WHAT IS THE PROBATE AND ESTATE TAX VALUE OF THE ESTATE?

The person in charge will need to make an inventory of the estate.   This inventory is critical to the entire estate settlement process.  The inventory will:

• Identify whether a Last Will and Testament, Codicil, Living Trust or other legal documents exist.
• Capture basic information about the deceased, a surviving spouse and other relatives of the deceased.
• List what property the deceased owned, how the property is titled, what percentage the decedent owned, the fair market value of the asset, and any debts the decedent owes.
• Identify what assets are probate assets, what assets have automatic inheritance rights, and what assets are trust assets.
• Identify the  location of the tax returns and other documents.
• List any income the decedent receives, including social security benefits

The following questions and answers can help a family member or estate representative prepare the estate inventory.

• How do you know what the decedent owned or owed?
  
• How do you assign a value to property listed in the inventory?
  
• Who can access the safe deposit box?
  
• How do you calculate the probate value of the estate?
  
• How do you calculate the federal estate tax value of the estate?

Q. Where can an executor or family member get the information required to complete the inventory?

A. Hopefully the deceased prepared a Family Treasure Map before he died.   If not, the executor or family member will need to search for information and documents to help them create the inventory worksheets.

• The checkbook and prior cancelled checks
• The mailbox
• Paper files
• Conversations with professional advisors:  tax preparers, lawyers, doctors
• A safe deposit box
• Conversations with business partners
• E-records

Q. What assets are included in the inventory?

A. Everything the decedent owned, or had an interest in, including:

• real estate deeds, insurance, condominium bylaws, and property taxes
• checking and savings accounts and any checkbook
• cash, including coin collections
• annuities
• brokerage accounts
• savings bonds
• life insurance policies
• certificates of deposit
• vehicles
• jewelry
• art
• other collectibles
• household inventory
• accrued wages, unpaid vacation and sick pay
• retirement plans, including 401(k)s, IRAs, 403(b), even though a beneficiary is named
• benefits, including social security and VA benefits
• property in another state or country
• anything in a safe deposit box
• health savings account
• debts owed the deceased

Everything the decedent owes:

• credit cards
• student loans
• medical bills
• child support
• alimony
• mortgages
• car Loans

Include any gifts the decedent made in the two years before his death.  This information is needed to calculate the federal estate tax value of the estate.

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Q. How do you assign a value to each item?

A. Once a list of the assets is made, someone should assign a fair market value to the estate property.  The fair market value of the property is the price someone would pay to purchase a particular piece of property.  Different types of property have a different method for calculating the fair market value.  A family member or estate representative may determine the fair market value used in the inventory.  Or, the estate representative may hire someone to determine the fair market values to be used in the inventory.

If the estate has valuable personal property, such as antiques or jewelry, you may want an appraiser to complete an appraisal form.

The fair market value is used  to calculate the probate value and the estate tax value of the estate.

Each asset must be valued as of the date of death of the decedent.  For federal estate tax purposes, the estate may also be valued six months later and the lower value may be used to calculate the federal estate tax.

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Q. Who can access the safe deposit box?

A. It depends on how the safe deposit box is titled.

• If the decedent owned the box as joint tenants with right of survivorship, a surviving joint tenant has the right to access the box.
• In many states, the executor or other family members may need a document from the probate court authorizing the bank to give access to the executor or family member.
• In some states, a bank representative must take an inventory of the box.
• If a trustee owns the box, the successor trustee has the inherent legal right  to access the box.

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Q. How do you calculate the probate value of the estate?

A. Different states have different rules on how to calculate the probate value of the decedent’s property.

Some states use the fair market market value of the estate, which is sometimes described as the gross value of the estate.   Other statues use the net value of the asset as the probate value.  The net value of the property is the fair market value less secured liens..

For instance, John dies.   A real estate appraiser establishes a fair market value of $750,000 for his personal residence.   When John died, the mortgage secured by the personal residence was $400,000.

If the state probate rules use the net market value as the probate value of the estate, the probate value of John’s personal residence is $350,000 ($750,000 minus $400,000.

If the state probate rules use the gross value as the probate value, the probate value of John’s personal residence is $750,000.

