Probate is the official way that an estate gets settled under the supervision of the court. A person, usually a surviving spouse or an adult child, is appointed by the court if there is no Will, or nominated by the deceased person’s Will. Once appointed, this person, called an executor or Personal Representative, has the legal authority to gather and value the assets owned by the estate, to pay bills and taxes, and, ultimately, to distribute the assets to the heirs or beneficiaries. The purpose of probate is to prevent fraud after someone’s death. Imagine everyone stealing the castle after the Lord dies. It’s a way to freeze the estate until a judge determines that the Will is valid, that all the relevant people have been notified, that all the property in the estate has been identified and appraised, that the creditors have been paid and that all the taxes have been paid. Once all of that’s been done, the court issues an Order distributing the property and the estate is closed. Not all estates must go through probate though. First, if an estate falls below a certain threshold, it is considered a “small estate” and doesn’t require court supervision to be settled. Click here to find out Utah’s small estate threshold and procedure. Second, not all assets are subject to probate. Some kinds of assets transfer automatically at the death of an owner with no probate required. The most common kinds of assets that pass without probate are:
• Joint Tenancy assets-when one joint tenant dies, the surviving joint tenant becomes the owner of the entire asset, without the need for a court order. This is called “right of survivorship.” For example, if a house is owned this way, “Jane Sage and John Sage, as joint tenants,” and Jane dies, John owns the entire house.
• Tenancy by the Entirety or Community Property With Right of Survivorship-these are forms of property ownership that function like joint tenancy, in that the survivor owns the entire property at the death of the other tenant, but are only available to married couples.
• Beneficiary Designations-retirement accounts and life insurance policies have named beneficiaries. Upon the death of the account or policy owner, these beneficiaries are entitled to the assets in the account or the proceeds of the policy.
• Payable on Death Accounts/Transfer on Death Accounts-bank and brokerage accounts can have designated beneficiaries, too. The account owner can fill out forms to designate who should receive the account assets after their death.
Third, if a decedent had created a Living Trust to hold his or her largest assets, than that estate, too, won’t go through probate, unless the assets left outside of the trust add up to more than Utah’s small estate limit. That, in fact, is why that Living Trust was created, to avoid probate after the death of the trust’s Grantor. But for estates in Utah that exceed the small estate’s threshold, and for which there is either no Will, or a Will (but not a Living Trust), probate will be required before an estate can be transferred to the decedent’s heirs or beneficiaries. The general procedure required to settle an estate via probate in Utah is set out in a set of laws called the Uniform Probate Code, a set of probate procedures that has been adopted, with minor variations, in 15 states, including Utah. In Utah, under the UPC there are three kinds of probate proceedings: informal, unsupervised, and supervised formal.
Informal Probate
Most probate proceedings in Utah are informal. You can use it when the heirs and beneficiaries are getting along, there are no creditor problems to resolve and you don’t expect any trouble. The process begins when you file an application with the probate court to serve as the “personal representative” of the estate. (This is what most people think of as the “executor”). Once your application is approved, you have legal authority to act for the estate. Usually you’ll get what’s called “Letters Testamentary” from the court.
Once you get the letters, you need to do these things:
• Send out formal notice to heirs, beneficiaries, and creditors that you know of
• Publish a notice in a local newspaper to alert other creditors
• Provide proof that you’ve mailed notices and published the notice
• Prepare an inventory and appraisal of the estate’s assets
• Keep all the property safe
• Distribute the property (when the estate closes)
Once the property’s been distributed, you close an informal proceeding by filing a “final accounting” with the court and a “closing statement” that says you’ve paid all the debts and taxes, distributed the property, and filed the accounting.
Unsupervised Formal Probate
A formal probate, even an unsupervised one, is a court proceeding. That means that a judge must approve certain actions taken by the Personal Representative, such as selling estate property, or distributing assets, or paying an attorney. The purpose of involving a judge is to settle disputes between beneficiaries over the distribution of assets, the meaning of a Will, or the amounts due to certain creditors. The informal probate process won’t work if there are disputes, so that’s when the court gets involved.
Supervised Formal Probate
A supervised formal probate is one in which the court steps in to supervise the entire probate process. The court must approve the distribution of all property in such a proceeding.
When is Probate necessary?
If the decedent owned assets (such as a home or other real property, bank accounts, or investments) titled solely in his or her name and without a valid beneficiary designation, probate is necessary to sell these assets or distribute them to the beneficiaries or heirs. With the decedent gone, only a personal representative has authority to sign the deed or other document transferring title to these assets. The one exception is when the estate is under $100,000, and therefore a small estate affidavit can be used to collect the decedent’s assets.
What property can be transferred without a Probate?
