Probate & Avoidance: Weighing the Risks

Probate is the process of opening a decedent’s estate.  If a Will is found, it is filed with the County Register of Wills and its instructions must be carefully followed by the named Executor.  Where no Will exists, an estate Administrator is selected from the nearest degree of relatives.

It is necessary to commence probate when the decedent had assets in his or her own name which are valued at more than $50,000, and in all cases where the decedent held title to real estate.  Probate will be done in the county and state where the decedent last legally resided, and then can be extended to other counties or states where the decedent’s other property or assets may be located.

Once the Will is filed or administration is commenced, the law in Pennsylvania requires publication of legal notice to creditors and any other interested parties.  The decedent’s assets are appraised and all proven bills and debts are paid.  Specific statutes govern each step of the Executor or Administrator, and caution and professional advice are needed to be certain of compliance.  Not later than nine months after death, a state inheritance tax return must be filed and the tax paid; the tax rate for assets passing to close family is 4.5% and to others, 12% or 15%.  If the decedent’s assets are worth more than the Federal Estate Tax Limit ($5.45 million in 2016), a Federal Estate Tax Return must be filed and tax is assessed according to a graduated rate table.  Income tax concerns can also arise.

Often the first question asked by an estate planning client is, “How can I avoid probate and all the costs and taxes?”  There are several steps that can be taken to accomplish this end, but each carries attendant risks which should be thoroughly explained and weighed.

One technique is to give away assets so that they are no longer owned at death.  To avoid probate and taxation, the assets must be completely given away so that there are no strings or incidents of ownership remaining in the hands of the gift giver (the “donor”).  The gift must also be completed more than one year prior to the donor’s death in order to escape state inheritance taxation.

No gift should ever be made if the donor needs the gifted property for his or her own support or comfort.  Often a client may express a desire to give a home or large sum of money to his or her children, with an unwritten understanding that the children will keep it available to the parent.  Extremely dangerous consequences can result.  First, the child may simply refuse to cooperate later when the parent needs the asset, and in the worst case may evict the parent from his or her home out of a motive of personal greed.  Second, the child may exercise good faith, but may get into debt trouble or be sued by third parties, and could lose the gifted property.  Placing a gift in names of a child and his or her spouse doubles these risks, and further adds the danger of divorce claims to the gift.  (Federal tax law imposes other concerns, but these are beyond the scope of this article).

Failure to make full use of all professional advice creates unnecessary risks and problems for the family.  A slight savings at the outset may cost the survivors in unforeseen ways, and impose hardships which could have been avoided.  Recent changes in the law have made living trusts subject to virtually all of the same rules and statues as Wills.  For most people, a living trust creates complications and added costs.  Salespeople are pushing people into buying expensive and unnecessary estate plans.  Be careful not to deal with strangers for something so important and permanent as an estate plan.  Consult a local experienced attorney.

By Lisa Pepicelli Youngs, Esq.

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