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Estate Planning Frequently Asked Questions
- What property is subject to the probate process?
- How is the probate process started?
- In which probate court is a will filed?
- What does the executor do?
- What happens if someone dies in one state and owns a vacation home or other real estate in another?
- Can an individual probate an estate without help from an attorney?
- Does the executor have personal liability?
- Can probate be avoided?
- What about living trust “kits” sold to protect an estate from probate?
- How much does probate cost?
- What is a power of attorney?
- When does a power of attorney take effect?
- Does a power of attorney take away the principal’s rights?
- Are powers of attorney irrevocable?
- Can an attorney-in-fact make gifts of the principal’s money to the principal’s loved ones, including the attorney-in-fact?
- Can the attorney-in-fact be held liable for his or her actions?
- What if there is more than one attorney-in-fact?
- Can the attorney-in-fact be fired?
- What kind of records should the attorney-in-fact keep?
- Can the attorney-in-fact be compensated for his or her work?
- How does one draw up a health care proxy?
- What is a living will?
- What is a health care proxy?
- Why have a health care proxy?
- Should a medical directive accompany the health care proxy?
- When does a health care proxy take effect?
- What if the principal regains the ability to communicate his or her own decisions?
- What are Alaska and Delaware trusts?
- Should I have a trust?
- What does it mean to be a “fiduciary”?
- Who should have a copy of the health care proxy?
- Who should be appointed as a health care agent?
- What is an estate plan and why do I need one?
- Can a person object to a proposed guardianship for him- or herself or for someone else?
- Isn’t my estate too small for an estate plan?
- Won’t joint accounts take care of passing on my assets?
- Why should I pay a lawyer a lot of money for some simple documents?
- Which must I pay first, my federal or state death taxes?
- What decisions can a ward still make for herself?
Q: What property is subject to the probate process?
A: The probate estate includes all property owned by the deceased person (the decedent) at the time of death. Certain kinds of property, such as property owned jointly by the deceased and another person, life insurance on the life of the deceased, and property held in trust, are not part of the probate estate and are not subject to the probate process. For example, jointly-owned bank accounts pass automatically to the surviving joint owners upon the death of one of the owners without going through probate. This non-probate property, however, is part of the decedent’s taxable estate.
Q: How is the probate process started?
A: First, a petition for probate of the will must be filed with the probate court, along with the original will and a certified copy of the death certificate. Notice must be mailed to all of the decedent’s “heirs at law” (usually the surviving spouse, children and children of any deceased children), to those named as beneficiaries in the will, and, if a charity is involved or there are no heirs at law, to the state’s Attorney General. Notice must also be published in a local newspaper. If no one objects by a deadline set by the court, the court appoints the executor named in the will.
Q: In which probate court is a will filed?
A: Generally the will is filed in the probate court for the county in which the decedent resided at the time of his or her death.
Q: What does the executor do?
A: The executor (“executrix” if a woman, or “personal representative” in many states) is responsible for collecting the probate property and for paying any debts of the estate. The executor must file with the probate court an itemized list, known as an “inventory,” of the probate property, including the value of each item. The executor also must file an estate tax return within nine months of the date of death if the estate is taxable (worth more than $675,000). Creditors of the estate have a prescribed period of time to bring claims against the estate. Some states count this period from the date of death and others from the appointment of the executor. Executors generally wait until this claim period has expired to complete distribution of the estate according to the terms of the will. As his or her final responsibility, the executor must file an accounting with the probate court showing the income and expenditures of the estate administration.
Q: What happens if someone dies in one state and owns a vacation home or other real estate in another?
That can mean two probate administrations, the main one in the state of residence and an “ancillary” administration in the state where the real estate was owned. Generally, if the decedent owned probate property (meaning anything in her name alone), the probate administration must take place in her state of residence. In most instances, personal property (such as bank accounts and stock) in another state will also be administered by the probate court in the decedent’s state of residence, but not if the property is real estate. So, owners of vacation homes or other real estate in a second state should consider forms of ownership that avoid probate. This might entail joint ownership with another family member, a life estate so that the property passes to the decedent’s beneficiaries automatically at death, or a trust.
Q: Can an individual probate an estate without help from an attorney?
A: That depends on the size and complexity of the estate and how much free time a person has. Unfortunately, most courts have very idiosyncratic rules that are familiar only to those who work with them a lot. Experienced practitioners can be much more efficient than a layperson can. And they know how to approach difficult questions that inevitably arise, such as in which county the estate should be filed, how to serve notice to minor children, or what to do if a beneficiary is incompetent. Many states have a simplified process for smaller estates, such as those under $15,000. In most cases the probate court clerks can guide executors through the administration of these estates.
