I. Important Estate Planning Documents
II. Probate Property vs. Non-Probate Property
III. The Probate Process Explained
IV. Dying Without A Will
V. Small Estates
VI. Myths About The Probate Process And Non-Probate Property
Q. What does the term, “estate planning” mean?
A. Estate planning is the process of careful and thoughtful planning of your legal and medical affairs for the time periods both during your lifetime and after your death, and the crafting of legal documents that accomplish those objectives. These legal documents ensure that the legal interests of you and your loved ones are protected, and your healthcare intentions are fulfilled.
Q. How often should my estate plan be reviewed and, possibly, revised?
A. The circumstances of each person and each family are different. In most cases a review of your estate plan every three years is probably a good idea. Major life events such as deaths, births, mental or physical incapacity, divorce or legal separation, or the receipt of a substantial inheritance or gift are all certainly cause for reviewing and possibly changing your estate plan. Your testamentary intentions may also evolve over time as well. For example, as you grow older you may wish to make a charity a beneficiary of your estate. If an estate is subject to Ohio or federal estate taxes then changes in those laws make a more frequent review of your estate plan advisable.
Important Estate Planning Documents
Q. What legal documents do most people need to accomplish those objectives?
A. Regardless of whether one is rich or poor, everyone should have, at a minimum, a will and a living will. However, most clients also wish to have a durable general power of attorney and a healthcare power of attorney.
Q. What is a will?
A. The will is a legal document that:
- Provides direction as to whom your probate property should be distributed to after your death.
- Appoints an executor to administer your estate whose duty it will be to:
- make sure that your beneficiaries receive what they are entitled to receive.
- complete and file an inventory of the assets of your estate.
- pay your creditors, including those who are owed for medical and funeral bills.
- pay any income taxes that may be due and to file any state and federal income tax returns.
- pay any estate taxes that may be due for that small percentage of estates for which they may become due and to file any federal or state estate tax returns.
- file an accounting of any assets received and any disbursements made of those assets.
- fulfill any other responsibility that the local probate court may impose upon your executor.
- Provides the executor with sufficient express authority to carry out his or her duties in order to efficiently administer your estate.
- Provides for the appointment of a contingent executor in the event that your named executor is unable or unwilling to serve, or is deceased.
- Will appoint a guardian of the persons and a guardian of the estates of your children who may be the same person or more than one person depending upon your wishes, if you have minor children.
- Will initiate the administration of your estate when it is filed with the local probate court by the person that has been named as your executor.
Q. What is a living will?
A. The living will is a legal document that:
- Is also known as an “advanced medical directive.”
- States your intention that you do not wish to have your life artificially preserved if two physicians provide a medical opinion that, to a reasonable degree of medical certainty, you would die but for the fact that your life is being preserved by artificial means ( a respirator or some other medical device).
- May, if you elect, authorize your attending physician to withdraw nutrition and hydration.
- Provides the names of at least two individuals whom the hospital or the doctors may contact regarding your healthcare issues.
- Contains a provision for you to elect to make or to decline to make an anatomical gift of any or all body parts for any and all types of medical research and/or organ transplantation.
Q. What is a durable general power of attorney?
A. A durable general power of attorney is a legal document that:
- Is only in effect during your lifetime and, in a certain sense, serves as the lifetime counterpoint to your will.
- Grants broad powers to another person, most often a spouse, to take care of your legal affairs during your absence, physical or mental illness, or inability to take care of your own affairs.
- Provides for the alternative appointment of another person to hold the power of attorney in the event that the person whom you initially chose is unable or unwilling to serve, or is deceased.
- Is a powerful legal instrument whose power should be granted only to those who are highly trustworthy, otherwise it can be abused by those who are dishonest in order to embezzle from you.
- Is an instrument that remains effective even though you may become mentally incompetent.
- Is often the preferred method of handling the affairs of an aging parent or relative over that of establishing a guardianship with its legal requirements of filing an inventory and periodic accountings with the local probate court.
- It may express your choice of a guardian of your person in the event that circumstances require that the local probate court appoint one to protect your interests.
Q. What is a healthcare power of attorney?
A. A healthcare power of attorney is a legal instrument that:
- Appoints another person, typically your spouse, to make healthcare decisions for you when you are physically or mentally unable to make those decisions for yourself.
- Grants the person who holds the power of attorney to authorize the hospital and the doctors to withdraw life sustaining medical treatment and assistive devices if two physicians provide an opinion that, to a reasonable degree of medical certainty, you would die but for that treatment or assistance.
