PLANNING GLOSSARY OF TERMS
PROBATE is the court-driven legal process of settling someone’s estate after they die. It cannot be completely avoided, but the confusion, duration, and hassle can be significantly mitigated by designing a trust-based estate plan.
WHAT’S THE PROBATE PROCESS?
Locate the Original Will: Secure the deceased’s original will, if available. DO NOT OPEN THE WILL IF IT IS SEALED.
File the Will and Death Certificate: Submit these documents to the Circuit Court in the county where the deceased resided at the time of their death.
Qualify the Executor or Administrator: Formally qualify the person named in the Will as the deceased’s Personal Representative (AKA “Executor”) at your county’s Probate Court (usually by the Court Clerk) or receive a court-appointed Administrator.
THEN, THE PERSONAL REPRESENTATIVE MUST:
Inventory the Estate: File an inventory of the estate’s assets with the Commissioner of Accounts within four months.
Send Notice to Heirs and Creditors: Publish a legal notice in a local newspaper and directly notify known creditors and heirs.
Pay Debts and Claims: Settle all legitimate debts, claims, and final expenses of the estate.
File Estate Tax Returns, if Applicable: Prepare and submit any required state and federal estate tax returns.
File an Accounting or Waiver: Complete a detailed financial accounting or obtain a waiver if all heirs agree.
Distribute the Assets: Distribute the remaining estate assets according to the Will or state law.
Close the Estate: File a final report with the court and request discharge from your duties as Personal Representative or Administrator.
HOW MUCH DOES PROBATE COST?
In Virginia, probate taxes are 10 cents for every $100 of your TAXABLE ESTATE.
Your county likely adds an additional taxation of 3.33 cents for every $100 of your TAXABLE ESTATE.
Probate taxes generally equate to $1,333 for every $100,000 you own and $13,330 for every $1,000,000 you own (and, remember, your TAXABLE ESTATE includes the value of your home).
The cost of probate taxes and fees do not include municipal, court, and attorney’s fees, which vary by location and your choice of a probate attorney.
The full cost of probate is typically 3% to 5% of your TAXABLE ESTATE.
The TAXABLE ESTATE is the total value of a person’s property that is subject to taxation at the time of their death. This includes investment holdings such as cash, stocks, and bonds, as well as real estate and property such as cars, buildings, and collectibles. Expenses like funeral expenses paid out of the estate, debts owed by the deceased at the time of death, and the value of the property passed on to the deceased’s spouse are deducted from the estate’s value before taxation. Deductible debts may include credit card debt, lines of credit, mortgages, and personal loans. Administrative costs for settling an estate also count as deductions. The taxes imposed on the estate are then paid out of the estate itself. Federal estate taxes are ONLY due on the amount of your estate that exceeds the current federal exemption threshold, which is currently $11.7 million (but is subject to change at the direction of the presidential administration in power at the time of your death). Virginia DOES NOT have a state estate tax.
A last WILL and testament is a legal document that specifies how your assets will be passed to your heirs after your death. It may also legally nominate permanent guardians for your minor children. The will must also name a personal representative (also known as an “Executor”) who will be responsible for processing your will through probate.
Wills can create testamentary trusts by directing that a trust be formed out of the will. This type of trust does not form until death and is irrevocable upon formation.
WHAT HAPPENS IF I DIE WITHOUT A WILL?
If you don’t have a valid will when you die, the circuit court will appoint a personal representative to oversee your estate and your property will be distributed according to the state of Virginia’s intestacy laws. None of your property is protected from creditors. Whatever is left of your property after creditors and court fees are paid will pass to your surviving spouse unless you have children from a previous relationship, in which case 1/3 of your property will pass to your spouse, and the other 2/3 will be divided among your children. If you are not married at the time of your death, your estate will be distributed among your children. If you have no children, then it will go to other relatives, starting with your parents and moving on to your siblings, nieces and nephews, grandparents, and so on.
If you are a widow with children and you die without a will, you will not have legally nominated anyone to be the guardian(s) of your children. Instead, the circuit court will appoint a guardian for them, which may place them with the authorities of children’s services.
A TESTAMENTARY TRUST is a trust that is created by a will at the time of someone’s death. It does not take effect until death and is irrevocable upon formation. A TESTAMENTARY TRUST still requires the court process of PROBATE.
A POUR-OVER WILL is used when people make revocable living trusts to avoid probate. The POUR-OVER WILL directs that if any property passes through the will at the person’s death, it should be transferred to (“poured into”) the person’s trust and then distributed to the beneficiaries of that trust. This keeps the property from having to go through the court process of probate.
TRUSTS are legal entities we can use to hold property. Keeping your property in a trust is generally safer than leaving it in the hands of a family member; even a loved one with the best intentions could face a lawsuit, divorce, or other misfortune that would put that property at risk to creditors.
