MARK D. FREEMAN, ESQUIRE

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Be sure that your wishes are carried out

after you have departed this life.small logo

 

PROBATE 101

 

What is Probate?

Probate is the privilege that the government grants to transfer assets that are owned by a deceased person to another.  This means that you cannot transfer title of an asset that is subject to probate without obtaining the appropriate government authority, usually at the county courthouse.  Because power of attorney ceases upon death, an agent under power of attorney does not have the legal authority to transfer assets out of the name of someone who is deceased.  Obtaining the appropriate authority to transfer assets out of the name of a deceased person usually involves a petition to obtain letters testamentary or letters of administration to the appropriate court and short certificates issued by the appropriate court.

What property is subject to probate?

Any property owned solely by the decedent at the time of their death that does not convey as a matter of law to another is subject to probate.  Assets titled as joint tenants with right of survivorship or as tenants by the entireties are generally not subject to probate, although they are generally subject to inheritance tax.  Assets titled as tenants in common are subject to probate.  Life insurance is generally not subject to probate unless there is no living beneficiary designated or the estate is the named beneficiary.  Most qualified plans such as IRAs 410(k)s, 457 plans, 403(b) plans and other IRS qualified plans are not subject to probate (they are subject to income tax and death taxes) unless there is no living beneficiary designated or the estate is the named beneficiary.  POD (payable on death) accounts, TOD (transfer on death) accounts and ITF (in trust for) accounts are generally not subject to probate unless there is no living beneficiary designated or the estate is the named beneficiary.  Assets held in a trust are generally not subject to probate but are subject to inheritance tax.  POD, TOD and ITF accounts are however, generally subject to inheritance tax.   Exactly how an asset is titled becomes critical in determining which assets are subject to probate and which assets are not.

Why do we have probate?

The first purpose of probate is to protect the interests of creditors of the deceased.  While many who die, have little if any debt, the probate provides an orderly process which ensures that whatever debt may be owed gets paid.  Secondarily, it is the personal representative’s job to pay any income taxes owed, file an inheritance tax return and pay inheritance taxes, if owed by the estate, as well as any other death taxes such as federal estate and gift tax.  Generally, after creditors and income and death taxes are satisfied, then the personal representative ensures that each beneficiary receives what they are entitled to receive.  Because a personal representative can become personally liable for unsatisfied debts and claims against the estate, as a personal representative administers an estate, they want to take the appropriate steps to ensure that creditors, the government and beneficiaries cannot later come back and claim that the personal representative failed to properly perform their job.  Most personal representatives will hire a law firm to protect the personal representative from potential claims of creditors, government agencies or beneficiaries.  

What is a personal representative?

A personal representative of an estate is the person who is obligated to carry out the orderly administration of the estate of the deceased as required by law.  In the case of a decedent who had a will naming a personal representative, the personal representative is generally called an executor or executrix.  If the decedent dies without having a will naming an executor or executrix, then the personal representative is generally called the administrator of the estate.  The personal representative can be a person or an entity such as a bank.  When you consider naming a personal representative, it should be a person that you trust to handle your money and honor your wishes.  Your personal representative can hire a competent law firm to provide them with advice on how to properly administer the estate.  You should have a high degree of confidence in the integrity of your personal representative when it comes to handling the assets of your estate. 

Last Will and Testament vs. Intestatacy

Assets of a decedent can be subject to probate whether the decedent died with a will or without a will.  When a person dies with a last will and testament that names a living personal representative or existing entity and disposes of all probate assets, then that person dies “testate” and their wishes as expressed in their last will and testament will be incorporated into the probate process.   If a person dies without any last will and testament, then that person dies “intestate” and the laws of intestacy will dictate what happens to the assets that are subject to probate.  Where there is a will that does not name a living or existing personal representative, or all of the assets are not disposed of by the will, you can have a partial intestacy.  In some cases the decedent’s wishes are identical to the law of intestacy, in other cases it is not.  The best way to ensure that your wishes are carried out upon your death is for you to execute a last will and testament. 

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Related to Probate - What about Guardian of Minor Children.

Guardians are appointed by the same Judges that rule on probate matters which is Orphans Court Judges in Pennsylvania and Surrogate Court Judges in New Jersey.   A will is an appropriate place for a parent with dependent children to nominate one or more individuals to serve as Guardian of their minor children should they die.  Since it is presumed that a parent knows their children better than any other person, and a parent knows their own family better than any other person, Judges will ordinarily appoint the individual or individuals a parent nominates in their will to be Guardian of their children unless there are good reasons presented to the Court not to do so.  