Any of the decedent’s untitled property, such as personal and household possessions, valuables, or money, can be transferred without a probate. Doing so, however, may subject such property to the claims of the decedent’s creditors. In addition, several types of property pass outside of probate because they have a built-in transfer mechanism that does not involve probate. Such property includes:
• Jointly owned assets, such as a joint bank account or a home or other real estate owned as joint tenants with rights of survivorship
• POD (Pay on Death) bank accounts or TOD (Transfer on Death) stock brokerage accounts
• Insurance proceeds, including life insurance and accidental death benefits
• Death benefits of annuities, pension plans, and retirement accounts, including IRAs and 401(k)s
• Property held by a trustee of a living trust
When else should Probate be considered?
Even if the decedent did not own titled property that requires a probate to be transferred, you should still consider a probate if:
• The decedent left unpaid debts, and you want to cut off potential claims of the decedent’s creditors.
• There is a dispute over who is entitled to the decedent’s property.
• The decedent had a last will, which you want to be able to enforce in court. A will that is not probated is not legally enforceable.
• The decedent’s estate needs to make an income tax or estate tax election. (Usually, only a personal representative can make this election.)
• The person dealing with the decedent’s property wants to be discharged from liability to the heirs and beneficiaries after the property is distributed.
Letters testamentary is a one-page document issued by the court stating that the personal representative has been duly appointed. If someone tells you they will not release an asset of the decedent without letters testamentary, it means they want to deal only with a personal representative.
What Are My Probate Options?
• Small Estate Affidavit: You may be able to avoid filing a probate by signing a small estate affidavit, which can be used to collect a decedent’s Utah property, except real estate, if the net value of the decedent’s property subject to probate does not exceed $100,000. A small estate affidavit is not legally available, however, until 30 days after the decedent’s death.
• Filing Options: If filing a Utah probate cannot be avoided, the most common filing options are: Informal probate, which is generally appropriate for simple, uncontested estates and usually costs less than a formal probate because no attorney travel or in-court time is required. In some circumstances, the decedent’s relatives may be required to sign written consents to this process. Formal probate, which is appropriate for estates in which the right of the person seeking appointment as personal representative is contested or in which some other dispute may arise. Formal probate requires an in-court hearing, which the attorney (but not the client) is required to attend.
• Ancillary probate for out-of-state decedents: This option can be used when (a) the decedent resided outside Utah at the time of death, (b) a probate has been filed there, and (c) the decedent owned Utah real estate or other property that needs to be sold.
Avoiding Probate and Estate Taxes
There are several ways property can avoid probate, including:
• Assets owned as joint tenants with rights of survivorship: All property left to a surviving spouse avoids probate and federal estate tax. This includes assets such as a bank account or a home or other real estate that are owned as joint tenants with rights of survivorship.
• Pay-on-death bank accounts or transfer-on-death stock brokerage accounts: The proceeds from these accounts go to the beneficiary you name probate free, as long as that doesn’t conflict with other components of your estate plan.
• Insurance proceeds, including life insurance and accidental death benefits: These proceeds bypass probate but will be subject to estate taxation unless the insurance policy is held by an irrevocable trust.
• Property held by a trustee of a living trust: If the living trust is revocable, its assets may bypass probate and go directly to beneficiaries, but those assets will be subject to estate taxation. If the living trust is irrevocable, then the assets are not part of the estate and may bypass not only probate but also estate taxation.
• Property held by a charitable, special-needs or other irrevocable trust: As with the irrevocable living trust, property that belongs to an irrevocable charitable or special-needs trust is free from probate and estate taxation.
• Death benefits of annuities, pension plans and retirement accounts: Money inherited from company pensions and 401(k)s, and even individual retirement accounts (IRAs), is not subject to probate, but is subject to estate tax consideration. Because the IRA has been funded with pre-tax dollars, IRA beneficiaries are also liable for income taxes due when the funds are withdrawn.
Understanding Trust
Trusts are created by settlors (an individual along with his or her lawyer) who decide how to transfer parts or all of their assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depend on the terms on which it was built. In some areas, it is possible for older beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime beneficiary and a trustee at the same time. A trust can be used to determine how a person’s money should be managed and distributed while that person is alive, or after their death. A trust helps avoid taxes and probate. It can protect assets from creditors, and it can dictate the terms of an inheritance for beneficiaries. The disadvantages of trusts are that they require time and money to create, and they cannot be easily revoked. A trust is one way to provide for a beneficiary who is underage or has a mental disability that may impair his ability to manage finances. Once the beneficiary is deemed capable of managing his assets, he will receive possession of the trust.
Categories of Trusts
Although there are many different types of trusts, each fits into one or more of the following categories:
Living or Testamentary
A living trust – also called an inter-vivos trust is a written document in which an individual’s assets are provided as a trust for the individual’s use and benefit during his lifetime. These assets are transferred to his beneficiaries at the time of the individual’s death. The individual has a successor trustee who is in charge of transferring the assets. A testamentary trust, also called a will trust, specifies how the assets of an individual are designated after the individual’s death.
