Estate debts and avoiding probate

[nun]

I'm going over my will. Right now all my retirement accounts have beneficiaries, but my regular accounts and my house will have to pass through probate. I was considering filing a Transfer On Death form for my regular accounts too, but if I do that there won't be any liquid money to pay estate fees and debts. Any advice on how people have organized things would be appreciated.

 

[Dash man]

I'm going over my will. Right now all my retirement accounts have beneficiaries, but my regular accounts and my house will have to pass through probate. I was considering filing a Transfer On Death form for my regular accounts too, but if I do that there won't be any liquid money to pay estate fees and debts. Any advice on how people have organized things would be appreciated.

That's what a living trust is used for. Find yourself an estate planning attorney...it's worth the money to set it up properly.


Sent from my iPhone using Early Retirement Forum

 

[ERD50]

That's what a living trust is used for. Find yourself an estate planning attorney...it's worth the money to set it up properly. ..

I dunno. Maybe that is overkill for some?

What is the probate limit in your state? As I understand it, you could keep an account with an amount below that , and that would be available to your executor to pay any outstanding bills. I assume this means you would do some sort of TOD for the house?

-ERD50

 

[nun]

I dunno. Maybe that is overkill for some?

What is the probate limit in your state? As I understand it, you could keep an account with an amount below that , and that would be available to your executor to pay any outstanding bills. I assume this means you would do some sort of TOD for the house?

-ERD50

That's what I was thinking. My state's probate limit is $25k. Maybe I'll keep an account with 5% of the estate value outside of TOD that would pass into the estate for the expenses and taxes. I would have to use a trust for the house.

 

[bclover]

yes,
my plan is to spend down everything to the point where the probate clerk will see it and say "Seriously"?

When my dad died he had a small account with about 10K in it but he really didn't have any large debt that we had to pay. He had prepaid his funeral expenses. taxes were zilch, I think we had to pay 1/4 of a year property taxes on the house.

 

[Del Q]

My father passed away this August and I'm working with his estate now. His assets were low enough to avoid probate, under $50k in MN, but his estate is still faced with substantial state inheritance tax since he owned farmland. The farmland was deeded to several relatives prior to his death and he kept a life estate. He thought the land would simply transfer to the spouse, children and grandchildren he deeded it to, but it still is going through the whole estate tax process. A federal return needs to be completed even though it's under the federal limit, this appraisals and lots of attorney time. He had under $50,000 of assets and after final expenses there won't be enough to pay the legal fees. A lot of the heirs will be surprised when they get the bill for their portion....they'll have a part of his assets but no income for a year.


I've learned that there's no free lunch. Pay an attorney now to have it done the way you want or have the estate pay the attorneys to take care of it then.

 

[RE2Boys]

Agree that for this purpose, a trust may be overkill.

I work seasonally in an accounting office and have seen many trusts that benefit the attorney and the accountant but do little for the family. Create unnecessary complications and expenses when (at least in PA) a will would have been more appropriate. Trusts are way oversold.....but it depends on an individuals situation and what you are trying to accomplish.

And in PA, a trust does nothing to avoid any state inheritance tax.

 

[ERD50]

My father passed away this August and I'm working with his estate now. His assets were low enough to avoid probate, under $50k in MN, but his estate is still faced with substantial state inheritance tax since he owned farmland. ...


I've learned that there's no free lunch. Pay an attorney now to have it done the way you want or have the estate pay the attorneys to take care of it then.

I think you may be confused. The farmland was an asset, right? So it isn't correct to say his assets are under $50K, is it? Estate taxes would probably come into play, regardless if an attorney was consulted earlier.

The decision between trust and TOD isn't going to do anything Estate Tax wise (other than you might have an option to set up a by-pass trust if you go the trust route, but this is no longer an issue for most of us with the current exemptions). So for the OP, I really don't think an Estate Attorney will save them anything on taxes.

The attorneys will charge for their services of course, and IME, make things more complicated for the heirs/executors. Like an FA, they can't make it too simple, or people will wonder what they are paying them for.

It appears to me the OP has a good grasp of the situation, and a fairly simple estate and plans - I'm skeptical that lawyers will add value in this case.

I just googled "Transfer on death pros cons", and it was really straightforward for simple estates. TOD for the house might be more complex though, depending on the State.

-ERD50

 

[Bamaman]

If you get down to it, probate is where you get the judge to authorize the executor to sign for the estate when selling estate assets--i.e. real estate in most cases. They also want to make sure debtors are paid and especially taxes paid, if applicable.