WHAT ABOUT TAXES?

You should divide the world of taxes into three separate types.  The first is income taxes.  Income taxes owed to local, state and federal governments by a decedent up to the time of the decedent’s passing are considered debts of the decedent.   The second type of taxes are inheritance taxes and estate taxes that are owed to a state such as the Commonwealth of Pennsylvania or the State of New Jersey, depending on your domicile and location of real property at the time of death, and the third type of tax is Federal Estate and Gift Tax which is owed to the Federal Government.

Federal Estate and Gift Tax

Federal Estate and Gift Tax is levied on the value of any asset you have an interest in at the time of your death along with some other items such as most life insurance policies, the value of annuities you own, the value of any qualified plans you own and any transfers you have made within three years of your death plus the value of gifts made during the lifetime of the decedent to the extent the cumulative gifts exceeded the annual exclusion limit to any individuals in any calendar year.  For a long time, the annual exclusion was $10,000.00, in 2002 the annual exclusion was increased to $11,000.00 and in 2006 it was again increased to $12,000.00 per person per year.  The annual exclusion excludes the first $12,000.00 (in 2006) given to an individual in a calendar year from being added to a person’s estate.  If you die in 2006 and your estate plus certain other assets plus gifts that exceed the annual exclusion limit do not exceed $2,000,000.00, your estate will not be liable to pay Federal Estate and Gift Tax.  (A maximum of $1,000,00.00 is allowed for Gifts).   The $2,000,000.00 limit is called a floor for estate and gift tax purposes.  This floor on the Federal Estate and Gift Tax is called the Applicable Exclusion Amount and it is also changing.  It remains $2,000,000.00 for the years 2006, 2007 and 2008.  In 2009 the floor increases to $3,500,000.00 and in 2010 the Estate Tax is repealed.  In 2011, if Congress fails to act the Federal Estate Tax is reinstated with an Applicable Exclusion Amount of $1,000,000.00.  The Gift Tax remains at $1,000,000.00 from 2006 through 2011.  What will happen in 2011 is a mystery at this point.  Suffice it to say that if your net worth along with certain other assets exceeds $1,000,00.00 you should be considering the implications of Federal Estate and Gift Tax on your estate planning.  With proper planning it is relatively easy for a married couple to effectively enjoy double the Applicable Exclusion Amount.   Click here for more information concerning Federal Estate and Gift Tax.  http://www.irs.gov/pub/irs-pdf/p950.pdf

The value of many estates does not reach the floor and thus many estates do not have to pay any Federal Estate and Gift Tax.   There are planning techniques that allow the exemption of double the Applicable Exclusion Amount for couples. 

Inheritance Tax

When you hear the saying that the only two certainties in life are death and taxes, they must have had the inheritance tax in mind.  With very few exceptions, any asset that passes to another person upon death is subject to inheritance tax.  This is true whether the asset is subject to probate or not.  Examples are probably the best way to illustrate the inheritance tax.  Let’s say that after her husband passes away, a widow adds her only child’s name onto her house and all of her bank accounts.  The house is now titled to widow and child as joint tenants with right of survivorship and each bank account is titled to widow and child.  Upon the passing of widow, half of the value of the house is subject to inheritance tax and half of the balances in the bank accounts are subject to inheritance tax.  The inheritance tax rate to children in Pennsylvania is 4 ½ % and in New Jersey it is 0%.  The inheritance tax rate changes depending on your relationship to the deceased.  In addition, there is a look back for inheritance tax purposes.  Gifts made and assets that were jointly titled within the look back become subject to inheritance tax as well.  The look back in Pennsylvania is one year and in New Jersey is three years.

One issue that surprises heirs from time to time is where they are the remainderman of a life estate or were joint tenants with a parent or other person.  Although probate is not required in these instances, inheritance tax can be owed and if it is not timely paid could incur penalties and interest.  This issue arises most often when the heir sells the property and the title company demands to see the inheritance tax return showing that inheritance tax was paid on the joint tenancy or the life estate.   

For more information on the Pennsylvania Inheritance Tax see http://www.revenue.state.pa.us/revenue/taxonomy/taxonomy.asp?DLN=691

For More information on New Jersey Inheritance Tax see
http://www.state.nj.us/treasury/taxation/index.html?ot7.htm~mainFrame

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The purpose of this site is to provide useful information about wills, estate planning and estate administration. It is not intended to provide legal advice.You should consult a competent estate planning and/or estate administration attorney before acting on any of the information contained on this site.