Estate Planning for Beginners, Part One

Where do we begin with estate planning? At the beginning, of course, which is the probate process. What is probate? It takes one of two forms. The first is where a will is presented to the probate court and the second is where there is no will and the court is asked to appoint an administrator to probate the assets of the estate.

In situation No. 1, the will is presented to the probate or surrogates court for proof. Proof of what, you may ask? The will needs to be validated and confirmed as valid by the probate judge. This process may include the judge’s request to bring in the witnesses to the will and possibly the attorney to confirm that the testator of the will was of sound mind, over the age of 21 and under no undue influence at the time the will was signed.

Once this is completed, the judge looks to the will to see who the deceased named as executor and possibly trustee and under normal circumstances, and formally appoints these individuals or entities to act as executor as provided in the will. (For related reading, see: 4 Essential Estate Planning Documents for Everyone.)

What Should Be Included in the Will 

  1. Distribution of tangible assets (your car, boat, jewelry, clothing and other personal effects).
  2. Directions to pay all debts and taxes that may be due as of the date of death. (Mortgages do not normally have to be paid off.)
  3. Distribution of real estate.
  4. Specific bequests of money to named individuals or charities, if applicable.
  5. The distribution of all of the rest, residue and remainder of the assets. (Everything not otherwise disposed of by the terms of the will.)
  6. The appointment of the guardian for any minor children.
  7. The appointment of the executor or executors.
  8. The appointment of trustees, if applicable.

The role of the named executor is to execute the terms of the will for the benefit of the named beneficiaries and report back to the probate judge for approval of the planned distributions, as outlined in the will. To get to this point, the executor is required to notify the public that the deceased individual has passed away and that creditors have a limited amount of time to make claim against the estate. Once all claims have been satisfied including federal and state income taxes and, possibly, estate taxes, the executor presents a plan to the court for the ultimate distribution of the assets.

If minor children are involved, the will typically names the individual or individuals who will be the guardian of the child/children.

Assuming the judge approves all that has taken place, the beneficiaries are asked to approve the plan of distribution and sign off on this plan. It is at this point in the settlement of the estate that the assets are finally distributed to the beneficiaries and the estate is eventually closed.

When the assets are passed out to the named beneficiaries, the executor has a responsibility to provide each beneficiary with the cost basis of the assets being distributed. It is required that every asset owned by the testator at the time of his death was revalued to a date of death value. These values become the actual cost basis to the beneficiary and will be used to calculate capital gains and losses when and if the asset is ever sold.

If during the settlement process the will provides for a trust, possibly for children until they reach a certain age or for older parents who may not be been able to handle an outright distribution, the trustee takes over those assets subject to the trust and begins the management and investment responsibilities. Within many cases, this can include discretionary powers to pay out the income and/or principal during the life of the beneficiaries. (For related reading, see: Digital Assets: The Hidden Part of Your Estate.)

Dealing With Minors as Beneficiaries

If in fact, we are dealing with minor beneficiaries, the trust may provide that the trustees pay for the “maintenance, education, support and health” of young children through the use of the income and principal of the trust. The trust may also go on to say that once all of the children have been educated through four years of post-secondary education, the trustees are directed to terminate the trust and distribute the remaining assets among the children and in most cases, per stirpes. Per stirpes means “by representation;” I define it as “by the roots." In other words, if one was to have three children, the assets would normally go one via third to each child. But what if one of the three children died, leaving children (grandchildren of the testator) surviving? The use of per stirpes allows those children to inherit the funds that would have come to their parent.

But what if there is no will? In this situation, the laws of the state take over under what is called the intestate distributions. Intestate means to die without a will. In this situation, the intestate rules (under state statutes) provides a formal plan of distribution that the deceased neglected to do themselves and believe me, this plan may leave family beneficiaries very unhappy. Each state may be very different, and these rules should be reviewed but never depended upon. From my own experience as a former trust officer, I can outline a number of situations where dying without a will was a nightmare to settle and can rip families apart. (For related reading, see: Estate Planning for Your Beloved Pets.)