TRUSTS can be used to determine how a person’s money should be managed and distributed while that person is alive or passed on to beneficiaries after their death. In this way, it can dictate the terms of a beneficiary’s inheritance much like a will, but without the hassle of probate and with greater privacy, financial protection, and control.
TRUSTS can also be used to provide for a beneficiary who is underage or has a mental disability that may impair their ability to manage finances. Once the beneficiary is deemed capable of managing their assets, they will then gain access to the trust property in part (controlled by a trustee) or in full (given outright).
TRUSTS are either REVOCABLE LIVING TRUSTS or IRREVOCABLE TRUSTS.
If a WILL is like a bicycle, then a REVOCABLE LIVING TRUST is an automobile. While a bicycle can get you from point A to point B, you probably don’t want to use it when it’s raining, cold outside, or when traveling a lengthy distance. In other words, a bicycle has limits when it comes to (1) protection, (2) distance, and (3) versatility. Sometimes it’s best to take the car, and if you’re car shopping, they come in all shapes, sizes, and capabilities.
Much like a vehicle, a REVOCABLE LIVING TRUST can be created to serve different purposes. A small, compact car is enough for some people, while others require a large van or truck to accommodate their needs. A revocable living trust is much more versatile than a WILL, and similar to a vehicle, it can be tailored to meet your goals, wants, and needs.
IRREVOCABLE TRUSTS are, as the name suggests, irrevocable (although some can be revoked through certain legal processes). Irrevocable trusts are powerful tools when it comes to avoiding estate taxes, protecting wealth, preserving your retirement and life insurance funds, and creating a lasting legacy. Some irrevocable trusts can also help preserve (and potentially pay the maintenance costs of) the family home. Other irrevocable trusts can help you avoid creditors and potentially divorcing spouses.
“WHY DO I NEED A TRUST? I’M NOT RICH.”
- To avoid probate
- For privacy
- To protect presently owned or inherited property from creditors
- To provide for and protect your spouse from unnecessary taxes and creditors
- To provide for and protect underaged beneficiaries
- To protect and preserve the inheritance of adult beneficiaries who are financially immature or compromised by substance abuse or gambling addiction
- To protect your children’s inheritance in a blended family or remarriage scenario
- To support a child or adult with special needs
- To plan for and support your pet’s immediate and long-term care if you become incapacitated/after you’re gone
- To plan for and support your horse’s immediate and long-term care if you become incapacitated/after you’re gone
- For tax planning
- For Medicaid planning
- For retirement planning
- For life insurance planning
- For business succession planning
WHAT TYPES OF TRUSTS SHOULD I CONSIDER?
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An INDIVIDUAL TRUST is typical for unmarried people (and often best for married people, too, for various reasons) to avoid probate and protect your property from taxes and creditors.
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A JOINT is typical of first-marriage couples as a way to consolidate property to pass onto their children, avoid probate, and protect their property from creditors and taxes. A separate trust might be better for remarried couples for various reasons.
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A JOINT POUR-OVER TRUST is a great option for blended families and married individuals who have brought their own separate property into a marriage and would like the control to make sure that it stays separate property. This option allows you to come together in marriage to form a Joint Trust for your joint property while maintaining a Separate Trust for your separate property at the same time.
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A TRUST RESTATEMENT is the rewriting of an existing trust where such significant changes are made that it basically becomes a new trust.
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A TRUST AMENDMENT is a new document that makes relatively small changes to your existing trust.
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After your death, a MARITAL TRUST can be used to take care of your spouse for the rest of their life.
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A FAMILY CREDIT SHELTER TRUST is an estate planning strategy married couples use to keep property out of the surviving spouse’s “taxable estate.” At the time of the surviving spouse’s death, the property held in trust for them now transfers to other named beneficiaries and is not counted as property owned by the surviving spouse at the time of their death—it bypasses their estate. This type of trust is also known as a “bypass” trust.
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A MARITAL QTIP TRUST is an estate planning strategy married couples use to keep property out of the deceased spouse’s “taxable estate” by taking advantage of the federal “unlimited marital deduction.” At the time of the first spouse’s death, the property is held in trust for their surviving spouse and will be counted in the surviving spouse’s “taxable estate” at the time of their death, but it will also transfer to other named beneficiaries chosen by the first spouse to die. This is especially advantageous to blended families who want to ensure their surviving spouse and their separate children are both taken care of.
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A QUALIFIED DOMESTIC TRUST (QDOT) is a marital trust for foreign spouses.
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A GENERATION SKIPPING TRUST is a trust often used to transfer property to grandchildren but can be used to transfer property to anyone more than one generation younger than you.