- Grants the person who holds the power of attorney the authority to:
- Obtain your medical records and to authorize the release of your medical records.
- To have you transferred from a hospital to a nursing home.
- To consent to medical treatment on your behalf as recommended by your physicians.
- To authorize your transfer from one medical care unit to another within a given hospital.
- To take such other actions as you may authorize, including the fulfillment of your desire to make an anatomical gift.
- Works “hand and glove” with the living will so that your wishes concerning your healthcare, advanced medical directives, and anatomical donations are carried out.
- Provides for another individual to be appointed to serve in the event that the person who you initially designated is unable or unwilling to serve or is deceased.
Probate Property vs. Non-Probate Property
Q. What is probate property?
A. Probate property is property that is distributed according to the terms of your will and under the supervision and subject to the order of the local probate court. Examples of probate property would be either real estate or bank or brokerage accounts just in your name. Probate property would also include items of tangible personal property such as household goods, tools, farm equipment, automobiles and the like.
Q. What is non-probate property?
A. Non-probate property is property the ownership of which is transferred at the moment of your death to another person either under the terms of a contract or by operation of law. The following are some examples of non-probate property:
- Joint and survivorship bank or brokerage accounts.
- Real estate owned as joint tenants with right of survivorship.
- Payable on death or transferable on death bank or brokerage accounts.
- Real estate that is transferable on death.
- Life insurance policies.
- 401(k) Retirement Accounts.
- Individual Retirement Accounts (IRAs).
- Motor vehicles that are titled in the joint names of husband and wife.
Q. What is a contract?
A. A contract is a legal document that commits to writing an agreement between two parties. Each party has the obligation to perform certain acts in order to fulfill the terms of the contract. Oftentimes, one party agrees to pay a sum of money as consideration for the performance of the other party’s obligations that arise under the contract.
Q. What does it mean to say that the ownership of non-probate property transfers at the moment of death under the terms of a contract?
A. When you own non-probate property that changes ownership at the moment of death under the terms of a contract, the contract that you have signed designates another person to be your beneficiary.
- The best example is a life insurance policy. The policy creates a contractual relationship between yourself and the life insurance carrier in which you agree to pay the life insurance premiums and the life insurance carrier agrees to pay the face amount of the policy to your beneficiary or beneficiaries in the event of your death. The law uses the term “third party beneficiary” to describe the legal status that your beneficiaries have in relationship to the contract. Because the life insurance proceeds are paid under the terms of a contract, they are not included in the inventory of the assets included in your estate that is filed with the local probate court because the policy proceeds are non-probate assets.
- Banks accounts that are owned as joint tenants with right of survivorship, such as those typically owned by spouses, are considered non-probate property. While both are alive, each of the joint tenants owns an interest in the account to the extent of his or her contribution to the account. At the moment of death, the surviving tenant becomes the sole owner of the account. As in the instance of life insurance policies, the decedent’s interest in the joint account is not included in the inventory of the probate estate because the bank account is a non-probate asset.
- Sometimes a parent may wish to designate a child or a grandparent may wish to designate a grandchild as the beneficiary of a “transferable on death” (“TOD”) or “payable on death” (“POD”) bank account. During the parent or grandparent’s lifetime, the beneficiary has no present ownership interest in the account. However, at the moment of death, the ownership of the account vests in the TOD or POD beneficiary. Again, the value of the account is not listed on the inventory of the estate.
- 401(k) Retirement Accounts, IRAs, and pension plans are also non-probate assets and are not listed on the inventory of your estate. However, each of such plans, whether because of the legal provisions of the specific plan or whether by virtue of the requirements of the Internal Revenue Code, may offer various payment options that your beneficiaries may elect or may impose certain payment amounts that your beneficiaries must receive.
- Ownership of real estate as joint tenants with right of survivorship or with a transferable on death beneficiary designation is permitted under Ohio law. When a person dies who owns real estate that is titled in this manner, the title for the entire interest in the real estate vests immediately upon death in either the surviving joint tenant or in the TOD beneficiary. However, for the beneficiary to have clear title to the real estate, an affidavit, signed by a person who has knowledge of the circumstances of the decedent’s death, which: (1) provides that person’s name and address; (2) describes the relationship between the beneficiary and the decedent; (3) lists the date and place of death of the decedent; and (4) has attached to it a certified copy of the decedent’s death certificate, must be filed with the local recorder’s office. Upon the filing of the affidavit and the death certificate, the legal title to the property is transferred in its entirety on the records of the county to the named beneficiary. Real estate that is non-probate is not listed on the inventory of the decedent’s estate nor is it subject to probate.
