PROBATE - FREQUENTLY ASKED QUESTIONS A. Probate is a legal process that takes place after someone dies.

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1 THE DEATON LAW FIRM RUTH A. HUGHES-DEATON TEL: MCCRACKEN CIRCLE FAX: SUITE C rhd@ruthdeaton.com CYPRESS, TEXAS PROBATE - FREQUENTLY ASKED QUESTIONS Q. Who is responsible for handling probate? A. In most circumstances, the executor named in the will takes this job. If there isn't any will, or the will fails to name an executor, the probate court names someone (called an administrator) to handle the process -- most often the closest capable relative, or the person who inherits the bulk of the deceased person's assets. If no formal probate proceeding is necessary, the court does not appoint an estate administrator. Q. What is probate? A. Probate is a legal process that takes place after someone dies. It includes: proving in court that a deceased person's will is valid (usually a routine matter) identifying and inventorying the deceased person's property having the property appraised (if necessary) paying debts and taxes, and distributing the remaining property as the will directs. Typically, probate involves paperwork and court appearances by lawyers. The lawyers and court fees are paid from estate property, which would otherwise go to the people who inherit the deceased person's property. Probate usually works like this: After your death, the person you named in your will as executor -- or, if you die without a will, the person appointed by a judge -- files papers in the local probate court. The executor proves the validity of your will and presents the court with lists of your property, your debts, and who is to inherit what you've left. Then, relatives and creditors are officially notified of your death. Your executor must find, secure and manage your assets during the probate process, which commonly takes from three months to a year. Depending on the contents of your will, and on the

2 amount of your debts, the executor may have to decide whether or not to sell your real estate, securities or other property. For example, if your will makes a number of cash bequests but your estate consists mostly of valuable artwork, your collection might have to be appraised and sold to produce cash. Or, if you have many outstanding debts, your executor might have to sell some of your property to pay them. In most states, immediate family members may ask the court to release short-term support funds while the probate proceedings lumber on. Eventually, the court will grant your executor permission to pay your debts and taxes and divide the rest among the people or organizations named in your will. Finally, your property will be transferred to its new owners. Q. What is the effect Probate administration on the income tax basis of property? A. The probate of estates can be a very simple and streamlined procedure. However, it does require the cooperation of all of the heirs and beneficiaries in valuing the assets of the deceased and accounting for his debts and obligations. An important result of the probate process is that the heirs and legatees are given an income tax basis in the assets that they receive, according to the value determined in the probate process. This income tax basis will be the number used for determining gain or loss if an asset is later sold as well as the basis for depreciation, if an asset is used for business. Q. What should an executor do prior to the will being probated? A. The probate process is often daunting. Having an overall picture of what the process entails, and how steps fit together, will help everyone involved. However, the probate of every estate is unique. Everyone has different assets, debts, record-keeping habits, goals and family. Thus, the following description won't precisely match any probate you may become involved in. But flexibility, keeping in mind the overall picture, and careful use of professional advisers will help any executor complete his or her tasks effectively. Funeral arrangements. When death occurs, final arrangements--the funeral, ceremony, burial or cremation, and cemetery or other instructions--must be dealt with. Immediate family members generally handle this, but depending on the circumstances, a partner, friends or others may become involved. If you are the executor, your first step is to determine the wishes of the decedent. Most likely, the decedent has communicated these to you and others. In any event, consider all the sources of information so that you can carry out (or help others to carry out) the decedent's wishes: Letter of instruction. Many people prepare a letter of instruction that addresses many issues, including organ donations, funeral and burial or cremation requests. Try to locate this letter and review it as quickly as possible.

