State Law

Trusts are often created as an alternative to or in conjunction with a Will. Trusts are today usually considered an estate planning tool. The Uniform Probate Code includes provisions dealing with affairs and estates of the deceased and laws dealing with nontestamentary transfers such as trusts. The theory behind the Code is that wills and trusts are in close relationship and thus in need of unification. Since its creation, over thirty percent of states have adopted most provisions of the Code.

ARIZONA: Without a Will, all property passes to the surviving spouse unless there are children of the decedent. If there are children only the separate property and the one-half of COMMUNITY PROPERTY that belongs to the decedent, passes to the surviving spouse. The remaining goes to the children unless the children are not also children of the surviving spouse in which case one-half of the intestate separate property and all of the community property that belonged to the decedent passes to the children. Creditors have four months to notice the estate regarding claims.

CALIFORNIA: In California Probate STATUTORY attorneys and Personal Representatives’ fees are usually calculated based on the gross value of the estate. California has a simplified legal process known as a spousal confirmation proceeding in which, if no one objects, the court approves the transfer of all assets to the spouse. This procedure can only be used for married couples.

FLORIDA: Florida implemented a number of major changes in its probate code as of January 2002. Florida PUBLIC POLICY protects the spouse and, in some circumstances, children from total disinheritance. Absent a PREMARITAL AGREEMENT, a surviving spouse may have HOMESTEAD rights, elective share rights, family allowance rights, and exempt property rights.

In addition, certain surviving children of the decedent may also have homestead rights, pretermitted child rights, family allowance rights, and exempt property rights.

SOUTH CAROLINA: Without a Will, all assets go to the surviving spouse unless there are children in which case one-half goes to the children. Protective provisions of the South Carolina Probate Code grant a spouse who is left out of a Will an election to take a one-third share of the estate. A similar provision grants a share to a child who is left out of a parent’s will written before the child’s birth.

SOUTH DAKOTA: South Dakota has adopted the Uniform Probate Code.

UTAH: Utah has adopted the Uniform Probate Code.

WEST VIRGINIA: Without a Will, all assets go to the surviving spouse unless there are children in which case one-half goes to the children. If there is a Will, the surviving spouse can also renounce the Will and take the elective share instead. The elective share depends on the length of the marriage. Renouncing the Will requires that papers be filed with a court within certain time frames.

Taxes

One of the duties of the PR is to pay all taxes due the federal government and the state government, including estate tax, real property tax, and prior to death INCOME TAX.

Individual Income Tax

In the United States, even death does not relieve the liability for income tax. Even if the taxpayer is dead on December 31, an income TAX RETURN has to be filed for the year of death. As always, the income tax return is due by April 15th of the following year. Only the income received and any deductions paid through the date of death will be reported on the return. Income such as dividends and interest received after the date of death will not be reported on the individual income tax return but on the estate income tax return. Any medical deductions on the decedent’s part paid within one year of the date of death may be deducted on the final return. All other deductions must have been paid before death to be allowable.

Estate Income Tax

Income which comes in after the date of death should not be reported on the decedent’s personal income tax return. Interest, dividends, or other income paid to the estate, must be reported on the estate income tax return. A separate tax identification number is obtained for the estate. This separate tax return lists the TAXABLE INCOME such as dividends, interest, capital gains, and rents, and allows for deductions such as legal and executor’s fees. If the estate has been distributed and closed during the tax year, each beneficiary must list his or her proportionate share of the taxable income on his or her personal tax return. If the estate is open, the taxes are paid from the estate.

Avoiding Probate

In many estate plans, the Trust is the central tool that is used to control and manage property. A Trust continues despite the incapacity or death of the grantor. It determines how a TRUSTEE is to act with respect to the Trust estate. It determines how property is to be distributed after the death of the grantor. A properly drawn Trust is a separate entity that does not die when the creator dies. The successor Trustee can take over management of the Trust estate and pay bills and taxes and promptly distribute the Trust assets to the beneficiaries, without court supervision, if the Trust agreement gives the Trustee that power. Trusts, unlike Wills, are generally private documents. The public would be able to see how much the descendent owned and who the beneficiaries were under a Will, but typically not with a Trust. Like a Will, however, a Trust can be used to provide for minor children, children from a prior marriage, and a second spouse in the same trust, transfer a family-operated or closely-held business, provide for pets, provide for charities, and can remove life insurance benefits from a taxable estate, while still controlling the designation of insurance beneficiaries.

