Celebrate International Coffee Day by having a cup of your favorite coffee drink, and pausing to thank the hard-working (and often under-compensated) people who grow and process those tasty beans.
Oh, you just had a cup or three? Well, have another. Enjoy the day!
While strategizing your
estate plan you may hear the term "interested person." This is a term
of art that has specific meaning in estate planning law. It's any individual or
entity who has a legally recognized property interest in an estate. Interested
persons can include a spouse, heirs, beneficiaries, and creditors.
Interested persons have rights in the estate that others do not. Interested persons can demand notification or bond to protect their property interests. Interested persons have legal standing to challenge (contest) the Will.
Those property interests come into play when your estate is being settled in probate. At the beginning of the probate process, the personal representative must compile an estate inventory, which lists the probate assets. Before any beneficiaries can receive assets, valid debts must first be paid from the estate. Creditors must receive a copy of the estate inventory, and they have a defined period of time in which to make claims against the estate in probate.
It is the personal representative's responsibility to ensure that valid debts are paid from the estate. However, Minnesota law sets out a priority in which certain creditors are to be paid, and if the estate assets are exhausted, some of the "lower priority" creditors may not be paid at all.
If, after creditors have been paid and there are no assets remaining in the estate, the estate is said to be insolvent. This means the beneficiaries will receive nothing, even if the Will has language providing for an inheritance. As mentioned above, valid debts are to be paid first.
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A qualified estate planning attorney can help you create a strategy that helps preserve your assets for your loved ones.
It may have been some time since you nominated the beneficiaries of your life insurance policy. Perhaps you had named your spouse, children, grandchildren, or a charity. Who are the primary beneficiaries and who are the contingent beneficiaries? It's important to revisit your policies from time to time to make sure the persons named still reflect your intent.
Life insurance policies,
annuities, pensions and retirement assets, are all examples of payable-on-death
(POD) instruments, the proceeds of which are distributed to the beneficiaries named in the
instrument, and not by a Will. Therefore, POD instruments are not part of the
probate estate. This is an important distinction, because named beneficiaries on your life
insurance policy will have priority over any beneficiaries designated in your Will. If there were to be a conflict between the Will and POD instrument, the terms of the
POD would govern.
For example, if your
Will states that your two children will inherit the estate assets in equal
shares, but your life insurance has designated only the oldest child as
beneficiary--guess what? The younger child will not share in the life insurance
proceeds, as those proceeds are not disposed of by the Will. Of course, both
children will still inherit probate assets, per the terms of the Will.
You can name any
"legal person" as a beneficiary. This can be individuals, charities,
the trustee of your trust, or your estate. However, naming your estate as a beneficiary
is not a good idea. Life insurance proceeds becoming part of your estate would
become subject to creditor claims against the estate, whereas proceeds paid
directly to your beneficiaries are protected by law and unreachable by your
creditors.
One advantage of an insurance beneficiary designation is that the distribution of proceeds is much faster than distribution of probate assets. After the death of the policy-holder, the personal representative contacts the insurance carrier and submits proof of death, usually a certified copy of the death certificate. After that, the company issues funds to the beneficiaries, sometimes within a matter of weeks.
It is important to name contingent beneficiaries in your policy to ensure someone receives proceeds in the event your primary beneficiaries do not survive you. If your primary beneficiaries die before you, and there are no named contingent beneficiaries, the insurance carrier may be forced to distribute the proceeds to the "default" beneficiary stated in the terms of the policy. This default beneficiary is often your estate, which as noted above, may not bring a good outcome.
If you become divorced, it would be wise to remove your ex-spouse's name from the policy, unless for some reason you still want that person to be a beneficiary. Divorce, in and of itself, does not revoke the beneficiary designation. The insurance company doesn't care whether or not you are still married; they pay out to the named beneficiary who is still living, and your ex-spouse would receive the proceeds.
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Reviewing the beneficiaries named in your life insurance policies and other POD accounts is an important bit of financial housekeeping and should be done every so often, particularly when family dynamics change. It's a good idea to consult with a qualified estate planning attorney to help you best manage your assets.
Probate is the legal process of settling your estate after you die. Your debts are paid and your remaining assets are distributed to your beneficiaries or heirs. Your personal representative is responsible for probating your Will. If you have no Will; or you have a Will but you did not nominate a personal representative, or your nominated personal representative is unable to serve, the court will appoint one.
