When a loved one passes away, how do you manage their assets? While many estates must go through a court process called probate, there may be alternatives available to your family.
The first step in determining how to distribute assets upon the death of a loved one is to determine what legal procedures are required. This depends on many factors, including what the assets are, whether the assets have a title (like a house, a car, or a bank account) or not (personal possessions), who stands to inherit, whether the deceased was married, and the total value of the assets, among other things. Another set of factors to consider is whether your loved one had a valid will or trust.
I advise clients to first make a list of everything the deceased owned and to fill out a table like the example below:
After completing the table, we can determine rather quickly what needs to be done. First, we separate the property into two categories: probate property and non-probate property. Probate property is property that belongs to the deceased person’s estate, meaning that it does not have a beneficiary designation, is not held in joint tenancy, and is not held in a valid trust. Non-probate property is everything that passes directly to a beneficiary (or joint tenant) upon the death of the owner.
Of the assets listed in the example table above, only the personal property and the checking account are probate property because they have no beneficiary designations. So now that we have identified the probate assets, the next step is to determine if a probate court proceeding is required. Under Oklahoma law, if the decedent’s entire probate estate is valued less than $50,000, the assets may be passed to the heirs under an affidavit of heirship – a simple document that does not require court approval. In the example above, the probate assets total only $1,500, so the estate is eligible for distribution under an affidavit of heirship. If the deceased left a Will, then that document will determine who receives the assets. If the deceased did not leave a Will, then Oklahoma law will determine who the heirs are.
Even with a relatively simple estate like the one in this example, it can be confusing and sometimes overwhelming for families to work through this process alone. I work with families every day to handle the details of distributing an estate so they can focus on taking care of their loved ones and grieve for their loss.
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Caring For Your Loved Ones – Do You Have A Plan?
I recently attended a networking event. As often happens at these things, the conversation led to the inevitable question about what I do. My answer – estate planning – led to an equally inevitable response from my new friend. “I don’t have an estate, so I don’t need a plan.”
I would bet good money that she is wrong, and here’s why. Everyone has assets and everyone will die. I know that sounds a little harsh and you might doubt the truth of the first statement, but the second assertion should be no surprise. To illustrate my case, let’s look at two examples: (1) a married couple with young kids and (2) a widower with a bank account, an investment account and adult children.
Example 1: Married couple with young kids
The married couple owns a house with a big mortgage on it, one spouse works, and one spouse stays home with the kids. The couple knows that if something happened to either spouse the family would be in dire straits, so they have life insurance policies large enough to cover the mortgage and provide living expenses for the surviving spouse (they are young and in good health so the premiums are cheap). The primary beneficiary on each policy is the other spouse and the successor beneficiaries are their children. The couple goes out for their monthly date night and are hit by a drunk driver and both tragically die.
- Who will take care of the children? Without a will or other valid document nominating a guardian, the choice is left to the courts. Yes, the fate of these children now rests with a local district court judge. In the best case scenario, a loving family member will file a guardianship case and no one will challenge it. A less ideal outcome is that family members will fight over guardianship and they will be embroiled in a long, expensive custody battle. The worst case scenario is that no family member is suitable or willing to be a guardian and the children are placed in the foster care system.
- What will happen to the house? The bank will most likely foreclose on the property.
- What will happen to the life insurance proceeds? Under most state laws, the insurance company cannot write a check to a minor child. Before the proceeds can be released, a custodian of the money must be appointed by a court, otherwise the insurance company will hold the funds in a special account until the children reach the age of majority.
The couple could have avoided these outcomes with some basic estate planning. At the minimum they could have signed wills nominating a guardian for their children and a custodian for the insurance proceeds, and changed their beneficiary designations to the custodian for the children under the Oklahoma Uniform Transfer to Minors Act (there are traps here for the unwary so consult an attorney). The best option would be to set up a living trust to own the house, designate a guardian and a trustee, receive the insurance proceeds, pay off the mortgage, transfer the house to the children when they reach the age of majority, and establish strict rules on how money can be spent by the trustee.
Example 2: Widower with a bank account, an investment account, and adult children
The widower doesn’t want his kids to mess with probate (the court process to transfer property to your heirs). I don’t blame him; probate is expensive, complicated, and can take a long time. A good friend of the widower told him to just add his oldest daughter to the bank account and the investment account as a joint tenant with a right of survivorship. That way, when the father dies, everything automatically transfers to the daughter. The father did this and his daughter assured him that she would share everything equally with her three siblings. The father lives a long a prosperous life and does not die until several years after retitling the accounts. What could possible go wrong?
- Really bad outcome number 1: The daughter is at fault in a car wreck and is sued. The judgment against her is above the limits of her insurance policy. The judgment creditor collects from the daughter’s assets, which include the father’s accounts. Because she is a co-owner of the accounts, they are subject to her debt.
- Really bad outcome number 2: Father dies and daughter does not honor his request that she share equally with her siblings. Because she has a right of survivorship, upon the father’s death the accounts transfer outright into her name. She has no legal obligation to share and the probate courts have no jurisdiction over non-probate assets. The siblings have no recourse against their sister.
- Really bad outcome number 3: Father dies and the daughter honors his wishes that she share equally with her siblings. The investment account has grown to a substantial amount. Because the account passes to her under the right of survivorship, it is not subject to estate tax. However, when she transfers money to her siblings she is transferring assets from herself (not from her father) to her siblings. This type of transfer is considered a gift by IRS and anything over $14,000 is subject to gift taxation. Although there are ways to reduce or avoid the gift tax, you need to talk with both a CPA and an attorney.
As in example one, the widower could have avoided these outcomes with some simple estate planning. First, he could have used a power of attorney so that his eldest daughter could assist him in managing his accounts without subjecting them to her liabilities. He could have designated all of his children as beneficiaries in equal shares and avoided the gift tax issue entirely. If he had established a living trust, he could have shielded his children’s inheritances from their creditors.
In either example, bad outcomes result from no planning or poor planning. Even the smallest and simplest estates need a solid plan. Talk to an estate planning professional to learn more about how you can protect your loved ones.