Revocable or Irrevocable
A revocable trust can be changed or terminated by the trustor during his lifetime. An irrevocable trust, as the name implies, is one the trustor cannot change once it’s established, or one that becomes irrevocable upon his death. Living trusts can be revocable or irrevocable. Testamentary trusts can only be irrevocable. An irrevocable trust is usually more desirable. The fact that it is unalterable, containing assets that have been permanently moved out of the trustor’s possession, is what allows estate taxes to be minimized or avoided altogether.
Funded or Unfunded
A funded trust has assets put into it by the trustor during his lifetime. An unfunded trust consists only of the trust agreement with no funding. Unfunded trusts can become funded upon the trustor’s death or remain unfunded. Since an unfunded trust exposes assets to many of the perils a trust is designed to avoid, ensuring proper funding is important.
Common Purposes for Trusts
The trust fund is an ancient instrument – dating back to feudal times, in fact – that is sometimes greeted with scorn, due to its association with the idle rich (as in the pejorative “trust fund baby”). But trusts are highly versatile vehicles that can protect assets and direct them into the right hands in the present and in the future, long after the original asset owner’s death. A trust is a legal entity employed to hold property, so the assets are generally safer than they would be with a family member. Even a relative with the best of intentions could face a lawsuit, divorce or other misfortune, putting those assets at risk. Though they seem geared primarily toward high net worth individuals and families, since they can be expensive to establish and maintain, those of more middle-class means may also find them useful – in ensuring care for a physically or mentally deficient dependent, for example. Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. The same conditions of a will may apply through a trust, and individuals who don’t want their wills publicly posted opt for trusts instead. Trusts can also be used for estate planning. Typically, the assets of a deceased individual are passed to the spouse and then equally divided to the surviving children. However, children who are under the legal age of 18 need to have trustees. The trustees only have control over the assets until the children reach adulthood. Trusts can also be used for tax planning. In some cases, the tax consequences provided by using trusts are lower compared to other alternatives. As such, the usage of trusts has become a staple in tax planning for individuals and corporations. Assets in a trust benefit from a step-up in basis, which can mean a substantial tax savings for the heirs who eventually inherit from the trust. By contrast, assets that are simply given away during the owner’s lifetime typically carry his or her original cost basis.
Types of Trust Funds
• Credit Shelter Trust: Sometimes called a bypass trust or family trust, this trust allows a person to bequeath an amount up to (but not over) the estate-tax exemption. The rest of the estate passes to a spouse, tax free. Funds placed in a credit shelter trust are forever free of estate taxes even if they grow.
• Generation-Skipping Trust: This trust allows a person to transfer assets tax free to beneficiaries at least two generations their junior typically, their grandchildren.
• Qualified Personal Residence Trust: This trust removes a person’s home (or vacation home) from their estate. This could be helpful if the properties are likely to appreciate greatly.
• Insurance Trust: This irrevocable trust shelters a life insurance policy within a trust, thus removing it from a taxable estate. While a person may no longer borrow against the policy or change beneficiaries, proceeds can be used to pay estate costs after a person dies.
• Qualified Terminable Interest Property Trust: This trust allows a person to direct assets to specific beneficiaries their survivors at different times. In the typical scenario, a spouse will receive lifelong income from the trust and children will get what’s left after the spouse dies.
• Separate Share Trust: This trust lets a parent establish a trust with different features for each beneficiary (i.e., child).
• A Spendthrift Trust: This trust protects the assets a person places in the trust from being claimed by creditors. This trust also allows for management of the assets by an independent trustee and forbids the beneficiary from selling his interest in the trust.
• Charitable Trust: This trust benefits a particular charity or non-profit organization. Normally, a charitable trust is established as part of an estate plan and helps lower or avoid estate and gift taxes. A charitable remainder trust, funded during a person’s lifetime, disperses income to the designated beneficiaries (like children or a spouse) for a specified period of time, and then donates the remaining assets to the charity.
• Special Needs Trust: This trust is meant for a dependent who receives government benefits, such as Social Security disability benefits. Setting up the trust enables the disabled person to receive income without affecting or forfeiting the government payments.
• Blind Trust: This trust provides for the trustees to handle the assets of the trust without the knowledge of the beneficiaries. This could be useful if the beneficiary needs to avoid conflicts of interest.
• Totten Trust: Also known as a payable-on-death account, this trust is created during the lifetime of the trustor, who also acts as the trustee. It’s generally used for bank accounts (physical property cannot be put into it). The big advantage is that assets in the trust avoid probate upon the trustor’s death. Often called a “poor man’s trust,” this variety does not require a written document and often costs nothing to set up. It can be established simply by having the title on the account include identifying language such as “In Trust For,” “Payable on Death To” or “As Trustee For.”
Legal Assistance
Individuals who are considering drafting a trust or a will may wish to consult with an estate planning lawyer. He or she can explain the advantages of using a trust as well as a will. He or she can make recommendations based on the specific considerations of the client. He or she may even recommend using both documents, such as by using a pour-over will that places any property owned at the time of the testator’s death into the trust.