Creditors

Rules regarding notification of creditors are different for each state. However, in every state, creditors must make a claim for any amounts owed within a fixed period of time. This claim can be made directly to the Personal Representative in some jurisdictions, but in other jurisdictions, it must be made with the court. The PR can pay the claim out of the estate, but if the PR disputes its validity, the CREDITOR must seek a court order to receive payment. If there is not enough money to pay all the debts of the estate, state law dictates which creditors are paid first. It is not possible to “inherit” a debt. Beneficiaries and Personal Representatives are not personally liable for the debts of the estate, although the court may order estate property sold to pay certain creditor claims.

Probate Court

Probate usually occurs in the local court where the deceased permanently resided at the time of death. If the deceased did not have a Will, each state will have its own pattern for distributing the deceased’s real property. Generally it is necessary to go through probate or, in the case of smaller estates, a less formal procedure that is still under the general supervision of the probate court, before the deceased’s property can be legally distributed. If a person dies with a Will (which is known as dying “testate”), a court needs an opportunity to allow others to object to the Will. A number of objections, might invalidate a Will, for example, an ALLEGATION that there is a later Will or that the Will was made at a time the deceased was mentally incompetent. Additional challenges to a Will can include FORGERY, improper EXECUTION (signature), or a claim that the decedent was subject to undue influence. Dying without a Will is known as dying INTESTATE; however, such estates remain subject to the law and rules of the probate code of the decedent’s domiciled jurisdiction.

The Personal Representative typically must file a probate petition and notify all those who would have legally been entitled to receive property from the deceased if the deceased died without a Will, plus all those named in the Will, and give anyone who chooses a chance to file a formal objection to the Will.

A HEARING on the probate petition is typically scheduled several weeks to months after the matter is filed. If no objections are filed the court generally approves the petition and formally appoints the Personal Representative. While it is not required that there be representation by an attorney in probate court, probate is a rather formalistic procedure. The death of a family member is typically a stressful time even when the death is expected, such as with a person of quite advanced age or with someone who is terminally ill. Employing an attorney may be the less expensive alternative in the long run.

Ancillary Probate

The probate court or division has jurisdiction over all PERSONAL PROPERTY the deceased owned, plus all the real property the deceased owned which is located in that same state. If the decedent owned out of state real property, the laws of that jurisdiction will apply, unless there is a Will. If there is no Will, Probate is usually required in each state where the real property is situated, in addition to the home state. Even if there is a Will, after it is admitted to probate in the home state, it usually must be submitted to probate in each other jurisdiction in which the deceased owned real property. A separate probate action for such circumstance is known as ANCILLARYprobate. Some states require the appointment of a Personal Representative who is a local resident to administer the in-state property.

Will Contests

A Will Contest take place where a second, different Will of the decedent is produced or in the event there is an objection to the Will. An individual or entity must have proper standing to contest a Will. This means they must have a claim for some type of interest in the estate based on either another Will or a lawful relationship to the decedent. If the Will is held invalid, the probate court may invalidate all provisions or only the challenged portion. If the entire Will is held invalid, generally the proceeds are distributed under the laws of INTESTACYof the probating state. The fact that the decedent even attempted to create a new Will may invalidate the older one, even if the new Will is found not to be valid. Hiring an attorney is usually necessary to determine whether contesting a Will is even worth the expense.

Lawsuits

In addition to a Will Contest, estates can be involved in other lawsuits. Estates are legal entities, which can file suit, and be sued. Typically, such suits involve prior acts of the decedent, which gave rise to some claim. There are time limits involving such claims if the estate is to be sued. Potential claimants would be considered potential creditors.

Personal Representative

The Personal Representative (also called the “executor” or “executrix” if there is a Will or the “administrator” or “administratix” if there is no Will) is appointed as part of the probate proceeding. The Personal Representative can either be an entity, one individual, or two or more individuals (although this arrangement can become extremely complicated).