In most cases, the assets slide to the surviving spouse--again, if applicable. It's when there's no surviving spouse/parent that things get difficult especially if the estate's worth $5 million ish+.

As previously mentioned, it's best to have 401K's and securities with listed beneficiaries and kept outside of probate. Real estate can be placed into trusts and probate can often be avoided. Establishing a trust may result in expensive transfer taxes, and property taxes may be substantially higher with a trust than an individual owner/occupant.

We just completed settling an estate for a 99 year old aunt. We'd already sold her real estate and most assets were very liquid. We did have to settle an investment account owned jointly with previous business partners. The reason we had to probate her will was part ownership in an office building condominium--selling to her partners. They dragged out negotiations long enough where we're having to file 2015 income taxes on the estate--and estates are taxed much higher than individuals.

It certainly helps for those aging individuals to keep their business simple and retain enough cash to pay any expenses and taxes. Passing complicated probate situations on the next generation or leaving them unable to cash flow the liquidation of assets is just not a fair thing to do.

 

[Bamaman]

My father passed away this August and I'm working with his estate now. . . . .The farmland was deeded to several relatives prior to his death and he kept a life estate. He thought the land would simply transfer to the spouse, children and grandchildren he deeded it to, but it still is going through the whole estate tax process. A federal return needs to be completed even though it's under the federal limit, this appraisals and lots of attorney time. . . . .A lot of the heirs will be surprised when they get the bill for their portion....they'll have a part of his assets but no income for a year.

I've learned that there's no free lunch. Pay an attorney now to have it done the way you want or have the estate pay the attorneys to take care of it then.

I have a friend that's father died, and he had 46,000 acres of the finest farmland in the U.S. His mother's still alive and in good physical condition. But I hate to think what the family will go through when she dies. An incredible amount of cash will have to be paid within 9 months of her death to the IRS. Farmers (and owners of large businesses) with large assets need incredible amounts of life insurance--if the family doesn't want to break up and sell their family assets. These are the ones that also need tax attorneys to plan for the future tax implications.

 

[ERD50]

I have a friend that's father died, and he had 46,000 acres of the finest farmland in the U.S. His mother's still alive and in good physical condition. But I hate to think what the family will go through when she dies. An incredible amount of cash will have to be paid within 9 months of her death to the IRS. Farmers (and owners of large businesses) with large assets need incredible amounts of life insurance--if the family doesn't want to break up and sell their family assets. These are the ones that also need tax attorneys to plan for the future tax implications.

A quick google showed farmland in IL going for $10,000/acre (I was surprised, I thought only commercial property would go for that).

Area farmland prices dip more than rest of state | News-Gazette.com

So that means $460 Million!!!! I think the family will be just fine!

I doubt you could buy enough life insurance to cover a tax bill of 40% of that (almost all over the current $5.3M exclusion). But they should plan to have access to liquidity.

-ERD50

 

[marko]

We take a different tack:
We have no kids and our assets are set up to automatically go to the surviving spouse outside of probate.

After the remaining spouse goes, well....all the leeches are on their own; if they have to work to figure it all out, it'll be the first hard labor they'll have done in years.

 

[nun]

My situation is that I expect my estate to grow in retirement. It consists of a large house (paid for) and the usual retirement and regular accounts currently totals around $2M so no issues with Federal estate taxes, but state taxes do come into play. The retirement accounts currently all have beneficiaries.

What happens when I die....not on a metaphysical level.....on a financial level. There will be taxes and costs to pay. If I just had a will and everything went into probate the estate would be responsible for the costs and then the money would be distributed to my heirs. If I have named beneficiaries on my retirement accounts I presume they get the full amount of the accounts and any costs/taxes have to be paid out of the estate's other funds. If I was to put my regular accounts and the house in trust would my successor trustee be responsible for paying funeral and estate costs out of the trust?

 

[bclover]

Doesn't farmland have different estate tax issues.

In NJ it use to be that if you inherited a "working" farm (not sure what the rules where around working) and if you intended to keep it as such the farm was separate from other assets and taxed much much less.

I knew quite a few folks who inherited farms in the south jersey and the southern Delaware area and planted corn they never intended to sell or use as feed simply to keep the "working" farm designation and the tax exemption.

Does anyone know? it use to be that way many years ago in an effort to keep families in the farming business.