Some states exempt personal residences considered as a homestead from the probate estate calculations.   Funeral expenses and family allowances may also be exempt from the probate calculations.

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Q. How do you calculate the estate tax value of the estate??

A. The federal estate tax value of the estate is calculated in the same manner in all states.   The estate tax page explains how to calculate the estate tax value of the estate and determine if the estate is subject to estate tax.

Fact:   Fair market value of stocks

Historical stock values are available at: http://finance.yahoo.com/

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Your will and your trust are both important in determining what will happen to your assets after your death and the death of your beneficiaries.

A last will and testament

When you die:

• A will generally describes who inherits certain assets after your death.
• If you leave property outright to someone in a will, they become the owners at the conclusion of probate .
• The executor may not be able to take control of probate assets without approval of the probate court, which may take some period of time.
• The intended time frame of probate is actually as short as possible; the process is not intended to allow an executor to spend years managing the assets in the estate.

When your beneficiary dies:

• When your beneficiary dies, their will or state intestate succession rules determine who will inherit the property you gave them, assuming they have not transferred or sold it prior to that time.

A living trust or a testamentary trust

When you die:

• A trust can include instructions giving someone the right to income and the use of the property during their lifetime.
• A trust agreement may include elaborate directions regarding the management of certain trust assets and may contemplate an administration that lasts a very long time.
  A trustee can take immediate control of trust assets.

When a beneficiary dies:

Your trust can leave instructions on who has the right to income and the use of the property when the first beneficiary dies.  There are many situations in which you may want to control the second instance of inheritance:

• You want to provide your children with income but you want the assets to go to your grandchildren.  If your children marry, your grandchildren’s inheritance cannot be je0pardized by a possible divorce.
• You have been married before.  You want to provide income for your surviving spouse but also want to be sure your children from your prior marriage inherit some portion of your assets when your surviving spouse dies.
• You want to be sure your children inherit your separate assets if you die first, eliminating the opportunity for a spouse or step children to claim rights to your separate property.
• You have minor or disabled children and you want to  provide for their support and choose when or if they inherit the principal.

A probate asset is any asset owned by you as an individual and assets where your “estate” is the owner or designated or contingent beneficiary.

Probate assets will be managed by the executor named in your will or by a personal representative appointed by the court if you do not have a will.

• Instructions in your will generally determine the beneficiary of your probate assets.  If you do not have a will, state intestate secession rules determine the beneficiary.
• The executor or personal representative must determine what type of probate procedures are required to get authority (Letters or Affidavits) to manage the property.

WHAT IS A PROBATE ESTATE?

The word “Estate” is used to describe the net worth of the decedent when he or she dies.   The value of the estate includes all of the assets and all of the liabilities of the decedent on the date of death.

The definition of the decedent’s estate is not the same as the definition of the decedent’s probate estate.   The way property is titled will determine where the asset is included as part of the decedent’s probate estate.

Title is the manner in which both real and personal property is owned.   Title may be proven by certificate, deed, bill of sale, contract, signature cards or other documents.   The title document may also designate a beneficiary.

The title may state an individual owns the property, multiple people own the property, i.e., joint tenants with rights of survivorship, or a trust owns the property.

It turns out title is more than a piece of paper conveying ownership of a house, a car or a safe deposit box.  Property title determines whether contract law governs the inheritance of the property or whether the wishes written in your will or trust govern the inheritance of the property.

When someone dies, the estate representative will review the way property is titled.   Based upon the method of title, think of the decedent’s estate as going into three buckets: the probate bucket, the trust bucket and the automatic inheritance bucket.  Which bucket the asset belongs in is determined by the way the property is titled.

Property placed in the probate bucket comprise the decedent’s probate estate.   All of the property represents the decedent’s total estate.

What assets belong in the probate bucket?
What assets belong in the trust bucket?
What assets belong in the automatic inheritance bucket?
Why do the asset buckets matter?

Q. What method of title places property in the probate buck?

A. Probate assets include the following method of title:

• Property owned by an individual
• Property owned as joint tenants with rights of survivorship, no living joint tenant
• Property where “estate” is the designated beneficiary
• Property where “Estate” is the named beneficiary or becomes the default beneficiary because the designated beneficiary died before the owner
• The decedent’s share of property owned as tenants in common
• Community Property with right of survivorship, a living joint tenant.

