THE PROBATE PROCESS EXPLAINED
By: Sandra L. Clapp
Sandra L. Clapp & Associates, P.A., Eagle, Idaho
You can pick up many financial planning books or articles that will emphasize the “evils of probate” and encourage the reader to “avoid probate.” Many of these articles are designed to generate fear in the reader and rely upon state laws where administration of a decedent’s estate is cumbersome and costly. These articles may be designed to sell a financial product or professional service. Let’s focus for a few minutes on alleviating the fear of “probate” and reviewing the practical steps you should consider under Idaho law.
Probate is simply the legal process of appointing the personal representative (executor), paying the decedent’s debts and final expenses, determining the heirs (whether through a will or intestacy), liquidating assets, paying all estate and/or income taxes of the decedent, and distributing assets to the heirs. The “estate” generally refers to all property, debts, rights and obligations of the deceased person. Each person has an “estate” automatically on death without taking any formal action because the “estate” contains the rights or liabilities of the deceased person. However, to obtain authority to act on behalf of the estate, the court generally must appoint the personal representative (also known as the executor or administrator in other states). Once appointed, the personal representative assumes fiduciary rights and responsibilities to properly administer and distribute the decedent’s estate and is accountable to the court, creditors, and beneficiaries regarding the estate.
The laws of probate vary state to state and may be fairly straightforward or very complex and costly. The probate laws of a particular state generally include the details of how the personal representative is appointed, the priority of creditor claims against the estate, the identity of the beneficiaries in intestacy (if death occurs without a will), and distribution and closing of the estate. Idaho has adopted the Uniform Probate Code which provides for an efficient means to administer an estate without added court oversight or large additional cost. In most Idaho probate proceedings, actions to administer the estate are taken without direct court intervention and without the need to actually appear before a judge. Court involvement may be appropriate in situations where disputes arise, legal issues exist, or the personal representative is not acting properly. The initial appointment of a personal representative and determination of the heirs (through a will or intestacy) is generally a fairly swift process in Idaho and can take less than one week except in more complicated circumstances.
If you are an Idaho resident, the need to probate the estate should not alone be a reason to establish a trust or adopt more complex planning (although there may be other reasons which justify a trust or other planning documents). If you own real estate in a state besides Idaho or outside of the United States, it is important to keep in mind this ownership may complicate the administration of your estate upon death. Where real property is involved, another probate proceeding (known as “ancillary probate”) may be required in the other state in addition to the Idaho proceeding. With multi-state real property, it may be appropriate to establish a revocable trust or to hold the real property in a business entity, such as a limited liability company or limited partnership, to minimize the ancillary probate issues. A revocable trust will not protect your assets from creditors and should not be used for this purpose.
An important step in your planning is to ensure the beneficiaries and asset ownership are consistent with your desired distribution. Any asset with an identified beneficiary will transfer automatically on death to the beneficiary as a “non-probate transfer” and is not subject to your will or trust. In essence, the beneficiary designation will take precedence over your will. It is a common mistake to name as beneficiary the individual you have selected to manage your estate on the assumption this person will distribute the assets according to the will or trust. However, unless the beneficiary form expressly incorporates the distribution to the individual as the personal representative or trustee, the individual named will receive the asset unencumbered by any restrictions. Even if the recipient desires to reallocate the assets to the intended beneficiaries, this may not be possible because the recipient may be subject to federal gift tax limits. Naming a minor child directly as beneficiary is never prudent planning. Review your beneficiary designations on retirement accounts, life insurance, and annuities to make sure the distribution is accurate. Consult your financial advisor or attorney when naming your estate or a trust as the beneficiary of a tax-deferred account as this may unnecessarily accelerate income taxes on the distribution.
Because estate planning generally involves important legal issues, it is recommended that you consult with your legal and tax advisors to ensure any action taken is appropriate for your circumstances. This article is not intended to replace legal advice applicable to your situation and should be used only for informational purposes. If you would like more information, contact Sandra Clapp at 938-2660 or www.clapp-legal.com.