Probate Wealth Planning Centers 2018 The probate process is the legal settlement of an estate at a person s death. Specifically, probate is the court proceeding whereby the court confirms the validity of the decedent s Will and appoints an Executor (or, in some states, a Personal Representative). The Executor s duties include: collection of all assets titled in the decedent s name, payment of the decedent s outstanding debts, filing of the necessary tax returns and distribution of the remaining assets to the proper beneficiaries. In most states, the Executor must report their activities to the court by preparing and filing an inventory and information report and preparing and filing an accounting. Probate is not necessary to transfer assets that pass via a beneficiary designation (such as life insurance or retirement benefits), jointly-owned property with rights of survivorship, which passes to the survivor by operation of law, or for assets held in trust (all non-probate assets ). Nevertheless, it is important for an individual to create a Will to have control over the distribution of his or her assets. If an individual passes away without a Will, or dies intestate, his or her estate will instead be distributed according to the intestacy laws of his or her jurisdiction. The probate court appoints an administrator of the estate who distributes the estate according to the default state laws. The probate process following death generally begins with the next of kin (and/or nominated Executor in the Will) contacting the decedent s trust and estate attorney as well as the accountant and any person with special knowledge of the decedent s assets. Generally speaking, an estate must be opened if the decedent died owning property of any kind in his/her name alone, or as a tenant in common. The attorney and his or her paralegal will handle preparation of court forms and will assist with marshalling assets. The accountant (and/or attorney) will prepare the necessary tax returns. Nevertheless, the named Executors are responsible for ensuring that all items are taken care of in a timely manner. 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC 2024094 2/18 1
The Probate Process Generally, the following are involved in a probate proceeding: 1. Application for Probate of Will The person nominated as Executor of the Will must file an application, together with a certified death certificate and the original Will and any codicils. The application will list basic information about the decedent, including an estimate of estate value, a list of beneficiaries under the Will and all heirs at law. The local authority will schedule a hearing to admit the Will (meaning certifying its validity) and appoint an Executor. If all parties are in agreement, the hearing may be waived. The local authority will provide the Executor with fiduciary certificates (often referred to as Letters Testamentary or Letters of Administration ) to evidence his or her authority to act on behalf of the estate. 2. Marshalling Assets Immediately after appointment, the Executor should begin collecting the decedent's assets. For example, the Executor will have to contact banks and brokerage firms and move accounts to an estate account. Generally this is done with original death certificates and copies of the Letters of Administration. Deeds to property in the decedent s name must be retitled in the name of the estate or sometimes directly in the name of the beneficiary. 3. Inventory and Valuation of Assets The Executor must determine the value of all assets as of the decedent's date of death. This includes all real property wherever located, tangible personal property such as furniture and furnishings, cars and jewelry, bank and brokerage accounts, and business and other investment entity interests. For any asset the value of which is not listed on an exchange, a professional appraisal will be needed. While non-probate assets are not listed in the inventory, those items will need to be valued for purposes of filing Federal and State estate tax forms. 4. Expenses and Claims Once the Executor is appointed, any creditors will have a certain period of time to present claims against the estate to the Executor. The decedent also may have outstanding bills, such as medical bills, credit card balances, and a funeral bill. The Executor should keep track of the outstanding bills and claims received and should maintain detailed records regarding payments. 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC 2024094 02/18 2
5. Estate Tax Returns The federal estate tax return is due exactly nine months after the decedent's date of death. If an estate tax is due, it must be paid no later than the nine month anniversary of the date of death. A six-month extension is available for filing the estate tax return (but not for paying the estate tax). An extension for time to pay the estate tax is available only if payment is impossible or impractical. Under federal law, the debts of the federal government must be satisfied first if the estate is insolvent. An executor who pays a debt to another creditor before the U.S. is personally liable to the extent of the amount paid to the improperly prioritized creditors 1. The executor can file the income tax return and hold back a reserve for any outstanding tax and estate expenses. 6. Final Account and Proposed Distribution The Executor must prepare an account and proposed distribution of the estate. The account can take several forms. Generally, with large estates, the account is prepared professionally and includes schedules showing an inventory of assets received from the decedent, all income, purchases and sales since the date of death, all expenses paid, and any distributions made in satisfaction of specific bequests. The account further will show the remaining principal on hand and the proposed distribution of the remaining assets in the probate estate. Once the account is settled, the remaining estate assets may be distributed and the state administration period will be closed. Avoidance of Probate Using Revocable Trusts A Revocable Trust helps avoid certain probate expenses and delays. The probate process consists of filing the Will in court in order to have it approved. The court appoints an Executor who then has legal authority to administer the decedent s estate and to transfer the decedent s assets titled to the estate beneficiaries. In contrast, assets held in a Revocable Trust, which is a separate legal entity for property ownership purposes, are owned by the trust. The death of the individual who created the trust does not affect the ownership status of the assets. Therefore, the Trustee of the trust can manage and distribute the trust assets without a court proceeding or other official action upon the donor s death. If a trust is created under a Will, which is also known as a testamentary trust, administrative matters such as the resignation and appointment of Trustees will require a court proceeding, whereas a simple one-page document can be signed for similar purposes with a properly funded Revocable Trust. Also, if the decedent owned real property in a different state in the Revocable Trust, it allows the avoidance of ancillary probate in such state. However, the trust cannot avoid the different state s estate taxes 2. In addition, the dispositive provisions in Revocable Trusts are private, unlike the dispositive provisions in Wills. 1 31 U.S. Code Sec. 3713; U.S. v. Coppola, (2d Cir. 1996). 2 Checkpoint Contents, Federal Library, Federal Editorial Materials, Tax Advisors Planning System, 33: ESTATE PLANNING STRATEGIES USING TRUSTS: Bonnie J. Lawless, Esq., 33:3.00 REVOCABLE LIVING TRUSTS, 33:3.02 Advantages of a Revocable Trust, 33:3.02(A) Avoiding Costs and Delays in Probate Proceedings 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC 2024094 02/18 3
States and counties vary in the details regarding their probate processes and their timeframes for probate. For example, if the decedent lived in New York, Florida, California, Connecticut, Rhode Island, or Massachusetts, a Revocable Trust may expedite the process of transferring title at death 3. For all of these reasons, some individuals choose to avoid probate by transferring ownership of their assets to a Revocable Trust. In addition, it also is common to have a short Will and an unfunded Revocable Trust so that upon death the public document has little information other than the fact that all of the decedent s assets pass to his or her Revocable Trust. In this scenario, probate is not avoided; however, the individual benefits from the privacy and lack of ongoing court control associated with a Revocable Trust. 3 Id 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC 2024094 02/18 4
Important Disclosure This material has been prepared for informational purposes only and is subject to change at any time without further notice. Information contained herein is based on data from multiple sources and Morgan Stanley Smith Barney LLC ( Morgan Stanley ) makes no representation as to the accuracy or completeness of data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Be aware that the particular legal, accounting and tax restrictions, margin requirements, commissions and transaction costs applicable to any given client may affect the consequences described. Tax laws are complex and subject to change. This information is based on current federal tax laws in effect at the time this was written. Morgan Stanley Smith Barney LLC, its affiliates, Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. 2018 Morgan Stanley Smith Barney LLC. Member SIPC CRC 2024094 2/18 5