Minnesota probate laws
apply to the estates of people who were Minnesota residents at the time of
their death, and it also applies to real property in Minnesota owned by out of
state residents. Having a Will does not enable your estate to avoid probate.
The need for probate is dependent on the amount and types of property you own,
and whether you own it alone or with others.
The probate
estate consists of property that is not held in joint tenancy with
another person, and does not have designated beneficiaries. If you have
property in your name only, or in tenacy-in-common with someone else (no right
of survivorship), that must be probated. Your personal property items are also
part of your probate estate.
Some types of property
are not subject to probate. This includes real property held in joint tenancy
with right of survivorship (such as between spouses), joint bank accounts,
payable on death (POD) investments, insurance policies and pension plans with
designated beneficiaries. You can also use a transfer on death deed (TODD) to transfer title of real property to a beneficiary without probate.
Certain small estates--those that do not include real property and which consist of
personal property with an aggregate value of under $75,000 are not subject to
probate.
Informal vs Formal Probate
Informal probate is initiated by filing an application with the probate court. Once the probate registrar determines the application is complete, the registrar issues a statement of probate and appoints a personal representative. The PR may pay debts and administer the estate without court supervision.
Formal probate typically involves complex estates that require a judge to make determinations. Formal probate proceedings are commenced by filing a petition to the court. The petitioner must appear at a court hearing. Formal probate proceedings can be either supervised or unsupervised by the court. Formal probate can become complicated for someone unfamiliar with the process, and it's usually a good idea to consult a qualified probate attorney.
Some considerations for deciding whether to file for formal probate:
The Probate Process
Your personal representative initiates probate by filing an application or petition with the probate court in the county where you lived at time of your death.
The major steps in the process include:
Taxes
The paying of taxes depends on the size of the estate. Minnesota has a $3 million estate tax exemption per person, and the IRS exemption is $11.58 million per person. If the value of your estate exceeds those exemptions, there are some ways to reduce your tax liability. Marital transfers, charitable donations, family limited partnerships, and certain types of trusts are possibilities. In such cases, it would be prudent to seek the advice of an experienced accountant or tax attorney.
When we think of estate planning, we might think of seniors who are planning how to leave their assets to adult children and grandchildren, or middle aged people who want to be sure there is a plan in place for their kids in case the parents die unexpectedly.
Young singles and couples (married
or not married) are usually the least likely to have an estate plan, such as a
Will. Many young people rent, have relatively few assets, and may think that
they don't need a plan now.
But even if you're just starting out, your earnings will go up during the course of your career, you will acquire more assets, and will someday have a bigger family. Now is the time to protect those assets and protect your family's future.
If you die without a Will
(intestacy), the probate court applies state law as to the priority of heirs in
what is called intestate succession. The court will appoint a personal representative
to administer your estate, without your input. If you have minor children and
die without a Will, the court will appoint a guardian for those children,
again, without any input from you.
Want to leave property to a
friend or a charity? Without a Will, there is no provision for that.
If you are unmarried but have a life partner and want to make sure that person receives
your assets? It cannot be done in cases of intestacy. Instead, your assets will
pass to your heirs based on the priority set by intestate succession.
For example: Brad and Erika are in a serious, loving relationship, but don't have children and are not planning to get married any time soon. They live together and share expenses in the house Brad inherited from his mother. Brad has two siblings he is close to, but his father hasn't been a part of his life since Brad was a baby.
If Brad dies without a Will, Erika would not receive any of Brad's assets. Under Minnesota laws of intestate succession, Brad's entire estate would go to his estranged father. Brad's father would be under no obligation to share his inheritance with Erika or allow her to continue living in the house. Brad's father would have no obligation to share with Brad's siblings, either.
Now suppose that Brad's father is not alive to receive the estate. Brad's two siblings would be next in line and would share the entire estate, 50/50. Erika would still receive nothing, and Brad's siblings would not be obligated to allow Erika to remain in the house.
If Brad and Erika were married, Erika would inherit under the laws of intestacy. But Brad and Erika have made the decision to not get married now, and the law makes no provisions for their choices.
Unfortunately, the laws of intestacy do not take into account who is important in your life and who is not. It is a blunt tool that tries its best to distribute assets to the people most closely related to the decedent.
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When someone sells an asset, they pay tax on the difference between the selling price and the adjusted basis (original cost plus improvements minus depreciation) of the asset--capital gains. The basis is determined when the asset was acquired.