3 Living will. A copy is often kept in the decedent's physician's records or hospital records. Living wills often include the decedent's wishes for final arrangements. Health care proxy. Some people sign only a living will, others only a health care proxy, some both. If the living will is silent, the health care proxy may include directions as to how to handle funeral and other steps. Deed for a burial plot. Many people purchase plots in advance. Locating this information can resolve the issue in many cases as to where and to some extent how the decedent's burial or internment should be handled. Pre-need funeral trust. The decedent may have made arrangements in advance for funeral costs. Review the decedent's letter of instructions and other important papers for this. Ask close friends and family whether they were aware of such arrangements. Call area funeral homes to find out whether any arrangements were made with them. Will. While a will may list the intent to be an organ donor as well as directions for the funeral and other final arrangements, it is often not available quickly enough. If the decedent's intent cannot be determined from the other sources indicated, attempt to locate the will quickly, or at least a copy. If the will is in the decedent's safe deposit box, expedited procedures are available to get it. Consult with the estate's attorney. Contact the decedent's religious adviser. If the decedent had any religious affiliations or beliefs (these are sometimes addressed in the living will), request a consultation with the religious adviser concerning the appropriate steps to take for burial, services, mourning and the like. If the family, friends and loved ones have any particular religious affiliation, a religious adviser may provide considerable solace for them. Consult members of the decedent's family and loved ones. The decedent's wishes must be honored, but often requests and feelings of others can also be respected. It can only serve to lessen tension at such a traumatic time. Because funeral and related immediate costs must be taken care of promptly, they are often paid for by family or others close to the decedent. The estate reimburses them later. State law will generally provide that the estate must reimburse reasonable funeral expenses. Get copies of all bills, receipts and other documents supporting the expenses you reimburse. If the funeral arrangements were lavish, unusual or expensive, an issue may arise as to what the estate can pay for. The will may provide directions for funeral or other arrangements that could be helpful for you as executor. If there are any disputes among family or others at a later date concerning these arrangements, the directions in the will can support your payment of these costs. If the will is silent and the expenses unusual, consult with an estate attorney before reimbursement to avoid any risk of being personally surcharged.

4 Emotional considerations. Sensitivity, compassion and caring are the most important characteristics the executor and all others involved initially need to exhibit. No matter how much notice and preparation preceded the death, the decedent's family and loved ones will have strong emotions over their loss. They may react with sorrow, hurt, disappointment or anger. Even the most decisive and organized people can become confused, indecisive and despondent. It is essential to be attuned to these feelings so that you can respond accordingly. If the decedent was the primary or sole source of support, the survivors will, along with the many personal feelings, be worried about their future financial stability and security. By handling an estate's affairs in an organized and professional manner, an executor can contribute significantly to helping the survivors move forward. Q. What documents are needed for probate? A. Organization is critical for managing any estate. Even for a modest and simple estate, there can be a considerable number of transactions and correspondence. For any estate, there is always the risk that a beneficiary or other person may question your actions. Thus, you should take steps to organize correspondence and other paperwork, keep records of all financial transactions, calendar key deadlines and review checklists to monitor the progress of the estate settlement. This section provides practical tips on addressing these matters. Assembling the documents. One of the first steps any executor should take is to obtain and review, with legal counsel if necessary, all the pertinent legal documents that may affect the estate. The following is a list of many of these: Living will, health care proxy. These may provide important information as to burial requests, funeral services and so on. Powers of attorney. Powers lapse on death. However, if a third party in good faith and without notice of death completed a transaction under the authority of the power of attorney, it may still be valid. If any significant transactions were completed near the time of the decedent's death, you may want to investigate them. Will. This is usually the primary document governing the estate. Revocable living trust. If a revocable living trust exists then the trust, in combination with the will, should govern most transactions. Be alert for any issues that may arise because of the use of two documents. They are not always used in the format of a simple pour-over will with everything in the trust. Letter of instruction. Any personal notes to provide guidance to you as to how the decedent would want you, as executor, and any trustees to handle matters can be quite helpful, even if not legally binding.

