Having worked in estate planning for more than 30 years, I’ve heard a veritable smorgasbord of questions on the subject. Some queries are amazingly off-the-wall. However, a few questions are asked over and over. Following are twelve common—and costly—misconceptions that I have had to clear up in the minds of many a client. Although I have already discussed these issues in previous chapters, all twelve are worthy of review.
Misconception #1: Probate costs are small.
No! Probate costs are not small. They average from $5,000 to $10,000, and many cost much more than that. The estate of Howard Hughes took eleven years to probate. Thirty-two wills were filed with the court, and not one was found to be valid. Hughes’ Nevada attorney fees alone sucked $8,500,000 dollars from his estate. And Texas courts were also involved. Because they will never have that kind of money, most people will never have that kind of problem. But many people ask me if it is possible to handle a probate without going through a lawyer.
The answer, of course, is yes. The law does not require an individual to hire an attorney. But probate can become very complicated. That part of Arizona law books relating to the transfer of property upon death consists of 444 pages! Most people don’t have the time or inclination to read 444 pages of lawyer jargon in an effort to handle their own probate problems. And, unfortunately, the courts aren’t very helpful when an individual tries to handle a probate on their own. In fact, it is a requirement that courthouse workers do not offer legal assistance. Even though they might like to tell you what your filing dates and other requirements are, the law specifies that they are not allowed to do so. Probating a will is a difficult process for most people.
Several clients have approached me with the same sad tale of woe, “We started to handle the probate of a relative who died, but after getting to a certain point, we just threw up our hands and said, ‘Oh, I need some help in this!’” That is when they came to an attorney to finish out that process.
Misconception #2: A will or testamentary trust avoids probate.
No, neither one avoids probate. A will is a unique document. It has absolutely no legal affect until the death of the person who signed it. Because of that factor, it must go through the probate process to be effective.
A testamentary trust is simply a trust that is a part of a will. And since it is a part of a will, it, too, is subject to probate. When a testamentary trust is involved, the trustee must report to the courts at least annually (and sometimes even more often than that) for as long as the trust exists.
One of my clients once commented that he was not concerned about probate because an attorney had set up a trust for him several years earlier. After asking this client a few questions, it became clear that his trust was simply a testamentary trust, meaning it was a part of his will. When I informed him that his testamentary trust would not offer him freedom from probate, he was surprised and a little bit mystified as to why the other attorney hadn’t advised him of that fact. As this client was determined to avoid the probate process, he decided to set up a living trust. A testamentary trust does not avoid probate.
Misconception #3: Your permanent home and vacation home can be handled through the same probate.
Yes, they can, if both properties are located in the same state. But if you own property in more than one state, a probate will be required in each state to transfer the title to the heirs. I had one client who owned property in both Arizona and Colorado. There had to be a second probate because property was owned in a second state. Many people from Michigan and Wisconsin move to Arizona to enjoy the pleasant winter weather. They often maintain property in both states. Upon their death, there must be a probate in both states—unless they avoid this by using a simple living trust. Property from more than one state can be transferred to one living trust, thus, eliminating a probate in each state. For those who own property in more than one state, a living trust is the wisest way to own title.
Misconception #4: A will can be probated in just a few weeks.
No, the law requires a minimum of four to six months in Arizona. In most other states, the law requires at least four months. On the average, a probate will take between ten months and two years.
Misconception #5: In probate, your will and your assets remain private.
One more emphatic no! Once a will is filed with the court, its contents are a matter of public record. Anybody has an opportunity to review those documents. Remember what happened when Natalie Wood died? Her 29 fur coats and $6,000,000 estate were the subject of a Wall Street Journal article. Simply put: A will equals public record. A living trust remains a private family settlement. You decide.
Misconception #6: A will helps you to avoid taxes.
Nope, a will by itself does not affect taxes in any manner. However, a living trust can seriously help minimize estate taxes.
It is rather pathetic that one of the costs of dying is paying the tax. Thankfully, a trust will not only minimize the fees and costs of settling your estate, but also will minimize the taxes. Right now, everyone enjoys a $1,500,000 exemption (see Applicable Exclusion Amount Chart). If the total value of your estate is less than that, you will pay no taxes. Knowing that, it is logical to assume that if you are married, together you can protect up to a $3,000,000 from any estate taxes. But unless you have done some planning, this is not the case.
In the event of the death of a spouse, the law does allow for an unlimited marital deduction. That means that there will be no estate tax if a person dies and leaves everything to the surviving spouse. Sounds great. However, upon the death of the second spouse, all property is considered to be part of the estate of the second spouse, and the second spouse to die has only one $1,500,000 tax exemption. The net effect is that a married couple has only one Federal Estate Tax Exemption.
But you can protect yourself. With a little foresight and careful planning, you can claim that second $1,500,000 estate tax exemption. You can transfer your property into your living trust, stipulating that in the event of the death of either spouse, the trust assets shall be divided into two trust shares known as “Share A” (survivor’s share) and “Share B” (decedent’s share.) Each share retains the estate tax exemption. Besides protecting up to $3,000,000 from any estate taxes, by this action you greatly reduce the taxes on anything over that amount.