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An INCENTIVE TRUST is a trust that requires beneficiaries to achieve certain goals set by you before your trust property will be distributed to them. Examples of this could be the beneficiary must graduate college, achieve a certain professional level, or that they could only use the trust property to buy a house or start a business.
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A SPENDTHRIFT TRUST is a good idea for transferring your property to beneficiaries that are not capable of managing their own money, may have problems with addiction, or any other reason they might be susceptible to wasting the property you have left them. A Spendthrift Trust can provide options for limiting their access to and control of assets left to them.
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A CHARITABLE REMAINDER TRUST is an irrevocable trust designed to reduce your “taxable estate” by dispersing income to the named beneficiaries of the trust for a specified period of time and then, when that time is up, donating what’s left to a designated charity.
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A CHARITABLE LEAD TRUST is an irrevocable trust designed to reduce your “taxable estate” by dispersing income to a named charity for a specified period of time and then, when that time is up, distributing what is left to your designated beneficiaries.
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An IRREVOCABLE LIFE INSURANCE TRUST is an irrevocable trust designed to hold a life insurance policy and protect it from creditors and taxes. It is another powerful tool in reducing your “taxable estate” and the insurance proceeds distributed to the beneficiary also will not be taxed.
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A STAND-ALONE RETIREMENT TRUST is a trust designed to receive your remaining retirement funds and hold them in trust for your chosen beneficiaries. This trust allows you to design the resulting trust for your beneficiaries however you choose rather than distribute their share of your retirement funds outright. This is particularly beneficial for underage beneficiaries or those who are not capable of managing their own money.
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A SPOUSAL LIFETIME ACCESS TRUST is an irrevocable trust executed during your lifetime to remove property from your “taxable estate” and provide it to your spouse to use during their lifetime (your spouse will not pay an “estate tax” on these funds at the time of their death either). This type of trust can also indirectly benefit you while you are alive because your spouse will usually be the trustee and will likely use the property for the benefit of you both.
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A FAMILY DYNASTY TRUST is an irrevocable trust created during your lifetime or formed upon your death for the long-term benefit of your family members for as many generations as your trust property can sustain. If set up and funded during your life, the property transferred to this type of trust is removed from your “taxable estate” and will also avoid the Generation Skipping Transfer Tax.
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A QUALIFIED PERSONAL RESIDENCE TRUST places your home in trust for a period of time (while you live in it) before passing it to your named beneficiaries. This also removes the home from your “taxable estate.”
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A HORSE TRUST is essential for responsible horse ownership. It is a separate trust designed to transfer care and/or ownership of your horse(s) to a trusted individual (and may provide financial support for your horse(s)) if you become incapacitated and after your death.
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A PET TRUST is essential for responsible pet ownership. It is a separate trust designed to transfer care and/or ownership of your pet(s) to a trusted individual (and may provide financial support for your pet(s)) if you become incapacitated and after your death.
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A GUN TRUST is essential for responsible gun owners with NFA-regulated firearms and is a great idea for owners of non-NFA regulated firearms whose Executor and/or beneficiaries won’t likely know how to handle their transfer. A gun trust transfers your firearms directly to your beneficiaries without your Executor accidentally violating state and federal gun laws.
Your trust can only protect and control the property you put into it. Therefore, the most important aspect of owning a trust is ensuring that your property is titled in the name of the trust and therefore “in” the trust. TRUST FUNDING & ASSET ALIGNMENT is the process of transferring ownership of your property from you to your trust. To do this, you physically change the titles of your property and accounts from your name(s) to the name of your trust. For example, putting your home “in” your trust requires retitling the deed to the name of your trust. For property and accounts that require a beneficiary designation (life insurance, transfer on death accounts, etc.), your trust would be designated as the primary or secondary beneficiary.
Once ownership is transferred, the trustee of the trust will have control of the property. Depending on your design goals, you can be the trustee of most types of trusts while you are still living.
A TRUSTEE is a “fiduciary” who is responsible for the administration, management, and distribution of the property held in a trust. A trustee can be an individual or an entity (like a corporation or a trust company). Trustees have many obligations and duties defined by law and the trust document itself.
A FIDUCIARY is a person, company, or organization that acts on behalf of another person or persons. They must always put their clients’ interests ahead of their own and preserve good faith and trust with those they serve. Being a fiduciary requires being bound both legally and ethically to act in the best interests others.
FIDUCIARY DUTIES OF A TRUSTEE INCLUDE:
- Loyalty to beneficiaries
- Impartiality between beneficiaries
- Confidentiality
- Avoidance of conflicts of interest
- Proper handling of trust property
- Prudent investment of trust property
- Accounting of trust property
- Informing and reporting to beneficiaries regarding the status of trust property
- Paying taxes
- Defending against claims by third parties