- Prior to the time that Ohio law was changed in the 1970's, most married couples that purchased real estate together had their deeds titled as tenants-in-common. If one spouse died, his or her share became a probate asset that was reportable on the inventory of the deceased spouse’s estate. Many of those couples who still own that real estate have never had the ownership of their property converted to joint tenants with right of survivorship. Thus, if either of them dies, his or her share will be included in their probate estate. In most cases it is advisable to make the conversion in the manner in which such real estate is titled.
- Motor vehicle titles that are owned in a non-probate form may be transferred to the beneficiary at the auto title section of the local clerk of court’s office upon the presentation of a death certificate.
The Probate Process Explained
Q. What does the probate process involve?
A. The decedent may die with or without a will.
- After the decedent’s death typically a relative, if there is no will, or the person named as executor, if there is a will, comes forward and retains the legal services of an attorney skilled in the probate process. The attorney prepares and files the following documents:
- An application for the fiduciary to be appointed to administer the estate.
- If there is a will, the will is filed.
- An application to admit the will to probate
- A listing of the decedent’s next-of-kin and beneficiaries named in the will, if one is filed.
- The fiduciary’s acceptance, which confirms the applicant’s willingness to serve and his or her acknowledgment of the responsibilities that the position entails.
- An application to appoint an appraiser to appraise some or all of the assets of the estate if the appraiser is not on the court’s list of approved appraisers.
- Notice of the appointment of the fiduciary and of the filing of the will is given to or waived by interested parties, including creditors, as is appropriate.
- If there is a will, the fiduciary will be called an executor. If there is no will, the fiduciary will be called an administrator. In both cases, letters of authority are issued by the court to the fiduciary that provide official documentation of the fiduciary’s authority to act on behalf of the estate.
- After the fiduciary is appointed, the fiduciary will then collect the assets of the estate. The attorney will check the real estate title records of the counties in which the decedent was believed to own real property. For bank and brokerage accounts of which the fiduciary has knowledge, the attorney will confirm the manner in which the accounts are titled. The fiduciary will locate items of tangible personal property such as motor vehicles, boats, tools and equipment, valuable collectibles, household goods and personal effects, and the like.
- The appraiser will then appraise the real and personal property of the estate. The attorney will prepare and file an inventory that lists the assets of the estate and their respective values, whether those values are provided by the appraiser or taken from account statements or whether those values can be readily determined from public sources. Notice of the filing of the inventory will be provided to interested parties.
- The fiduciary will then determine the liabilities of the estate. The fiduciary will examine each bill and, with the assistance of the attorney, make a determination as to whether the bill should be paid or whether the claim of the creditor should be denied. The law provides a procedure for the fiduciary to follow in order to deny a claim of a creditor. If the creditor does not act on the denial in a timely manner, the claim is waived. If the creditor does act in a timely manner, then the claim is contested and either settled between the parties or resolved by the court.
- In those instances where an estate may not have sufficient assets to pay all of its debts and claims, the law provides a schedule of priorities that the fiduciary must follow in the course of paying claims of creditors.
- In addition, in both solvent and insolvent estates, the fiduciary must consider the payment of certain statutory allowances and rights granted to the surviving spouse. Some of those allowances and rights include the following:
- If there is a will, the right of the surviving spouse to take against the will. This means that the surviving spouse may elect to take that share of the deceased spouse’s estate that he or she would have received if there had been no will.
- The right of the surviving spouse and the minor children, if any, to receive the family allowance, currently amounting to $40,000.
- The right of the surviving spouse to receive two automobiles from the estate.
- The right of the surviving spouse to live in the mansion house (the family residence) for one year following the death of the decedent rent free. However, if the mansion house must be sold to pay the debts of the estate, the surviving spouse is entitled to receive the equivalent of the rental value of the mansion house for the remainder of the one year period that he or she was required to vacate the property.
- The right of the surviving spouse to receive the mansion house as part of the share of the deceased spouse’s estate that he or she would receive if there were no will.
- The fiduciary will also assemble the decedent’s income tax records in order to see that all income tax returns that are required to be filed are prepared and filed with the state of Ohio and the Internal Revenue Service. The fiduciary will examine the returns for prior years to make sure that all income has been reported by the decedent. The attorney will prepare a Form 56 to be signed by the fiduciary in order to send a notice to IRS notifying it of the existence of the estate and will apply for a tax identification number for the estate.