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Q. What method of title places property in the trust bucket?

A. A trust asset is property where the trustee is named as the owner of the property, or the trust is named as a designated beneficiary.

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Q. What types of assets belong in the automatic inheritance bucket?
A.  Certain types of property have automatic inheritance rights, whereby contract law determines who owns the property.     Contract law overrides any instructions contained in a will, a trust, or state intestate succession laws.

• Joint tenants with right of survivorship, a living joint tenant
• Community property with right of survivorship, a living joint tenant
• Property owned by an individual, or more than one person with a designated living beneficiary:  life insurance policies, retirement account, pay on death bank accounts, transfer on death brokerage accounts, transfer on death real estate deeds and transfer on death vehicle registration forms.

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Q. Why do the buckets matter?

A. Once you know in what bucket the asset belongs , you can understand the size of the probate estate and the size of the total estate.

Probate assets will be managed by the executor named in a will or by a personal representative appointed by the court if there is no will.

• Instructions in the will generally determine the beneficiary of your probate assets.  If there is no authentic last will and testament, state intestate succession rules determine the beneficiary of probate property.
• The executor or personal representative must determine the value of the probate estate and whether the probate estate include real estate.  The estate representative will the know whether the estate can be settled using small estate procedures or if a normal probate case is required.

Trust assets will be managed by the successor trustee named in your trust. Instructions in your trust determine who are beneficiaries of assets owned by your trust.  The trust gives the successor trustee the legal authority to manage trust assets

Assets with automatic inheritance rights will be managed by the beneficiaries who automatically inherit the property. The law automatically determines the beneficiaries and overrides any instructions contained in a will or trust.  A beneficiary has the authority to immediately claim their property with a certified death certificate and an affidavit or other claim form.

Some examples:

A bank account or brokerage account titled only in the name of the decedent is a probate asset.  But if the decedent completed a payable upon death form for a bank account or a transfer upon death form for a brokerage account, the bank account or brokerage account is not subject to probate.

A life insurance policy that names a beneficiary who is living at the time the decedent dies has automatic inheritance rights is not a probate asset.  If the “estate” is the designated beneficiary, the life insurance policy is payable to the decedent’s estate and is a probate asset.

Property owned by a husband and wife as joint tenants with rights of survivorship has automatic inheritance rights and is not a probate asset when the first owner dies.

Real estate titled in the name of the decedent and another person as tenants in common is a probate asset.

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WHEN IS THE PROBATE COURT INVOLVED IN OUR AFFAIRS?

The probate court has a responsibility to manage our affairs when we can’t.

This can happen in three different situations:

1. You die and own assets titled in your own name, or the estate is the beneficiary.  Since you can no longer manages these assets, someone must be given the legal authority to manage these assets on your behalf.  The probate court has the responsibility to appoint an estate representative and monitor the activities of the estate representative.
2. You become incapacitated.  The law will consider you unable to manage your financial affairs or make your own health care choices.   Someone must be given the legal authority to make choices for you.  The probate court is obligated to appoint a conservator to manage your affairs, and then supervises the activities of the conservator.
3. A minor child is named as a beneficiary.   Since minor children cannot legally “own” property, a guardian must be appointed to manage their affairs until the minor child is considered an adult.  The probate court has the responsibility to appoint a guardian and to monitor the actions taken by the guardian.

When the probate court is involved, several things happen:

All of the information regarding you and your financial or health affairs are public records.   In many courts, these records can be accessed online by anyone.

The cost of probate comes from your net worth.   These costs can include court filing costs, legal fees, surety bond, and reporting fees.

The person appointed to be in charge of making choices for you or your minor children must follow choices set by state statutes, which may not be your choices.

The courts will appoint someone to act on your behalf, or on behalf of your minor children.   This person may not be someone you would want making choices for you and your minor children.

You can find out more about the probate process and avoiding probate on these pages:

• Probate assets
• Minor children
• Durable Power of Attorney For Finances
• Living Trust
• Conservatorship