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Probate & Estate Administration
If you die owning assets in your own name your family is required to commence a probate or administration proceeding in the state Surrogate Court. Probate and estate administration are court processes used to transfer assets at death. If a probate avoidance estate plan has not been made, probate will be necessary. The process in New York to probate a will is also called “proving a will”. That is an apt description because probate of a will in New York requires submitting evidence in a very specific form that the will is the valid last will and testament. This includes proving the family tree of the deceased. In the probate process the notice must be given to all persons who would inherit the property if there were no will. That means that people you disinherit will get an invitation from the Court to raise issues with the will if they so choose.
Probate Estate & Administration
Since states have jurisdiction of real estate, if you die in one state, but own property in another, your executor will have to conduct a separate probate proceeding in each state where you own property.
- Your probate estate is the assets in your name alone.
- Probate is the court process to distribute your assets to your beneficiaries as per the terms of your will
- Your probate/intestate estate is different from what is included in your estate for IRS purposes.
If There Is No Will
Without a will, the process of transferring property at death is called Administration. The Administration process is very similar to probate except there is no will. The family tree of the deceased must still be proved. After payment of debts and administration expenses the property will be given to the legal heirs, who in New York are called “distributees”.
Why Avoid Probate Administration
Probate/ Administration costs are probably some of the costliest and time consuming in the United States. Probate/Administration is also a public proceeding. The dollar value of the estate must be filed with the Court. However, if probate/administration avoidance is done improperly, it can create new risks to loss of assets, including substantial capital gains taxes. When done properly, a probate/administration avoidance estate plan can eliminate probate and protect the family without increasing taxes.
Avoiding Probate/Administration the risky way
There are many articles written that attempt to provide guidance on avoiding probate in an easy and inexpensive way. While some to the advice is useful, much of it is shortsighted. Probate/Administration avoidance can be obtained using joint tenancy of real estate, pay on death accounts, beneficiary designations, and outright gifts of property.
Avoiding Probate/Administration with Joint Tenancy of Real Estate
Clients often ask, “Should I just put my kids name on the deed?” Putting someone’s name on the deed means gifting them an interest in your property. When you put someone’s name on the deed you are also gifting them your cost basis. They are also “gifting” you their liability to creditors. It is important to remember that joint owners of real estate have an absolute right to force the sale of the property to get their half.
Avoiding Probate/Administration with an Outright Gift
It is possible to avoid probate of a house or other real estate by simply gifting it during life. In this scenario, mom or dad or both “put the house in the kid’s names”. As with joint ownership above, you have just gifted your cost basis. That means that if the house is worth significantly more today than when you bought it, you kids, when they go to sell the property, will have to pay capital gains income taxes on the difference between what you paid, and what they sold it for. This could result in hundreds of thousands of dollars in unnecessary taxes.
Avoiding Probate/Administration and Protecting your family
A Revocable Living Trust is a legal document that allows you to benefit from your property during your life, and retain control, while at the same time avoid probate at death. Unlike with gifting and beneficiary designations, with a Revocable Living Trust, you can get a stepped-up tax basis for your heirs at death. You can also protect assets from your beneficiaries’ creditors, bankruptcy, law suits and divorce. Assets placed in a Revocable Living Trust pass directly to whomever you name at your death, without any court intervention.
While you are alive and well you can manage the assets, buy, sell or gift the assets the same as when you owned them outside of the trust. However, if you become incapacitated, you can name a successor trustee who can manage the property for you. This prevents Court intervention or the need for a guardianship proceeding. At death the trust property can pass outright to those you name or remain in trust for their benefit giving them trust protections during their life.
- If you don’t have a Will, the law of the state where you live will decide who gets what as part of your estate. Be sure to look up your state law if you don’t have a Will to make sure the law says the same thing about how you wish for your estate to be distributed. If it doesn’t – you need a Will!
- Administration is the process to distribute your assets to your beneficiaries as per your state’s intestacy law.
Simply Having a Revocable Living Trust is Not a Plan
It is important to remember that the Revocable Living Trust does not achieve these objectives of probate avoidance, management in disability and protection for the next level of beneficiaries simply by being drafted. The trust must also be maintained. If your trust based probate avoidance plan is not integrated there is a strong chance it will not work. I have reviewed many estate plans where the client has prepared a Revocable Living Trust, and years later, there is no asset titled to the trust.
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