Q: Does the executor have personal liability?
A: Yes and no. No, because executors act as representative of the estate, so they do not personally take on the estate’s debts and obligations. Their responsibility is to pay those debts and obligations out of the estate funds, not their own. If the estate cannot meet its obligations, they are still not the executor’s responsibility. Yes, because the executor is liable to the estate if he or she does not administer the estate carefully and, for example, makes the estate insolvent through his or her actions, such as speculative investments or premature distributions to beneficiaries.
Q: Can probate be avoided?
A: Yes, but that doesn’t mean that estate administration and tax filings can also be avoided. Strictly speaking, probate involves only the court process of transferring property. Much property passes without court involvement. For instance, jointly owned property goes to the surviving joint owner outside of probate. Similarly, life insurance proceeds and some retirement benefits go to the named beneficiary. (However, if the beneficiary is the estate, the proceeds will still pass through probate.) In most cases, trust property goes to the beneficiaries named in the trust instrument without probate court involvement. So it is possible to avoid the court process by placing all property in one of these forms of ownership. However, that does not eliminate the requirement of filing an estate tax return. Life insurance proceeds, jointly held property and most trust property are all part of the taxable as opposed to the probate estate of the deceased. Where a tax return is required, much of the work of administering an estate must be done whether or not the estate is “probated.” This includes listing and valuing property, determining who receives the property, paying taxes, and ascertaining the debts of the estate.
Q: What about living trust “kits” sold to protect an estate from probate?
A: Many seniors have been approached at one time or another by sellers of “living trust kits” who voice dire warnings that probate can cost as much as 10 percent of an estate and delay inheritances by a year or more. Is it worth purchasing such products to avoid probate? The rules and systems for probating estates differ from state to state and may be more or less cumbersome and time-consuming depending on where a person lives. While it is possible for probate to cost as much as 10 percent of an estate, this is quite unlikely unless the estate is small or a will dispute or other complications arise. Although the entire probate process can take a year or longer, usually most of the estate can be distributed in the meantime. Finally, while a properly drawn and funded trust can allow probate to be avoided, it may do nothing to protect an estate from taxation. Whether a tax is due will depend on the estate’s size, the state’s inheritance tax laws and whether the decedent took proper tax planning steps. In determining whether to take the steps to avoid probate, individuals should consider the costs and trouble involved. Making the effort will serve its purpose only if all assets are transferred into the trust. If some assets are left out, the trust donor may well pay for the trust and for probate, too. Whether or not it is worth the effort and expense to avoid probate is a personal decision that should be made after consulting with a qualified professional. People selling living trust kits typically are untrained and unqualified to give proper advice. Some of their products can do more harm than good, depending on an individual’s circumstances and on the trust document itself. When presented with such offers, people should take their time, meet with an attorney who can give comprehensive advice, and then make a decision.
Q: How much does probate cost?
A: Cost depends on the size and complexity of the estate and on the practices of attorneys in a particular area. Some lawyers charge by the hour and some charge a percentage of the estate. Before hiring a lawyer to help administer the estate, prospective clients should ask him or her what it will cost. There’s nothing wrong with shopping around to get the best value. Also, it is not necessary to stick with the attorney who drew up the will, although there may be some advantage to having a lawyer who knew the deceased and is already familiar with his or her estate.
Q: What is a power of attorney?
A power of attorney is the grant of legal rights and powers by a person, the “principal,” to another, the “agent” or “attorney-in-fact.” The attorney-in-fact, in effect, stands in the shoes of the principal and acts for him or her on financial, business or other matters. The attorney-in-fact can do on behalf of the principal whatever the principal may do on his own behalf—withdraw funds from bank accounts, trade stock, pay bills, cash checks-to the extent authorized in the power of attorney. But this does not mean that the attorney-in-fact can just take the principal’s money and run. The attorney-in-fact must use the principal’s finances as the principal would for the principal’s benefit. In giving someone a power of attorney, an individual is giving the other person the right to exercise a legal right that the individual already has. People may not think of themselves as being powerful, but in fact every time they spend money, enter into contracts, sell property, cash checks, withdraw money from a bank, decide where to live and choose what kind of health care they want, they are exercising their legal rights and powers. Normally, no one else can exercise these legal rights for an individual. However, people have the right to delegate these powers to someone else—to allow this other person to act in their place. Giving someone a power of attorney does not limit an individual’s own rights in any way. It simply gives the other person the power to act when or where the individual cannot act.
