You’ve done your estate plan: you have a will, powers of attorney for finances and health, and a revocable “living” trust. So will your estate avoid probate?
Trusts are commonly used to avoid probate. However, simply having the trust is not enough. Your assets must be held in your trust at the time of your death to avoid probate administration. This means that you need to transfer your home, car, bank and investment accounts, and so on so that they are held by the trustee of your trust, and not by you alone.
(You may be the trustee of your trust; you will still need to transfer the title to your assets to avoid probate.)
There’s an old rule in the English common law (which is where American law comes from) that prohibits dead-hand control: you can’t own things when you’re dead. Once a person dies, the assets that they owned at the time of their death become part of their estate. The estate owns the assets. It’s the transfer of property from the estate to the deceased’s heirs that the probate court oversees.
Probate administration, therefore, transfers the ownership of so-called “probate assets” - assets you own in your name alone, that don’t pass by beneficiary designation or joint ownership.
A trust works by placing ownership of your assets in the name of your trust, which is not a person and can’t die. The trust owns and manages the assets for the beneficiaries of the trust, whoever those might be: you or, after your death, the people you want to have your property.
When you die, the trust agreement, which governs the management of the trust assets, will determine how the assets are held or distributed.
The typical probate-avoidance trust will have you as the beneficiary during your lifetime; you get to live in the house, access the bank accounts, and generally enjoy the use of your assets. Once you die, the trust will specify the way in which you want the assets to be treated: held for your young children to pay for their education, for example, or distributed outright to your adult children.
It’s important to note that trusts still require administration after your death; there are required notices to beneficiaries, taxes, and procedures that should be followed. However, a trust will generally allow your beneficiaries to do all this in private, without probate court supervision.
Trusts are a flexible tool in the estate planning toolbox and can be used to achieve a variety of goals, from asset protection to probate avoidance. The way your trust should be drafted and funded will depend on your assets and your goals. It’s important to discuss your goals with an estate planning attorney so that they can design the right estate plan for you.
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* Also posted at posteriblog.com, the firm's blog about inheritance law news and history.
The Guardian has a long, fascinating feature out today detailing what happens when the Queen dies. The code words for her death are, apparently, "London Bridge is down," which has a pleasantly sing-songy feel for something so serious. (One might guess that the code words will change after the publication of this article.)
Queen Elizabeth II has sat on the throne since 1952, which makes her the longest-serving monarch in British history. Most Britons don't remember having another monarch and therefore haven't lived through the transition between monarchs.
I was studying in London when the Queen Mother died in 2002, and was able to go down to see the funeral procession as it wound its way from Clarence House around Green Park to Westminster. The regalia was out- I swear I was nearly blinded by the sun shining off the jewels in the crown on the casket- and the pomp was dialed to 11. It was made still more interesting to watch by the knowledge that they relevant parties had been practicing the Q.M.'s funeral for years as she slept. (Imagine having the guards practicing your funeral procession literally outside your bedroom window as you sleep! Not very restful, I'd think.)
True to form, the palace has a plan for the Queen's death, and it is significantly more complicated than what the average person might need to plan. But there's a purpose to the planning: when someone dies (particularly when that someone has such national political importance) it's nice to know what you've got to do. Who's in charge? What are the services? Who gets what?
In the Queen's case, much of this is regulated by law (Charles will be king the moment she dies, no matter what the supermarket gossip mags speculate) or by tradition. For the average estate planning client, it's not this complicated. But there's still a need for ceremony, however small. For the wake, the funeral, the mercy meal. The notification of friends and family, the placement of the obituary. Big or small, death brings with it a multitude of details that must be dealt with, and knowing what you have to do in advance is a tremendous help in a time of shocked grieving. I hope many take the Queen's example and plan ahead.
“Estate planning” sounds like something for the wealthy- something not worth doing if you rent an apartment, owe money on your car, or don't have much in retirement savings. Many people who own their own home count it as their biggest asset.
But estate planning isn’t just about money. It’s about control. Who will make your medical decisions if you’re incapacitated? Who will pay your bills and manage your money? Who will raise your children and manage their money if you die?
Estate planning applies to everybody, not just the wealthy. It is not just a process that directs the distribution of your assets to your loved ones; it’s a way of protecting yourself while you were still alive.
Think of it this way:
You probably know who you’d want to make your decisions and manage your assets- no matter how much money you have. But have you taken steps to make that happen?
If you do not have a will, power of attorney, or other estate planning documents, your loved ones will not have the legal authority to carry out your wishes- even if they know what you would want.
Getting a basic estate plan is like having an insurance policy. You don’t want to have to use it, but if you are incapacitated or pass away unexpectedly, your loved ones will know what you want and will have the legal power to carry out your wishes. Whether you have an apartment and a life insurance policy through work or a paid-for home and a sizable portfolio, estate planning is a way to ensure that you’re taken care of even when you can’t take care of yourself.
