For the Person Who Wants to Avoid Probate and Reduce Estate
Taxes
Simple Rules to Avoid Probate. In Arizona, any assets that are
held in your name outright must be probated to pass to the next
generation or your intended beneficiaries heir(s). This includes
property held as community property and tenants in common. However,
there are many assets that never pass through a probate. For
example, retirement plan benefits, IRA's and life insurance
proceeds pass directly to the named beneficiaries. Property that is
owned jointly with right of survivorship (or as community property
with right of survivorship) goes directly to the other owner
(survivor). With little effort, your estate can be arranged to
avoid probate. Why should you have a living trust if probate can be
relatively simple to avoid? The following are some of the
advantages and disadvantages of a probate and a living trust.
Advantages and Disadvantages of Probate
- Notice to Creditors- can eliminate creditors' claims. -Cannot
distribute until 120 days after Notice to Creditors.
- Conservator/Guardian may be necessary
- Inventory-Public Record
- Additional cost of administration post death
Advantages and Disadvantages of Living Trust
- Joint Agreement for spouses -More cost up front
- Avoid conservatorship for assets in trust
- Option to give notice to creditors
- Ease of administration-no delay (if no notice to creditors) for
distributions
Estate Taxes: Is there really Repeal? In 2006, if you leave more
than $2,000,000 to anyone other than your spouse, your estate will
be taxable. This "exemption" gradually increases to $3,500,000 in
2009. The estate tax disappears in 2010, then comes back in 2011
with the exemption reverting back to $1,000,000. In 2003, husband
and wife can die with a $2,000,000 estate with a properly
structured "Bypass Trust" and "Survivor's Trust".
If you think only about avoiding probate, without proper estate
tax planning, you and your spouse will lose the benefit of the
"exemption" for one of you. A "Bypass Trust" is a trust that is
funded with the exemption amount of the first spouse to die. The
Bypass Trust is "carved out" of the estate of the first spouse to
die. Until the surviving spouse dies, the "Bypass Trust" is
available for his or her use, then it will pass to your children.
The "Bypass Trust" is not included in your or your spouse's estate.
The rest of the estate not used to fund the "Bypass Trust" is held
for the benefit of your spouse in a "Survivor's Trust", then passes
to your children upon your spouse's death.
Most married couples with an estate of $2,000,000 or more plan
for today. No one can predict exactly what will happen with the
estate tax laws. Congress is likely to "fix" them by possibly
permanently raising the exemption amount. Until that time, if you
want more flexibility, your trust can provide that your share of
the assets in the trust remains in trust for your surviving spouse.
If your surviving spouse believes that there may be estate tax
issues, and if the estate tax laws have not changed, your surviving
spouse can have the right to "disclaim" or "renounce" a portion of
the trust upon your death to a "Bypass Trust." Any disclaimer must
be made within 9 months of your date of death and follow IRS
requirements.
What should you do?
Here are simple questions to ask yourself to help plan for the
inevitable:
- Should I have a will or living trust?
- Do I have sufficient liquid assets to pay estate taxes, care
for my family and pay my debts?
- Have I checked beneficiary designations (e.g. life insurance
and retirement accounts)?
- Have I made my intent clear?
- Do I need to talk to my heirs about my plans to help avoid
conflict with I die?
The simple answer after reviewing these issues is to set up an
appointment with an estate planning attorney to review your
individual situation and to make appropriate recommendations.