5 Personal property list. Many decedents assemble a listing of how their personal property should be distributed. This is commonly done even if the will is silent. Attempt to locate such a list and follow it to the extent you can. Be cautious; if the list isn't prepared in a manner that makes it legally binding (most are not), then while you may want to carry out the decedent's wishes because of your moral obligation to do so, you must be constrained by the legal provisions of the will. Insurance trust. A common estate planning technique is to have a trust own insurance on your life (or the joint lives of you and your spouse). On your death (or on the death of the last of you and your spouse in the case of joint life, also called second to die, insurance), the insurance trust may receive substantial proceeds that may be used to fund loans to the estate or to purchase assets from the estate to provide liquidity. The trust cannot pay the decedent's estate tax directly. Q. What items should be included on an executor's checklist? A. The following checklist will assist you in handling an estate, but it isn't all-inclusive. Be certain to review the steps you need to take with the accountant, attorney and other professionals you hire: 1. Verify information on death certificate. If it is not accurate, order corrected certificates. 2. Locate and secure the original will. It must be filed with the court with the probate petition. 3. Open an estate checking account and route every transaction through the account to assure records of all transactions are in one place. Also, carefully explain each transaction to facilitate proper categorization and to assist in addressing any questions raised by beneficiaries or an IRS audit. 4. Search the decedent's apartment or house to identify and secure assets. 5. Write all banks and brokerage firms decedent dealt with (not just where there are current accounts) to identify other accounts or assets, safe deposit boxes, margin accounts, debts and so on. Also, obtain date of death values for any assets. 6. Review the wills and any trusts of relatives for powers of appointment in favor of the decedent. These are rights given to the decedent under a will or trust for the decedent to designate in his or her will where the property governed by the other person's will or trust should be distributed. Review the tax consequences of these with a CPA or tax professional. 7. If an estate tax return may have to be filed, write each broker, bank and so on for the alternate valuation date (six months following the decedent's death) balances

6 to determine whether the estate would be valued lower at the alternate valuation date to be discussed with a CPA or tax professional. 8. Determine accrued interest on any bank accounts, bonds or other interest-paying assets. This is interest earned on the account but not paid to the decedent before death. 9. Contact the Veterans Administration and the Social Security Administration concerning benefit information and to notify them of decedent's death so that future payments will be stopped. 10. Contact decedent's employer (and possibly former employers) for benefit information, severance pay, death benefits, accrued vacation pay and so on. 11. Obtain appraisals for all material assets such as real estate, business interests, jewelry and so on. 12. Maintain insurance on assets during administration. Have all existing coverage reviewed to be certain that it is up to date and that the estate is properly listed as the insured. 13. Invest idle cash balances in a diversified and safe manner that is consistent with the estate's overall investment objectives. 14. Identify and obtain property in hands of bailees (jewelry for repair, clothes for cleaning, etc.). One way to identify these is to scan the decedent's checkbook. Then contact local service and repair businesses to which checks have been written in the past to determine whether they are holding any of the decedent's property. 15. Write charities (see prior Form 1040, Schedule B; review old checkbooks) to identify outstanding pledges. 16. Write closely held businesses for stock subscriptions outstanding and shareholder (operating or partnership) agreements. Review them for any obligations or rights. 17. Write attorneys used by the decedent to request information concerning outstanding claims, litigation and so on. 18. Write any real estate brokers with whom the decedent dealt to determine whether there are any outstanding realty contracts. 19. Verify that the decedent has received any refunds due on prior federal and state income tax returns received. Review the old returns, and/or speak with the decedent's accountant, to identify the refunds. Then review the decedent's

7 checking and other accounts to determine whether a deposit in that amount was made. 20. Verify that any premiums or refunds due on insurance policies were received. 21. Review decedent's records and contact decedent's family to inquire as to any jointly owned property with the decedent. 22. Make an inventory of any of decedent's safe deposit boxes. 23. Inventory assets in any vacation or second home. 24. Inventory any cash on hand. If there is significant cash, have a witness on hand and consider videotaping the counting. 25. Pay funeral and other administrative expenses. 26. Set up ledger of all receipts and related items for every expense. 27. Pay taxes and utilities on all real property. 28. File decedent's final individual income tax returns after carefully reviewing with the CPA being used any elections, special provisions governing a final return, the allocation of expenses between the decedent's final income tax return and estate tax return. 29. Verify whether any reportable gifts were made by the decedent (or the decedent's spouse in which the decedent agreed to gift split) prior to death. Were these reported on gift tax returns filed? Are gift tax returns due? 30. File the estate's federal and state income tax returns. 31. File estate's federal and state estate and inheritance tax returns. 32. Obtain additional Letters Testamentary or Letters of Administration if necessary. 33. Obtain additional death certificates if necessary. 34. Make claims for any life insurance policies and obtain Form 712 from each insurance carrier. 35. Make claims for any employer-provided death benefits. 36. Make claims for any inheritances under other wills, trusts and so on of people making bequests to the decedent. Consider whether disclaimers should be filed for any.