Duties

The Personal Representative has the responsibility for managing the estate in accordance with established probate rules and procedures of the JURISDICTION where the probate takes place. Responsibilities of a Personal Representative include:

Locating, inventorying, and obtaining an appraisal of the assets of the decedent

Receiving payments owed to the estate, including unpaid salary, vacation pay, or other benefits due the decedent

Opening a checking account for the estate

Determining how property is distributed

Noticing potential creditors

Investigating the validity of claims against the estate

Paying bills, debts, valid claims and expenses of administrating the estate

Discontinuing utilities and credit cards, closing accounts and notifying appropriate private and governmental agencies of the death

Filing and paying income and estate taxes

Closing the probate

Compensation

Personal Representatives are generally compensated about 2% of the probate estate for their work. This varies moderately from state to state and generally decreases as a percentage as the size of the estate increases. All fees and reimbursed expenses are subject to court approval. Additional fees may be allowed if permitted by the court in certain circumstances. However, if a Personal Representative is incompetent or does not perform as required, the court may deny compensation, and the Personal Representative may be held personally responsible for any damages caused. Liability may arise from improperly managing the assets of the estate, failing to collect claims and moneys due the estate, overpaying claimants, selling an asset without authority or at an inappropriate price, neglecting to file tax returns promptly, or distributing property incorrectly to beneficiaries/

Types of Wills

Do-It-Yourself Wills

So-called do-it-yourself are wills that individuals create themselves, usually with the aid of self-help legal literature. There are numerous guides, form books, websites, and fill-in-the-blank literature in the marketplace geared for non-lawyers. This material purports to help you create a valid will and avoid the costs of hiring an attorney to prepare a will for you. While this may be true in some cases, there is much to be cautious about. Mainly, the consequences of preparing a do-it-yourself will can be potentially devastating. If you die and your will is declared to be invalid, you will not be around to explain what you had intended to accomplish in your will. Instead, a probate court will either interpret your will or distribute your property according to the state intestacy scheme. Keep in mind that your will is an important legal document. If it is not prepared and executed according to state law, your entire will can be set aside by a probate court. Additionally, just about anyone who envisions an alternative distribution of your estate can contest a do-it-yourself will. If it does not meet some very stringent tests mandated by state law, the court can disregard your do-it-yourself will.

Oral Wills

Oral wills are those whose contents and terms are merely spoken to a witness or witnesses, but not written down. There is great potential for fraud or even simple misunderstanding in oral wills. In most cases an “oral will” is only recognized by a probate court when made by members of the armed services or merchant marine in active service in time of conflict. Oral wills are not uncommon in situations in which a person feels he or she does not have time to prepare a written will and have it properly executed.

Death-Bed Wills

Deathbed wills are those created and executed when the testator is facing imminent death. These wills may be perfectly valid and binding, but the closer to the testator’s death the will is prepared the more likely it is to be challenged. The contest is usually based on a premise that the testator lacked sufficient mental capacity or was subject to undue influence. As previously stated, challenges can lead to costly and protracted will contests.

A deathbed will can potentially lead to errors. Its hasty preparation can be such that the will may not distribute the property in the manner that the testator intended. Hasty preparation can also fail to take advantage of some features that can reduce or eliminate the Federal Estate Tax. It is also more likely that the will would be found invalid because it does not conform to some legal requirement. These are some of the reasons many lawyers urge their clients or potential clients to create and execute their wills while they are still of sound mind and body.

Holographic Wills

A holographic will is one that you have written yourself. They are generally handwritten, although some states may allow for a holographic will to be created on a typewriter or with word processing software. These kinds of wills are not allowed in some states, but other states permit this kind of informal will. In states that permit them, the laws relating to holographic wills can be very specific or restrictive. For example, California requires that you write all material provisions entirely by hand and that you must sign your holographic will. On occasion, a holographic will is better than no will at all. In cases where the holographic will creates an ambiguity or an unintended result, it may have been better to have no will at all.