- If the value of the estate is in excess of $338,333, then under Ohio law an Ohio Estate Tax Return must be filed. If the value of the estate is in excess of $5,000,000, a federal estate tax return must be filed. The amount of this exemption may change in the future and is applicable for calendar year 2009. Most estates fall under the state threshold and, certainly, the vast majority of estates fall under the federal one.
- A popular misconception is that non-probate property is not included in an estate for estate tax purposes. That is not true. The concepts of what is taxable for estate tax purposes and what is either probate or non-probate property are completely two different legal concepts. Just because an asset does not pass through the probate process, but instead passes by the terms of a contract or by the provisions of applicable law, does not make that asset exempt from estate taxation. For example, life insurance payable to a named beneficiary after your death is non-probate property not subject to the probate process and not subject to the Ohio estate tax if the estate is large enough for an Ohio return to be filed. However, that same insurance policy would be included in the estate for federal estate tax purposes.
- If the estate has income in excess of $600 per year, the fiduciary has an obligation to file income tax returns on behalf of the estate, as well. This may actually be beneficial to the beneficiaries of the estate because it may be possible and advantageous to pass the administrative costs of probating the estate through to the beneficiaries to take as an itemized deduction on their personal income tax returns for the last year that the estate is in existence.
- The state of Ohio and IRS will audit estate tax returns that are filed and issue their findings, which may indicate that the return is approved as filed, that additional tax and interest are due, or that a refund is due the estate for an overpayment of tax.
- The fiduciary may also send a form to the IRS requesting that it audit all income tax returns filed on behalf of the decedent both prior to and after his or her death. If the IRS does not audit the returns within the time required by law, then all of those returns are deemed to be accepted as filed.
- Once all of the obligations of the estate have been paid and the appropriate tax returns filed and accepted, the fiduciary may go about the task of distributing the assets of the estate and applying for court approval to pay him or her a commission for services rendered to the estate and for the payment of attorney fees and expenses.
- The attorney will prepare and file a final accounting with the court together with applications for the approval of a fiduciary commission and attorney fees and expenses. If the beneficiaries have approved and if the court approves, the court will issue an order authorizing the payment of a fiduciary commission and an attorney fee.
- The court will publish notice of the filing of the account and the fiduciary will be required to provide a copy of the account to all of the beneficiaries prior to the time of its filing. If no objection to the account is filed and the court has reviewed and approved the account, the court will issue an order approving the account and closing the estate.
- Once the account is approved by the court, the attorney prepares a Form 56 to be signed by the fiduciary that notifies the IRS that the estate has been terminated.
Dying Without A Will
Q. Who gets my property if I die without a will?
A. If you die without a will your probate estate passes according to the provisions of the Statute of Descent and Distribution. This law contemplates 11 different factual scenarios that could arise in order to allow for a determination as to who among your next-of-kin will inherit from your estate. If none of the persons listed in the first 10 scenarios survive you, then your assets pass to the state of Ohio. The law gives preference to your surviving spouse, if you have one, under all potential circumstances as it does where there are only natural born children surviving. The law also provides for the division of property when there is a surviving spouse and surviving children from a prior marriage or where there is a surviving spouse and children from both a prior marriage and a present marriage. The law also provides for a division of the property under several different situations in which there is neither a surviving spouse nor any surviving children in order that more remotely related relatives may inherit from the estate.
Q. What if I have a small estate. Is it necessary for the procedures outlined above to be followed?
A. There is a procedure for estates to be relieved from administration. This is a more simplified legal procedure and applies to smaller estates. Generally, these simplified procedures will apply to estates that:
- Have a value of less than $35,000.
- Have a value of $100,000 or less if the decedent had a will that distributes the entire estate to the surviving spouse or the decedent died without a will and the surviving spouse is entitled to receive the entire estate under the Statute of Descent and Distribution.
- An even simpler procedure called a “summary release from administration” may be used in limited circumstances where the value of the estate is below certain thresholds.
Myths About The Probate Process And Non-Probate Property
Q. I have heard that if my property goes through probate the state of Ohio gets it all. Is that true?
A. Surprisingly and unfortunately many members of the public believe that this will occur. The answer is virtually never. Only if you had a will that left no beneficiaries or their lineal descendants surviving or if you died without a will with no next-of-kin surviving as set forth in the Statute of Descent and Distribution, would the state of Ohio ever get anything. The best way to prevent this problem from ever occurring is to have a will that provides for the distribution of your estate to a charity in the event that all of your named beneficiaries and their lineal descendants predecease you.