8 37. Make claims for veteran or other government benefits. 38. Make claims for pension or other retirement assets, arrange for any rollovers before the deadlines. Contact your accountant and the bank or brokerage form to confirm these deadlines. 39. Apply for a tax identification number on Form SS-4 for the estate and any trusts set up under the decedent's will. 40. File Form 56 with the IRS notifying the IRS where tax information should be sent. 41. Value all assets at date of death and value all assets at the Alternate Valuation Date, if appropriate. 42. Determine whether the estate received any Income in Respect of the Decedent (IRD) under Code Section File personal property tax returns if applicable. 44. Call the post office and arrange to have all mail forwarded to you as executor. Carefully review all mail to identify bills to pay (if the estate is required to do so), assets to gain control over (e.g., an interest or dividend payment could indicate a bond or stock that you had not previously been aware of). 45. Terminate decedent's lease for residential property if required or if permitted and advantageous. If not, investigate a sublease. Review the lease provisions to determine the rights you have as executor. 46. Obtain all prior gift tax returns since these will be necessary to properly complete the estate's tax return. 47. Determine whether ancillary probate is necessary to address real estate located in different states. 48. Obtain evidence corroborating any debts or claims and then determine if the estate must pay them. If debts must be paid, address them in the budget (cash flow analysis). 49. Review any unpaid medical expenses of the decedent and determine whether insurance will cover them, and if not, whether they have to be paid by the estate. 50. Verify who can legally use decedent's car; verify insurance coverage. 51. Cancel credit cards.

9 52. Cancel videotape rental, library and other courtesy cards. 53. Notify decedent's banks that they should permit outstanding checks to clear. 54. Obtain prior three years' bank records and income tax returns as they will probably be necessary in the event of an IRS tax audit. Q. Can I provide for the automatic transfer of assets to someone by using a joint tenancy with right of survivorship without going through probate? A. A Joint Tenancy with Right of Survivorship or Payable on Death is allowed under Texas law. The final disposition of assets held in A Joint Tenancy With Right of Survivorship or Pay on Death is governed by the beneficiary designation on the signature card or other document establishing the account or relationship. This designation of beneficiary makes the disposition of these assets outside of any probate proceedings. This type of transfer while avoiding probate does have potential problems because all of the assets subject to the beneficiary designation will go to that beneficiary and to no one else. This means that if this type of account or relationship is established with one child or heir to assist a person with the management of his /her assets and without the understanding that no other beneficiaries or heirs will receive the assets subject to the Joint Tenancy with Right of Survivorship or Pay on Death. This means that these assets will not be shared with the other estate beneficiaries or heirs. This is fine if this is what you want to do, but in many situations this result is not intended. It is a great technique but make sure that it does what you want. Q. What is a Disclaimer and can a decedent s estate be corrected by having a beneficiary disclaim part or all of the beneficiary s interest in the estate? A. Disclaimers are another method of correcting a Decedent's estate plan post mortem. In order to be effective, the disclaimer must be "qualified", and comply with the provisions of both the Internal Revenue Code and Texas Probate Code. If qualified, the disclaimer constitutes an irrevocable and unqualified refusal to accept an interest in property. The person's disclaimed interest is treated as if it had never been transferred to the person making the disclaimer. Under the Internal Revenue Code, the disclaimer must meet the following four conditions: 1. The refusal to accept the property must be in writing. 2. The written refusal must be received by the transferor, his legal representative, or holder of legal title, no more than nine months after the later of: a. the day in which the transfer creating the interest is made; or b. the day on which the person making the disclaimer reaches the age of twenty-one years. 3. The person making the disclaimer must not have accepted the interest of its benefits prior to the disclaimer.