In the case of inherited property the basis is not what the decedent initially paid for the asset. It is "stepped up" to the fair market value of the asset on the date of the decedent's death. This stepped-up basis applies to all inherited assets, including stocks, bonds, and real property. It can enable a beneficiary to minimize their tax liability when selling an inherited asset.
Here's an example. A home owner makes a provision in his Will to give his house to his daughter after he dies. He paid $100,000 for it 30 years ago. After he passes away his daughter inherits the house, but she doesn't plan to live in it and she sells it for $350,000. Ordinarily, she would be liable for capital gains taxes on $250,000 profit ($350k-$100k) without the stepped-up basis. Currently, the tax rate on that profit can be up to 20% for federal and up to 9.85% for Minnesota, depending on other income.
However, with the
stepped-up basis, the daughter would only be liable for taxes on the difference between
the sale price and value at the time of her father's death. So if the property
had a fair market value of $325,000 at the time of his death and she later sold it
for $350,000, she is only responsible for tax on $25,000 in profits.
If the sales price of
an asset is less than the basis, she could claim a capital loss.
Note that capital gains are either short-term or long-term. If a beneficiary sells the house within a year of taking ownership, this is considered a short-term gain and it is taxed as ordinary income. But there is a "home sales tax exclusion" rule that could protect the beneficiary from much of the capital gains tax liability. If the beneficiary inherits real property and lives in it as the primary residence for at least two years before selling it, the beneficiary can realize up to $250,000 in capital gains without paying taxes if single ($500,000 of gains if filing jointly).
Giving valuable property to your loved ones can create some issues for them when they inherit. Talking to a qualified attorney or tax advisor is a good idea when you are planning how best to distribute your assets.
Designing one document that expresses the estate planning wishes of both spouses--sounds like a dream, right? Well...not so fast.
Joint Wills used to be
more popular in the distant past, and Minnesota law still allows them. You
might even find a few practitioners who still offer joint Wills. A joint Will
has one attraction: it ensures that, no matter which spouse dies first, the
estate will ultimately pass to their beneficiaries in the agreed-to manner upon
the death of the second spouse.
If two spouses don't trust each other to follow through with the estate plan after one of them dies, then perhaps a joint Will is the answer.
But just because you can get a joint Will doesn't necessarily make it a good idea. In fact, a joint Will has some serious drawbacks. Once in a while I get a request for one, and because the disadvantages so greatly outweigh the advantages I decline representation in such cases.
A joint Will is a contract between both spouses to agree on the disposal of their estate after both have died. They both have agreed in writing to the terms of the Will, and changing those terms would require consent by both parties. As long as both spouses are alive (and competent to execute a new Will), they can mutually agree to change their Will at any time.
But after one spouse dies, the surviving spouse (who inherits the entire estate) is held to the terms of the joint Will and cannot alter that. The terms of the joint Will govern how the estate is distributed after the second spouse dies. This can create problems down the road for the surviving spouse.
What if years later the surviving spouse has different views or different family dynamics and wants to change how the assets are distributed? Perhaps wishing to give more to a child who has medical needs, or wants to go to college or start a business. Maybe the surviving spouse wants to reduce or leave out an inheritance to a child who has become estranged or has developed substance abuse or money problems. What if the surviving spouse remarries and has more children? Since the other spouse is no longer alive to give consent, the surviving spouse is locked in to the terms of the joint Will for the remainder of his or her life. The surviving spouse cannot execute a new Will, or a codicil (amendment) to the existing joint Will.
Even if two spouses express identical wishes for their estate planning strategies, it is far better for the attorney to craft separate "mirror" Wills for each spouse. This enables the surviving spouse to change those strategies later.
Some states do not recognize joint Wills. If presented with a joint Will, the probate court in another state may try to separate the document into two separate Wills. But if unable to do that, the court may invalidate the joint Will entirely and apply the laws of intestacy to the estate.
Finally, there is no clear advantage for attorneys to draft joint Wills. Back in the day, they were popular because of the time saved in their preparation--the attorney only needed to type one document. With today's computers, there is no clear advantages to drafting joint Wills. Thus, no cost savings to pass on to the client.
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Having a separate, valid Will for each spouse can help ensure that your property will be given to the people you choose and that there will always be the option to change things later. Receiving the guidance of a qualified estate planning attorney can help you get started.