Self-Probating Wills

You can help simplify the probate process by adding to your will the affidavits (sworn statements) of the witnesses who saw you signing your will. When these affidavits are included with a will, it is sometimes called a “self-probating will.” In the affidavits, the witnesses state that they saw you execute or sign the will, that you asked them to be witnesses to the will, that you appeared mentally competent at the time, and you acted voluntarily. Without these affidavits, the process is more complicated and lengthy. In those cases, the executor would usually need to contact the original witnesses and have them appear in probate court (if they can). Before the personal representative or executor can even file your will in probate court, the witnesses would usually appear in court (or sometimes provide an AFFIDAVIT) to state the circumstances surrounding the execution of the will. This TESTIMONY helps to “prove” that the will is genuine.

Probate courts usually permit your will to be filed along with the affidavits, without the need to summon witnesses or obtain new affidavits. The court then gives notice to other heirs at law who are given a specific amount of time to file any objections to the will being admitted to probate. If any of these choose to challenge your will, the probate court is more likely to require your witnesses to come into court (if they are still available) to TESTIFY about the circumstances in which your will was signed. In some states, self-authenticating affidavits are not accepted in situations where the testator dies shortly after the will is signed, or the will was not executed with the assistance of a licensed attorney.

Living Wills

LIVING WILL is something of a misnomer. It does not direct how your property is to be disposed of after you die. Rather, it is a document that specifies the general kinds of medical care you would want— or not want—in the event you became unable to communicate with your health care providers. Living wills are sometimes known as “medical directives” or “medical declarations.”

Probate & taxes

Probate

Probate is the process by which legal title of your property will be transferred from your estate to your beneficiaries. If you die with a will (“testate”), the probate court determines if your will is valid, hear any objections to your will, orders that your creditors be paid, and supervises the process to assure that property remaining is distributed in accordance with the terms and conditions of your will. The cost of probating your estate is determined either by state law or by practice and custom in your community. The usual cost to probate an estate varies between 3% and 7% of the value of the estate.

Taxes

As part of his or her duties, your personal representative will file tax returns for your estate to report the assets of your estate. The personal representative will also file an estate income TAX RETURN to report any income generated by your estate. Federal estate taxes are the highest in the federal tax code. Currently, estate tax is levied on decedents’ estates when the estate is valued over $675,000. This exclusion amount will rise in annual increments to $3.5 million in 2009. Federal estate tax rates range between 37% and 50% in 2002. Prior to 2002, the federal estate tax rate was 55%. This tax rate will drop 1% each year until it reaches 45%. The Federal Estate Tax begins in § 2001 of the Internal Revenue Code. (26 U.S.C. 2001). Merely making and executing a will does not reduce federal estate tax. However, through competent legal advice on estate planning, including the careful crafting of your will, you can minimize or avoid these taxes. Such tax benefits would not be available to you and your family if you died without a will.

Revoking a Will

As mentioned above, a change in your marital status may revoke all of your will, or it may revoke the part of your will relating to your former spouse. If you are mentally competent at the time you do it, you can revoke your will by burning it, tearing it up, or otherwise destroying it. Be aware that revoking your will must be properly witnessed and recorded. If not, someone may later claim that your will was simply “lost” and not revoked. Thus, copies of the will you thought you had revoked can be produced and duly probated. Alternatively, someone may claim that you lacked mental competence at the time you “attempted” to revoke your will.

Moving from State to State

The laws of all states differ with respect to wills. If you move to a different state after you make and execute your will, it may be a good idea to have your will reviewed by a lawyer in your new state. Basically, a will properly drafted and executed in your former state—and that would be valid in your former state— will typically be regarded as valid under the law of your new state.

Do not forget that the laws in your new state may be more favorable than the laws of your previous state. For example, your new state may have different processes to “prove” the will. Or your new state may permit some probate matters to be handled on a less formal and less expensive basis. Sometimes this can be accomplished simply by adding language that refers to certain statutory provisions in your new state’s laws.

Sometimes complications will occur because different states maintain different statutory classifications of property. The differences between states without community property schemes and those that have them can create important complications. If your will was executed in a state that does not have a community property scheme and you subsequently move to a community property state (or vice versa), you may want to confer with a lawyer in your new state to determine whether to create a new will to achieve your intended result.