Q: When does a power of attorney take effect?
A: Normally, a power of attorney takes effect as soon as the principal signs it. If the principal wants to keep the power of attorney from taking effect until some future event takes place, he or she can execute a “springing” power of attorney. A springing power of attorney takes effect only when the event described in the instrument itself takes place. Typically, this is the incapacity of the principal as certified by one or more physicians. In most cases, even when the power of attorney is immediately effective, the principal does not intend for it to be used unless and until he or she becomes incapacitated. The attorney-in-fact should discuss this with the principal so that he or she knows and can carry out the principal’s wishes.
Q: Does a power of attorney take away the principal’s rights?
A: Absolutely not. Only a court can take away a principal’s rights through a conservatorship or guardianship proceeding. An attorney-in-fact simply has the power to act along with the principal.
Q: Are powers of attorney irrevocable?
A: Certainly not. A principal may revoke a power of attorney at any time. All the principal needs to do is send a letter to his or her attorney-in-fact telling the attorney-in-fact that his or her appointment has been revoked. From the moment the attorney-in-fact receives the letter, he or she can no longer act under the power of attorney.
Q: Can an attorney-in-fact make gifts of the principal’s money to the principal’s loved ones, including the attorney-in-fact?
A: This depends on the wording of the power of attorney and on the laws of the state in question. Some state statutes require gift-making powers to be indicated on the document. That is, the power of attorney must authorize the attorney-in-fact to make gifts. In those states, the attorney-in-fact cannot act without the specific authority to do so. A well-drafted power of attorney will specifically give the attorney-in-fact the right to make gifts (assuming that the principal wants to give the principal that authority). The power of attorney may limit the amount of the gifts or the people to whom the attorney-in-fact may make gifts. If, on the other hand, the document does not give the attorney-in-fact specific authority, but it does give him or her a general grant of power to stand in the principal’s shoes and do whatever he or she may do, the attorney-in-fact still may be able to make gifts if the law in the state in which the attorney-in-fact resides allows this. Just remember that the attorney-in-fact is acting in a fiduciary capacity and all of his or her actions under the power of attorney must be in the principal’s best interest.
Q: Can the attorney-in-fact be held liable for his or her actions?
A: Yes, but only if the attorney-in-fact acts with willful misconduct or gross negligence. If the attorney-in-fact does his or her best and keeps the principal’s interests in mind as the basis of his or her actions, the attorney-in-fact will not incur any liability.
Q: What if there is more than one attorney-in-fact?
A: In most cases, when there are multiple attorneys-in-fact, they are appointed “severally,” meaning that they can each act independently of one another. Nevertheless, it is important for them to communicate with one another to make certain that their actions are consistent. If they disagree or take conflicting steps, that can create a serious problem. The only solution may be a guardianship or conservatorship under which a court would choose one of them (or someone else) to make the decisions.
Q: Can the attorney-in-fact be fired?
A: Certainly. The principal may revoke the power of attorney at any time. All he or she needs to do is send the principal a letter to this effect. The appointment of a conservator or guardian does not immediately revoke the power of attorney. But the conservator or guardian, like the principal, has the power to revoke the power of attorney.
Q: What kind of records should the attorney-in-fact keep?
A: It is very important that the attorney-in-fact keep good records of his or her actions under the power of attorney; this is the best way to be able to answer any questions that may be raised. The most important rule for an attorney-in-fact to keep in mind is not to commingle the funds he or she is managing with his or her own money. The accounts should be kept separate. The easiest way to keep records is to run all funds through a checking account. The checks will act as receipts and the checkbook register as a running account.
Q: Can the attorney-in-fact be compensated for his or her work?
A: Yes, if the principal has agreed to pay the attorney-in-fact. In general, the attorney-in-fact is entitled to “reasonable” compensation for his or her services. However, in most cases, the attorney-in-fact is a family member and does not expect to be paid. If an attorney-in-fact would like to be paid, it is best that he or she discuss this with the principal, agree on a reasonable rate of payment, and put that agreement in writing. That is the only way to avoid misunderstandings in the future.
Q: How does one draw up a health care proxy?
PeoA: ple should contact an attorney who is skilled and experienced in this area. Many hospitals and nursing homes also provide forms, as do some public agencies.
Q: What is a living will?
A: Living wills are documents that give instructions regarding treatment if the individual becomes terminally ill or is in a persistent vegetative state and is unable to communicate his or her own instructions. The living will states under what conditions life-sustaining treatment should be terminated. If an individual would like to avoid life-sustaining treatment when it would be hopeless, he or she needs to draw up a living will. Like a health care proxy, a living will takes effect only upon a person’s incapacity. But a living will is not necessarily a substitute for a health care proxy or broader medical directive. It simply dictates the withdrawal of life support in instances of terminal illness, coma or a vegetative state.
