Estate Planning 101: The Basics

Most people (including me) take a long time to solidify their estate planning documents. We lead busy lives, and we do not consider these documents to be priority items. From a philosophical standpoint, that may make sense. But, from a practical family standpoint, it does not. In over 29 years of practicing law, I have come to the conclusion that any person with assets over $50,000 should have estate planning documents. This article is a primer on what estate planning is, what constitutes the probate process, and why you should know about it.

What Is Probate? 

Probate is the process by which a deceased person’s assets are transferred to their beneficiaries or their heirs-at-law. Beneficiaries are people named in your will. Heirs-at-law are people named by statute as the parties receiving your assets should you not have a will. Heirs-at-law, in the simplest sense, are your spouse and your children, and then your grandchildren. If you are in a first-time marriage, your spouse is your only heir-at-law. If you are a widow or widower, your children are your heirs-at-law. If you have a predeceased child, the children of the predeceased child become heirs-at-law.

In order to avoid having the state statute determine who your beneficiaries are, you must either designate transfer-on-death or payable-on-death beneficiaries on all the assets that you own, and you should also have a will that indicates who should receive your property if you pass away. If you have minor children, those under the age of 18, you should have a trust within your will that indicates who will handle your children’s property if your spouse predeceases you.

How Does Probate Begin? What Does the Process Entail?

In order for a probate to begin, a petition needs to be filed with the probate court in the county in which the decedent lived. That petition must indicate whether or not there is a will and, if not, the heirs-at-law. Once the will is filed and the hearing on that will admitting it to probate has occurred, a personal representative (the person who represents the estate) is appointed and a time period is set for creditors to make claims against the estate of the deceased. Within that time period, the personal representative files a general inventory. This document declares all the property that the decedent owned which is subject to the probate proceeding. A general inventory does not include personal or real property that transfers by means other than a will, as in payable-on-death or transfer-on-death assets.

Once all the bills are paid and the last tax returns are filed, a final account is drawn up that shows with what the estate started and with what it finished, including all the bills that have been paid. The decedent’s last income tax return has to be filed, and an income tax return for the estate needs to be filed at both the state and federal level. The amount that is left is paid to the beneficiaries, and the beneficiaries must provide a receipt. All these documents are then filed with the probate court and the probate is dismissed.

This is an extraordinarily simplistic overview of probate, as there are nuances to the proceedings that are statutory. For instance, informal probate as opposed to formal probate can lessen the amount of hearings or appearances before the court and the documentation required to open or close the estate. However, the above is a good thumbnail sketch of what probate entails.

The Downside of Probate

A reason to avoid probate is the probate file is subject to public review. In addition, it is a time-consuming process requiring legal papers and court proceedings and, therefore, more costly in terms of out-of-pocket attorney’s fees. Because probate needs to occur when a decedent owns property in their own name, it is imperative that married couples name each other as beneficiaries or joint owners on all of their assets, including real property, stock, and limited liability company units. This ensures when one spouse dies, the other spouse does not have to incur the cost or the time in probating assets. An inventory should be done by all married couples documenting all assets owned; the values of those assets; how the assets are titled; and whether the assets are jointly held or recognize each other as beneficiaries.

Power of Attorney

The other estate planning document I recommend universally is a power of attorney for both healthcare and finances. Many spouses believe that, if one of them should become incapacitated to the point he or she cannot function physically and/or mentally, the other is automatically able to make decisions on his or her behalf. This is not true. In fact, if one spouse becomes physically and/or mentally disabled and the parties do not have a power of attorney, the non-disabled spouse must begin a guardianship action of the other spouse and the estate in order to make healthcare and personal decisions (guardianship of the person), and financial decisions (guardianship of the estate).

If you do not have powers of attorney for each other and to third parties, the non-disabled spouse has to file a petition with the probate court asking for a guardianship of either the person or the estate, or both. A doctor is appointed, along with an attorney, to protect the rights of the proposed ward of the guardianship, and the court will monitor the cost and expenses of the guardianship during the period of the disability. That means if you are operating a business and the operating spouse becomes disabled, essentially the non-disabled spouse has to ask the court for permission to make certain decisions in terms of operating the business not only day-to-day, but year-to-year. This creates a very difficult and costly situation over time.

Powers of attorney avoid this issue. A financial power of attorney allows spouses to make decisions for each other from a financial standpoint. A healthcare power of attorney allows spouses to make decisions for each other in terms of healthcare. It also allows spouses to gain information under the Health Insurance Portability and Accountability Act (“HIPAA”).

Conclusion

In closing, a simple estate plan requires any persons with fairly substantial assets and life insurance, particularly those with children (and who are operating a business), to have wills and powers of attorney to ensure smooth sailing both during their lifetimes and if one or both of the spouses should die unexpectedly. Although not a pleasant topic, it is one that is surely necessary to address. Throughout my practice, the number-one appreciative note I received was from a non-disabled spouse thanking me for ensuring they had proper powers of attorney so they could handle their disabled spouse’s business without court interference and as simply as possible.

Axley has an extensive estate planning practice that boasts two CPA attorneys who are well-versed in all aspects of estate planning and has the resources to handle all of your estate planning needs. The majority of estate planning is done on a flat-fee basis. We welcome the chance to meet with you to either begin the process or update an existing estate plan.

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