Q. I have heard that it is best to convert the ownership of all of my property to non-probate status. Should I do that?
A. The answer to this question depends very much upon your individual circumstances. People oftentimes misunderstand the differences between probate and non-probate property and, rather than consult with an attorney who understands the legal significance of the two types of property, they will depend upon their own instincts, or upon the advice of bank officials or relatives or allow themselves to be pressured by others who are not schooled in the law. Doing so can have disastrous consequences for their estate plan and for harmonious relationships within the family. It is best to seek legal advice before making any changes.
Q. What are trusts?
A. All trusts share the following characteristics:
- A settlor, the person who places his or her property into a trust.
- A corpus, or the property that is placed in trust for the benefit of another, which is also known as the principal of the trust.
- A beneficiary or beneficiaries for whose benefit the trust corpus is managed and preserved and to whom, under appropriate conditions, income earned on the principal and/or principal may be paid.
- A trustee who may be an individual or succession of individuals or a corporate trustee that is responsible for managing the corpus of the trust for the benefit of the beneficiary or beneficiaries.
- A trust instrument, which is a legal document that provides for the management and distribution of the property placed in trust and appoints the trustee and designates who the beneficiaries will be.
Q. Are there different kinds of trusts?
A. There are many kinds of trusts. The area of trust law is very complex and requires consultation with an attorney in order to enable you to gauge whether a trust is appropriate for your individual circumstances. You do not have to be rich to have a trust, but trusts are not appropriate for everyone. In fact, for many individuals, using estate planning techniques other than creating trusts may actually be more appropriate under their individual circumstances. Consultation with an attorney in this area of law is the key to a successful outcome.
However, if you are married and you wish to create a trust during your lifetime for the benefit of yourself and your family, some of the characteristics of such a trust that may be appropriate for you under your individual circumstances might include the following:
- The trust instrument may make provisions for your healthcare and maintenance during your lifetime and that of your spouse and will provide for the distribution of your assets after your death to your beneficiaries.
- In the trust instrument you will appoint either an individual or succession of individuals, oftentimes including your spouse, or a bank to serve as trustee. Banks typically charge a prescribed fee for services rendered.
- If your estate may be subject to either Ohio or federal estate taxes, the trust instrument may contain any number of provisions to minimize estate tax liability, including provisions to take advantage of the marital deduction, the Ohio exemption of $338,333, or the federal unified credit of $5,000,000.00.
- Property placed in trust as a result of a trust created during your lifetime is not subject to the normal probate process and may be distributed by the trustee directly to the beneficiaries named in your trust instrument. However, there may be instances under Ohio’s new Trust Code in which instruction and direction from the local probate court may become necessary.
Q. What are some of the other kinds of trusts that can be created?
A. Here is a list of just a few additional examples that is not all inclusive:
- Testamentary trusts that are created by the terms of your will and do not come into existence until you die. These trusts remain subject to the supervision of the local probate court after your estate is terminated and until, by the terms of the trust provisions of your will, the trust ceases to exist.
- Irrevocable insurance trusts into which the ownership of insurance policies are placed in order to benefit your beneficiaries.
- Special needs trusts, which are designed to provide for the supplemental needs of a disabled child who has been placed on Medicaid.
Q: I have read many advertisements from various companies that suggest that I should have a trust in order to avoid probate and save taxes? I have also seen preprinted forms for creating trusts in my grocery store or office supply store. Should I consider one?
A: Unfortunately, there are many companies that advertise and sell prepackaged estate plans. They attempt to sell the concept of having a trust as a means of avoiding probate and saving taxes in order to convince the consumer that he or she should have a trust. Typically, large fees are charged for what are essentially computer generated forms of the template variety that may not be appropriate for your individual circumstances or consistent with Ohio law.
These companies, in most instances, have, in fact, been engaging in the unauthorized practice of law. Public records across the United States disclose that many of these companies have been pursued by the attorneys general or the bar associations of numerous states for their illegal practices and many have been forced out of business. However, consumers have often been harmed in the process, especially those who did not need to have a trust established in the first place. For that reason, anytime you are contemplating matters concerning your estate plan you should consult with an attorney skilled in this area of law.