10 4. The interest must pass to a person other than the person making the disclaimer as a result of their refusal to accept the property. The Internal Revenue Code and the Texas Probate requires the disclaimer be in writing, signed by the disclaimant, and filed with the Probate Court in which the administration of the Decedent's estate is pending. Notice of the disclaimer must be given to the personal representative, as well as any charitable organizations, which may be effected by the same. Further, the disclaimer must be irrevocable. There are several situations in which a disclaimer would be useful, but perhaps the most widespread use is to decrease the amount qualifying for the marital deduction so that the Decedent's unified credit is utilized. This situation occurs when the decedent dies with a taxable estate, but his will does not provide for any estate tax planning. For example, the Decedent dies leaving his entire estate, which is taxable, to his surviving spouse. The surviving spouse disclaims an amount equal to the current unified credit (i.e. $1,000, in 2002). The Decedent's will provides that if the spouse predeceases, the assets pass to the decedent's children. The unified credit amount then passes to the Decedent's children free of estate tax, and the remainder passes to the surviving spouse, which qualifies for the marital deduction. Another reason is to save the disclaimed amount from being attached by the disclaimant's creditors, and is a permissible reason to disclaim. However, a disclaimer will not be effective if the disclaimant files bankruptcy within a certain time period before the decedent's death. Q. Can you provide for a Surviving Spouse and children even though there is no will or if there is a will it does not do so? A. In both Independent and Dependent Administrations, Texas law requires the personal representative to set aside certain assets for the benefit of the surviving spouse or minor children so as to prevent those assets from being subject to the claims of creditors of the estate. Creative use of these provisions of the Texas Probate Code can protect numerous assets for the benefit of the surviving spouse and minor children. The Texas Probate Code provides for the following protections for the decedent's surviving spouse and family: 1. Setting Aside Exempt Property-during the course of administration, all property of the estate that is exempt from execution or forced sale under the Constitution and the laws of the State of Texas shall be set aside for the surviving spouse, minor children, and unmarried children remaining with the family of the deceased. If at the end of administration it is determined that the estate is insolvent, not taking into account the exempt assets and allowances, then such exempt property shall pass to the surviving spouse and children to whom the property was set apart and title shall be absolute to those individuals and not be taken for any of the debts of the estate except as otherwise provided in the Code. 2. Allowance in Lieu of Exempt Property- Section 273 provides that if there are not among the effects of the deceased any of the specific articles exempted from

11 execution or forced sale under the Constitution and laws of this State, the court may make a reasonable allowance in lieu thereof to be paid to the surviving spouse and minor children. The allowance in lieu of homestead shall not exceed $15, and the allowance in lieu and other exempted property shall not exceed $5,000.00; 3. Family Allowance-Section 286 provides that an allowance be set aside for the surviving spouse and minor children in an amount sufficient for the maintenance of such surviving spouse and minor children for one (1) year from the time of death to the testate or intestate. The allowance shall be fixed with regard to the facts and circumstances then existing and those anticipated existing during the first year after such death. In a dependent administration, the personal representative sets allowances by filing an application with the Court and having the same approved by the Court. An independent personal representative will not be able to obtain an order from the Court setting the allowances. However, the independent personal representative is required to set the allowances. Q. If there is no will and the decedent's estate is small, is there a way to avoid or minimize the cost of probate? A. A Small Estate Affidavit can be used if the entire value of the assets of Decedent's estate, excluding homestead and exempt property, does not exceed $50, All of the distributees of the estate of a Decedent who dies intestate may file an affidavit with the Probate Clerk, sworn to by two (2) disinterested witnesses, showing the condition of the decedent's estate, and use the same to transfer title of Decedent's assets, without the necessity of an administration. Further, any person transferring the Decedent's assets pursuant to such small estate affidavit shall not be liable for the transfer. Q. If there is no will and no need for an administration of the decedent s estate, is there a simple, inexpensive and quick method to transfer real property? A. An Affidavit of Heirship as set out in Section 52(A) of the Texas Probate Code is used to provide a statutory form to be used concerning the identity of the decedent's heirs, and the affidavit shall constitute prima facia evidence of the facts stated therein after it has been on record for five (5) years or more in the county deed records. This is an easier way to transfer title to the heirs of a Decedent who dies intestate. Most title companies will routinely accept such evidence without question.