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People often share with me their fear or dislike of probate- much of the time because they have watched a friend or family member get caught in a long and frustrating probate administration. (For more about probate, see our Probate FAQs.)
Now, I should probably point out up front that I think a trust is the best way to avoid probate. (See "What's the Difference Between a Will and a Trust?".) But that’s not the only way, and I’d like to tell you about some others you can do yourself. *
One of the benefits of avoiding probate is that your beneficiaries have quicker access to the assets you leave them. The probate-avoidance strategies below are the most common. (But be careful- they can’t be changed by will, so you have to be sure.)
1: Update your beneficiary designations.
If you have life insurance policies or retirement accounts such as pensions, 401(k)s, and IRAs, you most likely named beneficiaries to receive those assets when you die. Beneficiary designations are a great way of avoiding probate; those assets will almost immediately be paid out or transferred to the person or persons you’ve named, without any court involvement. But be careful: beneficiary designations can’t be changed in a will, so make sure the people you’ve named are the ones you still want to receive those assets. (Not updating your beneficiaries can lead to unfortunate results.)
2: Transfer-on-death designations.
Transfer-on-death provisions are similar to beneficiary designations, and are often used on bank accounts and other financial instruments. If you have a transfer-on-death provision on your checking account, for example, the person you designate to receive the account can get the account transferred to their ownership after your death by presenting identification and a death certificate. It works very much like a beneficiary designation.
3: Joint ownership with rights of survivorship.
If you co-own assets with rights of survivorship, your co-owner will become the sole owner on your death. (The joint ownership has to come with rights of survivorship; otherwise your portion will pass through your estate.) Be careful with this one- it seems obvious, but once someone is a joint owner of one of your assets, it’s theirs. If it’s a bank account, they can drain it. If they have money problems, the asset is open to their creditors. If their marriage is unstable, the asset will be available to be divided in their divorce. Joint ownership with rights of survivorship is commonly used
4: Funding your trust.
This may seem obvious, but many of my probate estates are opened to take care of assets that were never moved into a trust. If you already have a trust, take the time to make sure that your assets are titled in the trust. If you aren’t sure how, call a lawyer to get some help.
* Disclaimer: What you should do is always going to depend on your particular goals, assets, and family situation. While the strategies listed above will help your assets avoid probate, there are downsides to each and these solutions may not be right for you. (And if you really love disclaimers, there are more on the Site Disclaimer page.)
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Does your Will say anything about your Facebook account? Your email accounts? Your Pokecoins?
Many people store photos online, have cloud-based collections of books and music, and use cloud storage products like DropBox and Google to store their documents. Some people even have valuable gaming assets or currency online.
The law is struggling to adapt to the explosion of online property we’ve all started to accumulate. (Technology develops at a much faster pace than legislation.)
The Uniform Law Commission, an organization that drafts model laws (such as the Uniform Probate Code and Uniform Commercial Code) recently drafted the Uniform Fiduciary Access to Digital Assets Act, which has been adopted by some states and is being considered in many others. New Hampshire and Massachusetts are both considering adopting this law, but have not done so yet.
So what can you do now? Having updated estate planning documents that authorize your agents and executors to have access to your digital assets is important. You may also wish to keep a list of your digital assets and a list of your wishes- for example, would you want the accounts to be deleted? Do you want your family to have access to all of the pictures? What about your email contacts?
If your agents and executors know what you want and have the authority granted to them in your estate plan, they’ll be well-placed to carry out your wishes. Depending on the asset, you may wish to incorporate it directly into your Will or Power of Attorney.
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Accessing Digital Accounts after Death
Many digital companies have procedures for dealing with account holders who have passed away. (Apple doesn’t as of this writing.) They may also have default modes of freezing accounts- Facebook, for example, "memorializes" the accounts of deceased users so that they can be viewed but not used.
Companies will require documentation (such as a death certificate or court appointment) if you want to do anything with another person’s account or have access to its contents. Even if a company does not have a specific policy, they may be able to help you if you can provide documentation proving death and showing that you have legal authority to deal with the account.
Facebook: Your Digital Legacy
Instagram: Report a deceased person’s account
WordPress: Deceased User
Dropbox: Access a deceased person’s account
It’s that time of year again: time to make your New Year’s Resolutions. There’s no shortage of articles out there on the topic: how to keep them, lists of suggested resolutions for work and health and even for online identity protection. You can even find out what the most popular resolution in your state is. (Weight loss in New Hampshire and a healthier lifestyle in Massachusetts, if you’re local and curious.)
Unsurprisingly, weight loss is the most common resolution nationwide (no wonder, after the holidays). But the second?
There are all sorts of ways people want to get organized: cleaning the house, getting their finances in order, alphabetizing the spices. (Okay, maybe that’s just me.)