Q: What is a health care proxy?
A: A health care proxy is a document executed by a competent person (the principal) giving another person (the agent) the authority to make health care decisions for the principal if he or she is unable to communicate such decisions.
Q: Why have a health care proxy?
A: If an individual becomes incapacitated, it is important that someone have the legal authority to communicate the individual’s wishes concerning medical treatment. This is especially true if the individual and family members disagree about treatment. By executing a health care proxy, principals ensure that the instructions that they have given their agent will be carried out in the event of such disagreement.
Q: Should a medical directive accompany the health care proxy?
A: Yes. A medical directive provides the agent with instructions on what type of care the principal would like. A medical directive can be included in the health care proxy or it can be a separate document. It may include specific instructions concerning the initiation or termination of life-sustaining treatment or a broader statement granting general authority for all medical decisions that are important to the principal. The health care proxy appoints an agent to represent the principal and a broader medical directive provides guidance in less serious situations.
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Q: When does a health care proxy take effect?
In general, a health care proxy takes effect only when the principal requires medical treatment and a physician determines that the principal is unable to communicate his or her wishes concerning treatment. How this works exactly can depend on the laws of the particular state and the terms of the health care proxy itself. A medical directive, whether part of a health care proxy or separate, will be followed when you can no longer direct medical providers yourself.
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Q: What if the principal regains the ability to communicate his or her own decisions?
If the principal becomes able to express his or her own wishes at any time, he or she will be listened to and the health care proxy will have no effect.
What are Alaska and Delaware Trusts?
A: Special trusts set up in these states can allow the donor of a trust to “have his cake and eat it, too.” Such trusts can shield property from certain creditors while allowing the donor to still retain a benefit from the trust. Traditionally, if the donor of a trust retains a benefit—such as access to some or all of the trust’s property—creditors can collect from the trust up to the limit of that benefit. Some high-net-worth individuals have created trusts in other countries—known as “offshore” trusts–in order to be shielded from creditors and still reap a benefit from the trust. In 1997, both Alaska and Delaware acted to permit such trusts to be created in their states (Nevada, Rhode Island, and Utah also have similar laws). So far, these trusts are untested in court, but at least the statutes in these two states are clear. It may make sense in employing these trust forms to keep all assets invested in Alaska or Delaware institutions so that it falls to courts in these states to uphold the new statutes. The Alaska and Delaware trusts have the advantage over offshore arrangements of being less expensive to set up and maintain. And many individuals may feel more comfortable having funds invested within the United States. However, be aware that neither Alaska nor Delaware trusts are available to protect assets from already existing creditors or if the donor is in default of child support payments. The trust may not require that income or principal be distributed to the donor; such distributions must be discretionary. The donor also may not retain the right to revoke or amend the trust. In addition, Alaska requires that at least one trustee be a resident of Alaska and that at least $10,000 be maintained in an Alaska bank or brokerage account. Alaska and Delaware trusts may also provide estate tax benefits. Normally, a taxpayer may not remove property from his or her estate while retaining any potential benefit (such as making a gift of money that the person making the gift still controls). But the IRS has stated that this combination is possible with these new trusts, since creditors may not make any claim on the property.
Q: Should I have a trust?
A: As with all estate planning, anyone considering a trust should contact an attorney who is skilled and experienced in this area.
Q: What does it mean to be a “fiduciary”?
A: A fiduciary is a person who is held to the highest standards of good faith, fair dealing and undivided loyalty with respect to the principal. The attorney-in-fact serves as the principal’s fiduciary. The fiduciary must always act in the principal’s best interest and keep his or her goals and wishes in mind in making any discretionary decision. However, since the fiduciary shares control with the principal, fiduciaries do not have the same responsibility as trustees or executors, who have total control over an estate or over trust assets. The fiduciary’s duty covers only the level of care he or she takes in his or her own actions as attorney-in-fact.
Q: Who should have a copy of the health care proxy?
A: The agent should have the original document. The principal should have a copy and the principal’s physician should keep a copy with that individual’s medical records.
Q: Who should be appointed as a health care agent?
A: Since the agent is going to have the authority to make medical decisions in the event the principal is unable to make such decisions for him- or herself, the agent should be a family member or friend that the principal trusts to follow his or her wishes. Before executing a health care proxy, the principal should talk to the person whom he or she wants to name as the agent about the principal’s wishes concerning medical decisions, especially life-sustaining treatment.
