The Bogleheads' Guide to Retirement Planning (42 page)

If one establishes a trust and transfers assets to the trustee, the terms of the trust will control the disposition of the assets so transferred.

The technical definition of probate is the process of organizing a deceased party’s assets, determining his or her liabilities, paying those liabilities, determining the correct beneficiaries, and transferring whatever is left to the beneficiaries, all under court supervision. A person dying having a valid will is said to have died testate, whereas a person dying without a valid will is said to have died intestate.

Assets subject to probate, commonly known as the probate estate, include all of a person’s assets with several notable exceptions. Assets are treated differently depending on the type:

This section provides a general overview of what happens during the probate process. Although the procedure differs somewhat from state to state, and different terms are used in different states, this description should provide enough background to understand the tasks that must be accomplished to successfully navigate the probate process under the guidance of an attorney.

If a person dies not having a will, the property will be distributed in accordance with the laws of intestate succession. The intestate succession statute represents the legislature’s best guess as to how someone would want property distributed after death. If the statutory distribution is not satisfactory, it will be necessary to have a will to control the distribution of property after death.

The will kicks off the probate process. It is deposited with the probate court, along with a death certificate. The person desiring to be the personal representative, a term synonymous with executor, must be appointed by the court. This is accomplished by filing a petition for administration or similar form.

In testate cases, the will must be admitted to probate. Those having, or potentially having, an interest in the estate are given a chance to contest the validity of the will and the choice of the personal representative. The interested parties must receive notice of the probate to allow them the opportunity to bring forth any objections they might have.

A Supreme Court decision requires that all reasonably ascertainable creditors be given notice of the probate. This is accomplished by mailing all known creditors a copy of a document known as the notice to creditors. This gives creditors an opportunity to put in any claim they have against the estate of the deceased party. It is incumbent on the personal representative to review the deceased party’s papers and bank records to determine who might potentially file a claim against the estate and to provide the attorney for the estate with that information as soon as practicable after the commencement of probate. You can help with this process by keeping well-organized documentation as part of your estate plan.

An estate is a separate tax-paying entity. Any trust associated with the estate also becomes a separate tax-paying entity. To get a trust into the system, a form SS-4 should be filed so that a taxpayer identification number can be assigned. The fiduciary should file IRS Form 56 to inform the IRS of the proper contact party. The estate and nongrantor trusts need to file an income tax return, and the personal representative or successor trustee may have to file an estate tax return if the deceased party left a taxable estate.

The personal representative is responsible for gathering the assets of the decedent. They also decide which assets to sell and which assets to keep. That gets the estate into a position to pay creditors’ claims and then to distribute whatever is left to the heirs. To that end, the personal representative can sell real estate, securities, and personal property to raise cash. After all creditors having valid claims have been paid, the personal representative distributes the remaining assets to the heirs in accordance with the decedent’s will. If there is no will, the remaining assets are distributed in accordance with the intestate succession statute.

When all taxes have been paid, all creditors’ claims disposed of, and all distributions made, the estate has been fully administered and can be closed. In an estate not subject to estate tax, the entire process can be accomplished in less than a year. It is necessary to obtain an IRS closing letter in an estate subject to estate tax. That process can take several years.

Existing wills are typically administered and construed as if the former spouse had died at the time of the dissolution, divorce, or annulment of the marriage, unless the will or the dissolution or divorce judgment expressly provides otherwise. Simply put, a divorced spouse does not get your money when you die, but any children you had with that spouse may. It is a good idea to revise your will after a divorce to ensure things happen the way you want.

Depending on the state, there is generally no effect on an existing trust as the result of a divorce or annulment unless language providing for those eventualities is included in the trust instrument. Accordingly, trusts should be reviewed after a divorce to ensure that the trust reflects the grantor’s wishes.

There is no effect on existing account designations as the result of a divorce or annulment in most states. Accounts should be reviewed after a divorce to ensure that account ownership designations are in accordance with the wishes of the owner. Property rights for property that is held jointly or as a remainder interest are not affected by a subsequent divorce, but property that is held as a tenancy by the entireties is converted to property held as tenants in common after the divorce.

There is no effect on existing beneficiary designations for insurance policies or annuity contracts as the result of a divorce or annulment. Policies and contracts should be reviewed after a divorce to ensure that account ownership designations are in agreement with the wishes of the owner. You may not want your former spouse to receive the proceeds of your life insurance policy instead of your children or a new spouse. Pay close attention to details.

Suppose when you were 21 and single, you wrote out a will leaving everything you owned to the three who meant the most to you in the whole world: your mom, your girlfriend Sue, and your faithful golden retriever Gus. Five years later, Mom has remarried and you can’t stand her new husband, Joe. Sue ran off with your former best friend and is living in Vegas, and Gus bit the mail carrier and is now living on a farm in upstate New York. In the meantime, you met Greta at a party in Bali and married two months later. You and Greta have a new baby, Gilbert.