But one of those ways is to get a health care power of attorney. To arrange for guardianship of your kids. To get a will and maybe a trust, to organize your financial information.
This whole process is called "estate planning." It sounds daunting, but is really just the process of organizing your financial records, writing down your wishes, and making sure you have the right legal documentation.
Here are five easy ways to get started.
The more you know about what you have and what you want, the easier it will be for your lawyer to draft the right plan for you. Make a list of your bank accounts, retirement and investment accounts, and insurance policies. You should also make a list of your debts, including student loans, mortgages, and any consumer debt. Personal finance websites like Mint.com can help you get started.
Make some decisions.
Who would you want to take care of your children if you couldn’t? Who should make financial or medical decisions for you if you’re incapacitated? You don’t have to have a final choice before scheduling a consultation to have your will done, but it’s helpful to think about it in advance.
Find a lawyer.
I know I’m not totally unbiased here, but there are plenty of reasons paying a lawyer to get your estate plan is money well spent. Estate planning is complicated, and you will probably have a lot of questions. Lawyers are trained to recognize your specific areas of risk and to educate you so that you can make the best decisions for you and your family. Knowledge is power. If you don’t know a lawyer, ask friends if they have one they like. State bar associations also keep lists of lawyers and can refer you to one in your area.
Get at least a basic estate plan.
There are all sorts of complex estate planning techniques out there, but even the most basic plan is better than nothing, and it’s okay to start simple. Get a will, a power of attorney, and some health care planning documents. Make sure that your documents reflect your wishes- you want to control who receives your assets or who has control over them and over you if you’re incapacitated. These documents will save you a lot of money in court and attorney fees if you are incapacitated.
Update your beneficiaries.
The best-drafted will in the world can’t change your beneficiary designations, so make sure that you check to make sure your life insurance, retirement accounts, and other financial assets will be passing to the people you want them to go to.
Update your plan every few years.
Life goes on after you get your estate plan completed. It’s a good idea to check in with your lawyer every few years to make sure your plan still reflects your wishes. Major life changes are also a good time to check in- births, marriages, deaths, divorces, retirement, and moving to another state are all examples of the types of events that should trigger an estate plan review.
If it’s been a few years since you got your estate plan done, make an appointment with lawyer to get your checkup.
Check your will off your list!
You may have heard that you can give your children up to $14,000 each year without penalty. You may also have heard that there is a five-year lookback period when you apply for Medicaid. Though these are both planning issues that might be relevant to you, they are not connected. They’re two separate rules that apply to two separate situations.
Gift Tax Planning
The federal government imposes a tax on gifts that individuals give to others. There is a large exemption: an individual can give $5.46 million (increasing to $5.49 million in 2017) in gifts during their lifetime before they have to pay the tax.
There is also a yearly exemption- you can give $14,000 every year to as many people as you want without having to inform the IRS of your gift. (So I can give $14,000 to my brother, my sister, and three of my friends, and that's $70,000 I can give away without paying gift tax.) It’s only after the gifts you give total $5.46 million over your lifetime, not including the first $14,000 you give to any person during any year, that you pay the gift tax.
As you can see, not many people end up paying the federal gift tax. Not only are the exemptions large, but certain gifts, such as education and health expenses paid directly to the provider, do not count. You can pay your grandchild’s $50,000 private school tuition, for example, without making any taxable gift. Gifting strategies are generally used to reduce an individual’s estate and gift tax liabilities.
This $14,000 annual exemption is only for gift taxes. It does not have any relevance to Medicaid planning.
If you apply for Medicaid in order to pay for your long-term care (such as a stay in a nursing home), the state Medicaid agency will ask to see five years’ worth of financial records. These records are used as part of your application to determine whether you can afford to pay for your own care. (Medicaid is a welfare program, and there are strict asset and income limits for applicants.) The state Medicaid agencies are looking for evidence that you have moved assets out of your estate in order to make yourself eligible for Medicaid- for example, if you’ve given your child a check for $100,000 soon after receiving a diagnosis that indicates you'll need nursing home care.
If the Medicaid agency determines that you have made gifts out of your estate in order to make yourself eligible for Medicaid, you may have to "cure" that gift- that is, get the recipient to give the asset back.
This prohibition on moving money out of your estate does not have anything to do with the $14,000 gift tax exclusion amount. You cannot give $14,000 away each year without penalty from Medicaid- with Medicaid applications, each transfer is examined individually. If you’re interested in planning for your long-term care, it’s a good idea to meet with a lawyer to discuss your options and make sure that you aren’t doing anything that will harm you during the Medicaid application process.
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A process by which an individual designs a strategy and executes a will, trust agreement, or other documents to provide for the administration of his or her assets upon his or her incapacity or death. Tax and liquidity planning are part of this process.