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avoiding probate

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By Nancy Burner Esq.

Nancy Burner, Esq.

Executing a Last Will and Testament with an attorney is an important step in deciding and planning your legacy. However, this does not mean that all is solved upon one’s death. It is important that the client and future executor understands the process of probate and the necessary requirements of the court system. 

Probate is the legal procedure by which your assets pass upon your death. When a person dies with a will, the nominated executor must file a probate petition with the Surrogate’s Court in the county in which the decedent lived. This is necessary to be officially appointed by the court so that the executor can distribute property or assets left by the decedent. 

First, the executor files the original will, a certified copy of the death certificate, and the probate petition in Surrogate’s Court. Then, notice needs to be given to the decedent’s next-of-kin who would have inherited had there not been a will. The next of kin will either sign waivers and consents in agreement or issue a citation to appear in court to have the opportunity to object to the will. Often a family tree affidavit needs to be filed by an independent person who knows the family history. 

After jurisdiction is complete and any issues with the will addressed, the Surrogate’s Court will issue a decree granting probate. The judge issues Letters Testamentary giving the executor authority to act. These Letters Testamentary serves as the physical paperwork for the executor to carry out distributions of the estate. 

When a person dies without a will (intestate), it is necessary to file an Administration Petition with the Surrogate’s Court. Here, a close relative of the decedent applies to become the decedent’s Administrator. The assets pass to blood relatives according to statute. The Court will then issue Letters of Administration appointing them Administrator. As with a probate proceeding, all interested parties must be given notice and either sign a waiver or served with a citation issued by the court. Sometimes a kinship hearing is necessary to prove relation to the decedent. 

As you can imagine, the probate process can be costly and time consuming in even the simplest cases. Probate proceedings can drag on for years when distant relatives cannot be located or a relative decides to contest the will. Contested wills can result in litigation proceedings and become draining mentally and financially for those involved. The good news is that probate can be avoided through the use of beneficiary designations and trusts.

Assets held jointly with rights of survivorship pass automatically to the surviving owner upon death. This is common in the case of spouses. Likewise, assets with designated beneficiaries pass to the designated beneficiaries, avoiding probate. Examples of jointly held assets include joint bank accounts and real property owned by spouses. Common assets with designated beneficiaries include retirement accounts and life insurance policies. If you have not named a beneficiary on an account that allows it, these assets must go through probate. Of course, not every type of asset allows a beneficiary designation. 

Another way to avoid probate is by creating a living trust. While there are many different types of living trusts, most can hold assets such as bank accounts, real estate, businesses, and personal belongings. For example, a revocable living trust is primarily used to avoid probate. You, as the grantor, would be both the trustee and beneficiary during your lifetime. You would add a successor trustee to take over if you became incapacitated and upon your death. This successor trustee can seamlessly take over management of the trust property and no court proceedings are necessary. 

Keep in mind, any assets owned by a revocable or irrevocable trust will simply pass according to the terms of the trust, free from court interference. Certain trusts also allow a trustee to control assets if one becomes incapacitated.  

One size does not fit all when it comes to trust planning. It is important to discuss the best option for you and your loved one with an attorney who specializes in this area of the law and can explain the pros and cons of trusts, probate and more. 

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C. with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

By Nancy Burner, ESQ.

Nancy Burner, Esq.

Being hyperfocused on avoiding probate can be an estate planning disaster. First, what exactly is “probate”? Probate is the legal process whereby a last will and testament is determined by the court to be authentic and valid. The court will then “admit” the will to probate and issue “letters testamentary” to the executor so that the executor can carry out the decedent’s intentions in accordance with the last will and testament.

That usually involves paying all funeral bills, administrative expenses, debts, settling all claims, paying any specific bequests and paying out the balance to the named beneficiary or beneficiaries. Avoiding probate can be accomplished by creating a trust to hold your assets during your lifetime and then distributing the assets at your death in the same manner and sequence as an executor would if your assets passed through probate.

Typically, this would be accomplished by creating a revocable trust and transferring all nonretirement assets to the trust during your lifetime, thereby avoiding probate at your death. Retirement assets like 403Bs, IRAs and nonqualified annuities are not transferred to revocable trusts as they have their own rules and should transfer after death by virtue of a beneficiary designation.

Retirement assets should not be subject to probate. The designation of a beneficiary is vital to avoid costly income taxes if retirement assets name the estate or default to the estate. The takeaway here is that you should make sure that you have named primary and contingent beneficiaries on your retirement assets.

If you name a trust for an individual, you must discuss that with a competent professional that can advise you if the trust can accept retirement assets without causing adverse income tax consequences. Not all trusts are the same.

Avoiding probate can be a disaster if it is not done as part of a comprehensive plan, even for the smallest estate. For example, consider this case: Decedent dies with two bank accounts, each naming her grandchildren on the account. This is called a Totten trust account. Those accounts each have $25,000. She has a small IRA of $50,000 that also names the grandchildren as beneficiaries. She owns no real estate. Sounds simple, right?

The problem is that the grandchildren are not 18 years of age. The parents cannot collect the money for the children because they are not guardians of the property for their minor children. Before the money can be collected, the parents must commence a proceeding in Surrogates Court to be appointed guardians of the property for each child. After time, money and expenses, and assuming the parents are appointed, they can collect the money as guardian and open a bank account for each child, to be turned over to them at age 18. The IRA would have to be liquidated, it could not remain an IRA and the income taxes will have to be paid on the distribution.

I do not know of a worse scenario for most 18-year-old children to inherit $50,000 when they may be applying for college and seeking financial aid, or worse, when deciding not to go to college and are free to squander it however they want.

If the grandparent had created an estate plan that created trusts for the benefit of the grandchild, then the trusts could have been named as the beneficiaries of the accounts and the entire debacle could have been avoided. The point is that while there are cases where naming individuals as beneficiaries is entirely appropriate, there are also times that naming a trust as beneficiary is the less costly option, and neither should be done without a plan in mind.

When clients have a large amount of assets and large retirement plans, the result can be even more disastrous. Consider the case where a $500,000 IRA names a child as a direct beneficiary. If a properly drawn trust for the benefit of the child was named as beneficiary, there would be no guardianship proceeding and the entire IRA could be preserved and payments spread out over the child’s life expectancy, amounting to millions of dollars in benefits to that child over their lifetime. If payable directly to the child, there will be guardianship fees and the $500,000 will likely be cashed in, income taxes paid and the balance put in a bank account accruing little interest and payable on the 18th birthday of the beneficiary.

The concern is that individuals are encouraged to avoid probate by merely naming beneficiaries but with no understanding of the consequences. At a time when the largest growing segment of the population is over 90, it does not take long to figure out that the likely beneficiaries will be in their 60s, 70s or older when they inherit an asset.

Thought must be given to protecting those beneficiaries from creditors, divorcing spouses (one out of two marriages end in divorce) and the catastrophic costs of long-term care. Whether the estate is large or small, most decedents want to protect their heirs. A well-drafted beneficiary trust can accomplish that goal.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.