 

[bclover]

We take a different tack:
We have no kids and our assets are set up to automatically go to the surviving spouse outside of probate.

After the remaining spouse goes, well....all the leeches are on their own; if they have to work to figure it all out, it'll be the first hard labor they'll have done in years.

love it

 

[GrayHare]

US Savings Bonds are very useful for paying estate expenses. They are one of few assets that do not get a step up in basis upon their owner's death. This permits an authorized estate executor to redeem them as needed for expenses, then on the estate's tax return deduct those expenses against the bonds' interest, thus rendering those bonds tax free.

 

[bclover]

We just completed settling an estate for a 99 year old aunt. We'd already sold her real estate and most assets were very liquid. We did have to settle an investment account owned jointly with previous business partners. The reason we had to probate her will was part ownership in an office building condominium--selling to her partners. They dragged out negotiations long enough where we're having to file 2015 income taxes on the estate--and estates are taxed much higher than individuals.

It certainly helps for those aging individuals to keep their business simple and retain enough cash to pay any expenses and taxes. Passing complicated probate situations on the next generation or leaving them unable to cash flow the liquidation of assets is just not a fair thing to do.

Seriously? If they don't want the inheritance don't take it. get nothing, owe nothing. Don't most states give someone the ability to disclaim an inheritance?

I hate this assumption that some how we owe anything to the next generation.

Honorable son number 2 will pretty much graduate undergrad and law school, no loans, another kid through trade school and helping him start a business no loans, along with inheriting real estate I now have to worry about making it EASY for them.

Man we are turning into a bunch of ingrates. lol, if I leave the rugrates 1 million bucks, I doubt if I'm going to be "turning over in my grave" because they have to cough up 40K in taxes to get the money.

 

[ERD50]

Doesn't farmland have different estate tax issues.

In NJ it use to be that if you inherited a "working" farm (not sure what the rules where around working) and if you intended to keep it as such the farm was separate from other assets and taxed much much less. ...

State laws won't exempt you from Federal Estate tax.

Turns out there is an adjustment for working farms at Fed level, but it won't matter much if that farm is worth $460M! I don't get why a family farm is treated differently from a family business. I hate tax complexity!

https://www.irs.gov/Businesses/Smal.../Frequently-Asked-Questions-on-Estate-Taxes#8

What about the value of my family business/farm?

Generally, the fair market value of such interests owned by the decedent are includible in the gross estate at date of death. However, for certain farms operated as a family farm, reductions to these amounts may be available.
In the case of a qualifying family farm, IRC 2032A allows an inflation-adjusted reduction from value of up to $1,090,000 for 2014, $1,100,000 for 2015, and $1,110,000 for 2016.

Seriously? If they don't want the inheritance don't take it. get nothing, owe nothing. Don't most states give someone the ability to disclaim an inheritance?

I hate this assumption that some how we owe anything to the next generation. ....

On the other hand, why not make it simple, if it takes little effort? From what I've seen, some old folks have way too many accounts, IRAs and things set up that will take a lot of work to unravel. Why not simplify now while you can, and make it easier for the executor. Each account can involve several trips to a bank to get them the paperwork they think they want (and then later tell you something different), and then half the time they screw it up anyhow.

-ERD50

 

[pb4uski]

Seriously? If they don't want the inheritance don't take it. get nothing, owe nothing. Don't most states give someone the ability to disclaim an inheritance?......

Man we are turning into a bunch of ingrates. lol, if I leave the rugrates 1 million bucks, I doubt if I'm going to be "turning over in my grave" because they have to cough up 40K in taxes to get the money.

In some cases the estate has assets that the deceased desires to pass on but if the estate has inadequate liquidity to pay the estate taxes and the people inheriting the assets can't afford them so the asset ends up being sold to pay the estate taxes, which is not what the decedent wanted to happen. That is why planning is necessary. This liquidity squeeze is very common with family businesses and substantial property interests and is one of the most prudent uses of permanent life insurance.

 

[nun]

In some cases the estate has assets that the deceased desires to pass on but if the estate has inadequate liquidity to pay the estate taxes and the people inheriting the assets can't afford them so the asset ends up being sold to pay the estate taxes, which is not what the decedent wanted to happen. That is why planning is necessary. This liquidity squeeze is very common with family businesses and substantial property interests and is one of the most prudent uses of permanent life insurance.