Unfortunately for you, one day a wheel falls off an airliner passing overhead, and you are the unlucky one that it hits. You die while en route to the hospital. Your budding career as a pediatric cardiologist is over. Who will inherit your soon to be vast estate? Greta and baby Gilbert are not in your will! Fortunately for them, but not for mom, Sue, and Gus—here comes the law to the rescue. Greta and Gilbert are pretermitted parties. They are people related to you by marriage or blood whom you inadvertently failed to mention in your will. By statute in most states, they will get a share of your estate equal to the intestate share.

If you fail to leave anything to your spouse in your will, even if you do so intentionally, your spouse will still be able to get a share in your estate by invoking the provisions of your state’s spousal share law. The spousal share extends to assets beyond those included in the probate estate in most states. That prevents a former spouse from transferring assets with the intention of depriving the current spouse of those assets.

Almost any marriage right can be modified or waived via a prenuptial or postnuptial agreement. A prenuptial is agreed to before a marriage, and a postnuptial is agreed to after a marriage. Rights to property, to inherit, and to spousal share can all be waived or modified by one of these agreements. Nuptial agreements are often used in second-marriage situations to preserve property for the children of an earlier spouse.

Naming individual beneficiaries is usually the best choice for a beneficiary designation. That is the easiest way to ensure those people receive the asset.

Naming a trust as the beneficiary works well when there are issues. For example, the beneficiaries are minors, have a history of alcohol or drug abuse, are deeply in debt, have had a judgment or restitution order entered against them that remains unsatisfied, have a spouse with any of those problems, can’t manage money, or there is a desire to benefit more remote descendants.

The more common reason to use a trust, avoidance of probate, is inapplicable in this situation because accounts for which a beneficiary designation is available usually pass directly to the named beneficiary outside the probate system.

Designating the estate as a beneficiary is usually the least desirable choice. By designating the estate as a beneficiary, the account may become subject to claims of creditors. Also, IRAs that might have been withdrawn over an individual beneficiary’s remaining life span will probably have to be cashed in within five years.

It is important to keep beneficiary designations up to date. If a deceased spouse remains named as the beneficiary of an IRA, insurance policy, or annuity and no contingent beneficiary is named, the account or policy will become a probate asset and will become available to creditors of the estate. In an extreme case, an asset that would have been completely immune from creditor’s claims can become subject to those claims and completely consumed in satisfying the claims.

Give much thought and care to the selection of your fiduciaries, whether they are the agent named in your durable power of attorney or living will, the trustee or successor trustee of your trust, or the personal representative named in your last will and testament. These people will act on your behalf when you are either incapable of acting on your own behalf or have passed away.

When considering a person to act on your behalf, the first question to ask yourself is whether he or she will have the time to devote to your affairs. Managing someone else’s affairs takes time, and it must be done prudently. Does the person have the necessary temperament to act on your behalf? It does little good to name a person to act as the agent on your living will to prevent the doctors and hospital from taking unnecessary steps to prolong your life if the person you select is incapable of making the necessary decision. You should also consider whether the person you are considering has the necessary skills to manage your affairs. Will he or she use good judgment in making the necessary financial and legal decisions required to keep your affairs in good order? Finally, is the person you are considering honest? I mean
really
honest? You are entrusting your life and your fortune to this person, so make sure you select someone who can be trusted to not steal you or your heirs blind and who will act in your, or their, best interest.

Using a trust company to act as the fiduciary may be the best choice if no individual qualifies. You will have to pay them a fee to act for you, but you will gain the benefit of having a trust officer assigned whom you can get to know and with whom you can become comfortable before it is necessary to utilize the trust company’s services. If there is any misfeasance or malfeasance in the handling of your account, there is likely to be an errors and omissions insurance policy against which a claim can be made, if necessary. Before selecting a trust company, you should interview several, meet the people who would be working on your account, and understand and approve the fee structure. You should also understand that there are some services trust companies do not provide, such as acting as the agent on a living will.

This section addresses the documents you may need to complete your estate plan. Not all documents are required for all plans. Your individual circumstances will dictate the documents you need to accomplish your objectives. Most people will need a durable power of attorney, a designation of health-care surrogate, perhaps a living will, and a last will and testament to meet their minimum needs.

Begin by generating a list of your assets, insurance policies (all policies, not just life insurance), and trusted advisers (and not-so-trusted advisers) to make administering your affairs less burdensome, should you become incapacitated or die. Include information about who has custody of your money or other assets, including account type, account number, address, and phone number for each institution holding any asset belonging to you. If you have a brokerage account or an account with a mutual fund company, it is not necessary to list each individual security or mutual fund. Simply list the institution’s name, the account number, who you deal with on a regular basis, and the address and phone number of the office you use. You should also include a list of any real estate you own. It is a good idea to include statements (updated quarterly) and property tax bill copies in this section.