year and a half. It is not uncommon for the process to take 3-5 years.
WHAT IS INCLUDED IN THE PROBATE ESTATE?
Property that passes by Joint Tenancy, Payable of Death Accounts, Transferable on Death Account, Life Insurance Proceeds, or Retirement Death Benefits should all pass outside probate. Everything you own in your name alone or in Tenants In Common will pass through probate.
Joint Tenancy: If you and your spouse own forty acres together and you die, your spouse gets all the property. It does not matter what your will says concerning the property. If you are married, the deed to the property could read "Bob Jones and Mary Jones" or "Bob Jones and Mary Jones, Husband and Wife," or "Bob Jones and Mary Jones, His Wife." In Arkansas, if a married couple own property in Joint Tenancy it is called Tenancy by the Entireties.
Payable on Death/Transferable on Death: This can be used with a bank account, an account at your stock broker, and some institutions will allow you to do this with Certificates of Deposits. You name someone as death beneficiary. They have no right to the money until you die. When you do die, the money automatically goes to them.
Tenants In Common: If you and a brother own property as tenants in common, when you die your spouse does not automatically get your property. Your Will determines who gets the property. The deed will probably say, "Bob Jones and Jerry Jones, Tenants In Common."
WHAT HAPPENS IF I OWN PROPERTY OUTSIDE ARKANSAS?
Each state where you own real estate controls the land in that state. This means that you will have to have a separate probate in each state where you have real estate. You will pay all the expenses of another probate.
CAN I USE JOINT TENANCY TO AVOID THE PROBATE PROCESS?
Absolutely. This will completely avoid probate, but keep these important things in mind:
You and your spouse can hold everything in Joint Tenancy. When the first spouse dies there is no probate. When the surviving spouse dies, there will be a probate.
You may think that the surviving spouse can then put your children's names on the deed and avoid probate. You are absolutely right. You can, but first examine the consequences.
- The moment you put their names on the new deed, the IRS says that you have made a gift. Depending on how much of your $675,000 exemption you have used, you may have gift taxes to pay. The tax rate is between 37%-55%.
- The moment you put their names on the new deed, you may have caused them an enormous penalty in capital gains tax. The interest you give them does not get a stepped up basis.
- Each person you give an interest to can sell their interest without your permission.
- Once you put someone's name on the deed you cannot change your mind. It is too late if you get mad at them or they marry someone you do not like.
- Once you put their name on the deed or account, their creditors can get to your property. It does not matter if you still consider the property to be yours or that you worked hard and paid for that property years ago.
- If you want to sell the property, who has to sign the deed? Each person who has an interest has to sign. What if one of them is mentally incapacitated? You have to hire an attorney and go to court and have a guardianship hearing.
IS THE PROBATE PROCESS PRIVATE?
No. Every document filed at the probate court is public information. Anyone can look at it for free. The public learns exactly how much money you had and who you gave it to.
IF I GIVE ALL MY PROPERTY AWAY BEFORE I DIE, CAN I THEN AVOID PROBATE?
Absolutely, but remember these two things.
- The moment you put someone's name on the new deed, the IRS says that you have made a gift. Depending on how much of your $675,000 exemption you have used, you may have gift taxes to pay. The tax rate is between 37%-55%.
- The moment you put their names on the new deed, you may have caused them an enormous penalty in capital gains tax. The interest you gave them does not get a stepped up basis
Example: In 1940 you bought 40 acres for $1,500. Today at $2,000 per acre the 40 acres is worth $80,000.
If you sell it for $80,000.00 now you pay---------------------------------------------$15,700
If you give it away before you die and your children sell it immediately for $80,000,
If you give it way after you die through a will or trust and your children sell it immediately for $80,000, they pay ------------------------------------------------------------------------$0
WHAT IF I DO NOT DO ANYTHING?
You will at least be in the majority. This is the option chosen by most Americans. It is probably almost always the worst choice. Not only do you still go through probate, the State of Arkansas decides who gets your property. Most people think that everything will go to the surviving spouse. If you have children, you spouse gets only 1/3 of the real estate to use for life. The children get 2/3 of the real estate. The spouse gets 1/3 of the personal property and the children get the other 2/3. There are some exceptions to this. For example, the surviving spouse has a right to the house.
WHAT ELSE SHOULD I KNOW ABOUT PROBATE?
Your heirs cannot sell any of the property that is going through probate without the permission of the probate judge. If the Judge says no, they cannot sell the property even if they need the money.
ARE THERE ANY OTHER OPTIONS?
The use of a TRUST will probably solve most of your estate planning problems. It has many advantages over all other estate planning tools.
WHAT IS A TRUST?
A trust is a device that allows you to keep control of your property without it being owned by you.
IS THERE ONLY ONE KIND OF TRUST?
There are many types and varieties. Some are revocable. These you can change and amend any time. Some are irrevocable. These, once you set them up, cannot be changed.