That's the situation I'm in. My estate is $1M in retirement accounts and $0.2M in after tax and $0.8M in the house. The retirement accounts all have named beneficiaries so I assume they pass along directly and the heirs just pay tax on the inherited IRAs. That leaves $0.2M and the house out of which all the estates expenses need to be paid. If I put those in trust will I make my executor's task any easier.....the executor is the same person that gets the house and the $0.2M in my will and would be my successor trustee if I put them in trust.

 

[bingybear]

My situation is that I expect my estate to grow in retirement. It consists of a large house (paid for) and the usual retirement and regular accounts currently totals around $2M so no issues with Federal estate taxes, but state taxes do come into play. The retirement accounts currently all have beneficiaries.

What happens when I die....not on a metaphysical level.....on a financial level. There will be taxes and costs to pay. If I just had a will and everything went into probate the estate would be responsible for the costs and then the money would be distributed to my heirs. If I have named beneficiaries on my retirement accounts I presume they get the full amount of the accounts and any costs/taxes have to be paid out of the estate's other funds. If I was to put my regular accounts and the house in trust would my successor trustee be responsible for paying funeral and estate costs out of the trust?

I really don't really know what the official method of paying off all the fees, debts, and so forth is after death when one effectively avoided probate. My estate plan has most things avoiding probate with a will to cover things like cars, furniture.. items that do not have TOD or beneficiary designations.
If you completely avoid probate or not, your debts, taxes, etc still need to be paid unless you estate is insolvent. If you have assets TOD at death, I don't believe the estate can be deemed insolvent.
So you may want to do a pour over will to cover items not transferred by beneficiary or TOD. This will allow you to define what happens in probate. If you want your trust to fund the expenses, taxes, etc... I can't see why anyone would mind. I would expect that if there were not enough funds there, they could access other funds transferred out. These techniques are there to transfer assets easily and and avoid the cost and public nature of probate, not to avoid paying due taxes or debts. You may want to make your successor trustee or someone who works well with your successor trustee as your personal representative and make your wishes clear.

 

[nun]

These techniques are there to transfer assets easily and and avoid the cost and public nature of probate, not to avoid paying due taxes or debts. You may want to make your successor trustee or someone who works well with your successor trustee as your personal representative and make your wishes clear.

In the extreme case what if all my money was in retirement accounts with TOD beneficiaries. That money is part of my estate, it just doesn't need to go through probate. So would the executor have to take money from the retirement accounts to pay the estate's debts before the money was released to the beneficiaries and if so are the expenses charged pro rata?

 

[bingybear]

from creditcards.com

3. Name a person, not your estate, as beneficiary
Like life insurance, 401(k) accounts and the family home are shielded from creditors in some states. Other assets, including IRAs and payable-on-death bank and brokerage accounts, can also be difficult for creditors to reach because they have direct beneficiaries and don't go through probate.

The key to protecting those types of direct-beneficiary assets from creditors, experts say, is to specifically name an individual as the beneficiary, not your estate. "The worst thing you can do is name your estate as a beneficiary, but unfortunately I see people doing it all the time," Demeros said. "Anything you can keep out of probate is going to be harder for unsecured creditors to grab. But if you name your estate the beneficiary, that asset becomes part of the probate estate."

It's also a good idea to review your beneficiaries frequently, at least once a year, and to name a contingent beneficiary in case something happens to your first choice, said Stephen Silverberg, an estate planning lawyer in Roslyn, N.Y. "And if there's a box on the beneficiary form that says 'per stripes,' make sure you check it," he said. Meaning "of the body," in Latin, checking that box ensures that the benefits pass to the lineal descendants of your beneficiary if he or she dies before you do.



Read more: 5 steps to prevent your debt from haunting your heirs
Follow us: @CreditCardsCom on Twitter | CreditCards.com on Facebook
Compare credit cards here - CreditCards.com

almost sounds like you may be able to skirt debt. Not quite what I've always heard.
need to look some more.

 

[calmloki]

We take a different tack:
We have no kids and our assets are set up to automatically go to the surviving spouse outside of probate.......

Yep. Joint tenants with right of survivorship on just about everything. If one or the other of us dies there is no taxable event - the other continues to own the property/car/contract/account.

If we both die at the same time then it is a matter of some assets that someone will get some part of - not a big concern for me.

 

[nun]

A married couple is a single financial entity so when one spouse dies it's pretty difficult to get into trouble; the surviving spouse simply carries on....at least financially. The difficulty begins when significant assets are left to non-spouses. If I was married joint accounts, deeds to the house and a will would cover it.