Many people do not realize that the money received from life insurance is included in the value of the estate when determining whether estate taxes are due. This is true even though insurance payments are made directly to the named beneficiary and do not go through probate. When you buy life insurance specifically to pay the estate tax, or when you purchase insurance to leave a cash payment to your family, it is a shame to have the amount of the insurance first reduced by a tax. You can completely avoid taxes on the insurance proceeds simply by setting up a separate Irrevocable Life Insurance Trust or a Family Limited Partnership. This insurance trust or Family Partnership will now own your life insurance. Such a trust or partnership removes the insurance from your taxable estate, and, at the same time, allows your estate to have the full benefit of the insurance.
Misconception #7: A will prevents quarrels over assets.
Wrong! In fact, a will is the most contested of all legal documents. It’s very easy to contest a will. After all, a probate is already open to administer the estate. Anyone can file an additional pleading or request with the court. It requires only a simple filing of a document which might state, “Mom was about ready to change her mind on this provision when she died.” Or, “Dad was operating under the undue influence of my older brother when he made that provision.” Or, “Both Mom and Dad were incapacitated when they signed their wills.” Maybe someone will file a will contest just to get an edge in the negotiating process. This person hopes that everyone comes around to his way of thinking so his claim can be settled before the distribution is made.
In all my years of estate planning, I have found nothing to prevent quarrels over estates. But, unlike a will, a trust is very difficult to contest. In the first place, there is no probate, so there is not anything before the court. To contest a trust, a new lawsuit has to be started. A complaint has to be filed, showing that there is good reason to set aside the trust. This is difficult to do since you set up the trust during your lifetime. You indicated by your use of the trust that this is what you intended to have happen. It is difficult for an individual to say that the trust is not what you had intended. The courts will rarely set aside the terms of a trust. Besides, a trust is usually settled in a relatively quick period of time. It may be settled before your beneficiaries even know the manner in which your property will be divided. They might not yet even know what they want to argue about.
Misconception #8: A will from one state is not legal in another.
Not true. If a will is valid in the state where it was signed, it will be valid in any other state. This issue was addressed in our U.S. Constitution: Every state must grant full faith and credit to the laws of every other state. Just be aware that even though your will is valid, it may be a little more difficult to administer an out-of-state will in the state where you reside at the time of your death.
In one case, a resident of Arizona died having a Pennsylvania will and owning real estate in Texas. To settle the estate, both the Texas and Arizona courts required that the Pennsylvania will be proved to be valid under Pennsylvania law. This wasn’t too difficult in Arizona, but proved to be a burden in Texas. If you move from one state to another, and have a will from your previous state, consider taking the time to review the will, making sure that it’s up-to-date. You may even want to draw up a new will. But rest assured that your will is a valid legal instrument as long as it is valid in the state where it was drawn.
A trust will also be valid in every state. And one trust may own property located in more than one state. In the above instance, wouldn’t it have been much better if the Arizona resident had had a living trust instead of relying on a will?
Misconception #9: Drawing up your will is the only cost of planning your estate.
Absolutely not! The cost of your estate plan is the total cost of settling your estate. If you choose to settle your estate with a will, you must include the cost of the probate process—whether that process be $3,000, $7,000, or $10,000. According to Money magazine, the average cost of settling an estate through probate is between 5 to 10 percent of the estate. So, the average cost of settling a $200,000 estate is $10,000.
With a living trust, you eliminate the most expensive part of estate settlement, the probate process.
Misconception #10: To raise money, family members can liquidate property held by the estate.
The personal representative does have the power to sell property in the estate, but not for the purpose of making a distribution to the family. If a distribution is made and there isn’t enough money left in the estate, the personal representative is personally responsible for payment of all the claims. It isn’t wise to make a distribution out of the estate until a final plan has been approved. There is, however, a widow’s or widower’s allowance that is exempt from this process. In Arizona, that is the sum of $18,000. If the surviving spouse were to need more than that, the spouse would have to go back to court and show the judge that there was good cause. Of course, this takes additional time and money, so it’s not a very satisfactory procedure.
Misconception #11: In your living trust, you must name your attorney as your personal representative.
Not at all! In most states, you may name anyone of your choice to act as your personal representative, as long as they’re over the age of 18. Your personal representative may even be a resident of any other state. However, if you choose a corporation as your personal representative, many states require that it be a local corporation.
Some attorneys maintain that you must name him (your attorney), as your personal representative. While that is patently untrue, there are some all-to-obvious reasons an attorney might profess otherwise. The attorney so named will handle the settlement of the estate. The personal representative, of course, is entitled to a fee for his services. Also, the attorney for the personal representative is entitled to a fee. If the attorney is both the attorney and the personal representative, he may feel he is entitled to a double fee.
A woman once came to see me regarding the personal representative/living trust issue. She had previously had her wills drawn up by another attorney. After attending one of my seminars about living trusts, she had gone to her attorney, requesting him to change her will to a living trust. Her attorney responded, “I don’t know anything about living trusts, but I’ll give you a recommendation.” And he wrote down the name of another attorney. As she was leaving his office, he added, “Now, if you do change your will, whatever you do, leave me in as your personal representative.”
Well . . . she didn’t! She hired me to prepare a new trust. Her previous attorney is not included in the new will or the trust. You don’t have to name your attorney as your personal representative.
Misconception#12: Joint tenancy is the safest way to own property.
Big mistake! Joint tenancy does avoid probate when the first spouse in the joint tenancy dies. But if both parties to the joint tenancy die in a common disaster, or after the death of the second spouse, the jointly owned asset will still be subject to probate. Joint tenancy also means joint liability.
For more information about living trusts and estate planning, visit the Learning Center at http://www.legalawareness.com
About Steven W. Allen