Q: What is an estate plan and why do I need one?
A: Your “estate” is simply everything you own: bank accounts, stock, real estate, motor vehicles, jewelry, household furniture, retirement plans, life insurance. Your estate plan is the means by which you pass your estate to the next generation. This can be accomplished through a variety of instruments. Most retirement plans and life insurance policies pass to whomever you name as beneficiaries. Property that is jointly owned passes to the surviving joint owner. Trust assets go as provided by the terms of the trust. Only property you hold in your name comes under the instructions laid out in your will. If you don’t have a will, such property passes under the rules of “intestacy” set out in state law. In general, those rules provide that your property will be divided among your closest family members. Problems often arise when people don’t coordinate all of these methods of passing on their estate. The will may say to divide everything equally among your children, but if you put an account in joint names with one child “for the sake of convenience” there could be a fight about whether that account should be put back in the pool with the rest of your property. One of the most important aspects of a will is that it names an executor or personal representative to handle the probate of your estate. Litigation can develop simply because family members cannot agree on who should take on this role. For those with small children, the will is indispensable because it permits you to appoint a guardian in case both parents pass away. It also permits you to choose a trustee to manage your estate for the benefit of your children. This person may or may not be the same as the guardian. Estate plans also include other crucial documents, such as durable powers of attorney and advance medical directives.
Q: Can a person object to a proposed guardianship for him- or herself or for someone else?
A: While the rules differ from state to state, someone who is the object of a proposed guardianship has the right to object to the appointment of a guardian. Generally, next-of-kin also has the right to object. In many states, the proposed ward has the right to a court-appointed attorney if she cannot afford one on her own.
Q: Isn’t my estate too small for an estate plan?
A: No. For many individuals, especially those with smaller estates, the most important document is not the will, but a durable power of attorney. Through a durable power of attorney, you can appoint someone to handle your finances in the event that you are ever unable to do so yourself. It also permits you to choose your guardian in case one is ever needed, although one of the main purposes of a durable power of attorney is to avoid such a necessity. Similar to a durable power of attorney, a health care proxy appoints someone you trust to make medical decisions for you in the event of your incapacity. While a will protects your estate after you’re gone, a durable power of attorney and health care proxy protect you while you’re still here. Don’t leave home without them (unless there is no one you trust enough to appoint).
Q: Won’t joint accounts take care of passing on my assets?
A: Unless you have only one child, this is inadvisable because it is impossible to keep separate accounts for more than one child equal. This is especially true if you become incapacitated and no longer have control over the accounts. Trying to save a few dollars by managing your estate in this fashion runs the strong risk of causing discord in your family for generations to come. Why take the chance?
Q: Why should I pay a lawyer a lot of money for some simple documents?
A: You can buy software that produces most of the estate planning documents an attorney will prepare for you. And in nine cases out of ten, those documents will do just fine. But how do you know you’re not the tenth case? Do you have a taxable estate? Do you own significant amounts of tax-deferred retirement plans? Do you know how to fund the revocable trust provided on the computer program? Is there anything about your estate that is unusual, such as having a disabled child? In short, if there’s anything about your situation that’s not plain vanilla, you need to see a lawyer. If you have any questions about your estate plan, you need to see a lawyer. As with joint accounts, the problems you may create by not getting competent legal advice probably won’t be yours, but may well be your children’s. Do you want to risk leaving that legacy?
Q: Which must I pay first, my federal or state death taxes?
A: Both federal and state taxes must be paid within nine months of the date of death.
Q: What decisions can a ward still make for herself?
A: Generally, when someone is appointed guardian for another, that guardian “stands in the shoes” of that person—known as the “ward”—and is given the legal responsibility to make all decisions for her, whether financial, medical or personal. (In some states, this is known as “conservatorship”; in others, “conservatorship” refers only to financial responsibility.) While guardianship takes away the ward’s right to act for herself, the guardian must act in the ward’s interest and take actions that she would if able to do so. This means that the guardian should take direction from the ward to the extent that the ward is able to express herself. Most states allow for “limited” guardianships, where the court determines which specific rights will be transferred from the ward to the guardian. Unfortunately, in practice most courts do not take the time to craft a guardianship to the exact needs of the ward. It’s easier for all the parties but the ward to slap on a complete guardianship. If you are appointed the unlimited guardian for a parent (or anyone else), you should still seek that person’s participation in all decisions you have to make on her behalf. That’s the only way that you can fulfill your function of acting for her and it helps her retain her dignity and sense of self despite the guardianship appointment.
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