WHO ARE THE PEOPLE INVOLVED IN A TRUST?
There are three main players in the trust. The first is the "grantor." This is the person who puts the property in the trust. The second player is the "trustee." This person controls the trust. The third player is the "beneficiary." This person gets the benefits of the trust.
DO I HAVE TO USE A BANK OR TRUST COMPANY AS THE TRUSTEE?
No. If you can control your assets now, there is no reason to change this just because you put your property in a trust. However, a trust company or the trust department of a bank is good to use as trustee when you no longer desire or have the ability to take care of your investments or daily finances. If you have no one in your family that has the ability or no one that you trust to carry out your wishes, then a trust company or a bank's trust department may be for you.
CAN I BE THE BENEFICIARY OF MY OWN TRUST?
Yes. In fact, you can wear the hat of all three players.
WHAT ARE THE BENEFITS OF USING A TRUST?
- You avoid the potential of a guardianship hearing because you have already named someone to take your place if you are unable to handle your affairs. In addition, you can set up your trust to allow your family Doctor to make the decision of whether you can handle your own affairs. The alternative is to allow a judge to do this in a public hearing.
- You avoid probate. Since the property is no longer in your name as an individual, but is now in your name as trustee, there is no reason to go through probate. This is a savings of 5%-10% of your gross estate. An additional benefit is that it will only take weeks instead of years to transfer your property to your heirs.
- The trust will remain private. Unlike a will, which has to be filed as a public record in the probate court, the trust remains a private document even after your death.
- With certain provision in the trust, you can completely avoid or reduce estate taxes. This can mean savings of literally thousands of dollars.
- If your heirs are too young or immature to handle the money you will leave them when you die, you can use a trust to determine when they will receive the money and how much they will receive each time. For example, you can leave instructions that say, when my child reaches 35, he gets 1/3 of the property. When he reaches 45, he gets the other 2/3.
- The trust is less open to attack than a will. This means that your wishes have a better chance of being carried out.
- In the context of a second marriage, the trust is an excellent way to protect both the surviving spouse and the children from your previous marriage.
- If you have property in another state the trust will eliminate the probate in the other state.
- Transferring property through a trust allows your property to receive a stepped up basis. This could greatly reduce the amount of capital gains tax your heirs will pay.
- Setting your finances in order will give you peace of mind.
WHAT ARE THE DISADVANTAGES OF USING A TRUST?
A trust cost more initially than a will or any other form of estate planning. Compare long term cost before making a rash decision.
Let's assume that you have an $800,000 estate.
- If you and your spouse use a simple will, your cost will be:
- Probate Fees: 5%-10% which =
- Estate Tax:
- Cost of Will
- TOTAL COST
- $71,400 - $111,400
- If you give everything away, your cost will be:
- Probate Fees:
- Gift Tax:
- Capital Gains Tax Heirs
- Must Pay If They Sell Property:*
- TOTAL COST
*It is assumed for this example that of the $800,000 estate, the person owned 80 acres of land that he paid $3,000 for in 1950. By giving it away before you die, your child does not get a stepped up basis in the property. If your child sells the land during his lifetime, he must pay approximately 20% to 28% of the difference between $3,000 and its assumed current value of $3,000 per acre.
- If you and your spouse use a trust, your cost will be:
- Probate Cost:
- Estate Tax:
- Cost of Trust:
- $1,850 -$3,500
- TOTAL COST
- $1,850 - $3,500
WILL A TRUST AVOID INCOME TAXES?
No, but neither does a will nor joint tenancy.
WILL A TRUST PROTECT MY ASSETS FROM CREDITORS?
No, not as a general rule, but neither does a will nor joint tenancy. There are certain types of trusts called "spendthrift" trust that will perform this function. However, you cannot be the trustee of your own spendthrift trust. A good general rule to remember is, if you can get to the money or property, so can your creditors.
WILL I NEED MY ATTORNEY EVERY TIME I WANT TO BUY, SELL, OR CHANGE MY TRUST?
No, not as a general rule. However, if you start making wholesale changes effecting such important provisions such as those allowing you to avoid estate tax, then yes, you need to consult your attorney.
WHEN IS USING A TRUST A BAD IDEA?
- If you have major, complex debt problems and you expect to have your creditors coming after you even after you die, then you should consider using a will to cut off the creditor's claims after a certain period of time.
- If you own property that is a toxic waste area, you may consider using a will to cut off creditors claims after a certain period.
- If you are young and healthy and have an estate below $150,000.
- If you have an estate worth less than $150,000 and your main concern is appointing a guardian for your minor child. Appointing a guardian for your child can only be done with a will.
CAN ANY ATTORNEY CREATE A TRUST?
Legally yes, as a practical matter, no. The only training most attorneys have is a course on wills they took in law school. You should seek out an attorney who practices either exclusively in the estate planning field or at least predominantly in the estate planning field. Ask them how many trust they set up last month. If they say less than 7-10, you may want to seriously consider going somewhere else.