Often times when I meet with clients one of their primary goals of implementing an estate plan is to avoid the “death tax.” I will share with you the same two pieces of good news I share with those clients. First, we do not have a “death tax” in the United States. It is true that the federal government and New York State both impose estate taxes, but those taxes are imposed on the value of your estate, and are not a tax you have to pay for dying. The second piece of good news is that the estate tax only affects a very small number of estates. For 2020 the federal estate tax exemption is $11.58 million, meaning if your estate is worth less than $11.58 million your estate would not owe any estate tax. In New York, for 2020 the estate tax threshold is $5,850,000, again, meaning if your estate is under $5,850,000, your estate owes no estate tax. Additionally, both the federal government and New York State allow for unlimited transfers to a surviving spouse. So, the estate tax is only imposed on assets passing to someone other than a surviving spouse.
Although many people are worried about avoiding the “death tax”, few people are as concerned about avoiding something that can be quite costly, and likely will affect their estate, probate.
What is Probate?
Upon your death, your property is classified one of two ways. Property is either, “probate property” or “non-probate property.” The classification of your property as either probate property or non-probate property determines how the property passes.
Non-probate property is all property that has a beneficiary designation. Examples of non-probate property are IRAs, brokerage accounts, life insurance policies, and some real estate depending on the form of ownership. Non-probate property passes to the designated beneficiary in the case of an IRA, life insurance policy, or similar asset; or to the surviving joint tenant, in the case of real estate owned as either joint tenants with the right of survivorship[1] or tenants by the entirety[2]. Non-probate property passes outside the purview of the Surrogate’s Court, directly to the designated beneficiary.
Probate property is just the opposite of non-probate property, in that probate property is all property that does not have a designated beneficiary, examples of probate property are business assets, some real estate depending on the form of ownership,[3] cars, jewelry, cash, bank accounts, and the like. Basically, any property you own upon your passing where you have not designated a beneficiary will be considered probate property. Probate property passes via a probate of your Will[4]. In both a proceeding to probate your Will and an administration proceeding, the Surrogate’s Court for the county in which you lived prior to your passing will oversee the settling of your estate.
Why do I Want to Avoid Probate?
The top two reasons why you should want to avoid probate are that probate can be costly, even for modest estates, and probate can be time consuming, even for “simple” estates.
Probate costs include: 1. Surrogate’s Court filing fees, which in New York range from $45 for estates under $10,000 to $1,250 for estates over $500,000; 2. Legal fees, your executor named in your Will is likely not an experienced probate attorney, therefore, they will likely need to hire an attorney to help them probate your will and administer your estate; 3. Accounting fees, your executor may need to hire an accountant to file fiduciary tax returns for your estate; 4. Other court costs, the Surrogate’s Court has full discretion to impose conditions on your estate prior to admitting your Will to probate. These conditions can include, appointing a guardian ad litem to represent an incapacitated heir or missing heir. A guardian ad litem is another attorney, that will bill your estate for their services. The Surrogate’s Court could mandate that your estate publish a notice of the probate in a newspaper prior to admitting your Will to probate. This would be done if an heir could not be located. Publication costs can be expensive in even the smallest of local town papers.
Probate can be a slow process. The first step in a probate proceeding is getting your Will admitted to probate and having your nominated executor appointed. Just because you name someone in your Will as your executor, does not mean that they are automatically your executor from your date of death. The nominated executor must first petition the Surrogate’s Court to be appointed as your executor. Before the Surrogate’s Court will appoint the nominated executor as executor and admit your Will to probate, your nominated executor will need to obtain waivers of the notice of probate from all of your heirs, meaning all of the people who would inherit your estate if you did not have a Will or your executor must have the Surrogate’s Court issue a citation for those people to come to court on a certain date and state their objection to you as executor and/or the probate of your Will. This process can take a long time, because heirs do not always quickly return the waivers, and if they cannot be located, or if they refuse to sign the waiver, you will need to wait for your day in court. Even prior to the coronavirus pandemic, the time between the decedent’s death and the nominated executor actually being appointed as executor could take a few months. Now, in the midst of a global pandemic, of which New York was the U.S. epicenter for a long period of time, the time it takes to be appointed as executor has, understandably, increased.
Then, once your executor is finally appointed, they must collect your assets, pay creditor claims, and distribute your estate to your beneficiaries. As easy as this sounds, this can take a long time. First, your executor can be held personally liable by creditors if the executor makes a distribution to beneficiaries of estate assets within seven months of being appointed as executor, if the distribution causes the executor to not have enough assets to satisfy all creditor claims. Therefore, the best practice is for the executor to wait at least seven months from their appointment before making distributions to beneficiaries. Second, your executor will need to collect all of your assets, which includes figuring out what you actually owned on your date of death.
How do I Avoid Probate?
Probate can be avoided by creating a revocable trust and funding that trust during your lifetime with all of your probate property. By creating a revocable trust and transferring any probate property you own to that trust, you can avoid the need to probate your Will. Upon your passing the property held by the trust will pass by the terms of the trust, outside of the probate process. Basically, your trustee would act as your executor and distribute all of the trust assets to your beneficiaries. Although the trustee is not under the purview of the Surrogate’s Court, the trustee still has a fiduciary duty to manage the trust assets properly, to account to the beneficiaries, and to distribute the assets as you have directed in the trust.
The trust, as the name suggests, is revocable by you at any time. You maintain complete effective ownership of the property in the trust and have unfettered use of the property. If you place a house into the trust, you will maintain any property tax benefits you already have, such as veterans discounts and the STAR exemption. You can sell the house owned by the trust and purchase a new property within the trust. You can change the terms and provisions of the trust as often as you want.
One important caveat is that a revocable trust only works to avoid probate if you transfer all of your assets into the trust prior to your passing. If you miss even one probate asset, your Will likely will need to be probated to transfer that one asset not held by the trust. Therefore, it is also prudent to name your revocable trust as a beneficiary or contingent beneficiary of any non-probate assets as a fail-safe. In the event your named beneficiary predeceases you, you would not want a non-probate asset to inadvertently become a probate asset.
Glutton for Punishment: Ancillary Probate
If probate is bad, then two probates must be worse right? If you own real property in multiple states, your estate will likely need to be probated in both states. An ancillary probate is a probate in addition to the primary probate to address distribution of an asset in another state, such as a vacation home. Ancillary probate is necessary because of the constitutional doctrine of sovereignty between states, meaning no court in one state may determine the ownership of real estate inside another state. An ancillary probate will need to be done in all states in which you own property. So, if you are a New York resident, own a ski house in Vermont and a condo in Florida, your estate will be probated in New York and ancillary probates will be necessary in Vermont and Florida to transfer your ski house and condo. Ancillary probate can be, and should be, avoided. An ancillary probate adds time, expense, and unnecessary complication to your estate, and since an ancillary probate is typically for only one asset, it is very easy to avoid through transferring the real property you own in another state into a revocable trust. So, even if you feel your assets are too complicated or complex, or you just don’t want to go through the time and expense of retitling your assets into a revocable trust to avoid probate, you should at a minimum transfer any out of state property into a revocable trust to avoid any ancillary probates.
Probate is time consuming, costly, and avoidable with proper planning. The estate planning attorneys at Twomey, Latham, Shea, Kelley, Dubin & Quartararo are available at your convenience to answer your questions, review your current estate plan to ensure it continues to best reflect your wishes or to discuss the implementation of an estate plan that avoids probate.
[1] Joint Tenants with the Right of Survivorship is a way to own real property with another person or people, whereas the surviving owner or owners receive your share of the property upon your passing, rather than your share passing to your heirs.
[2] Tenants by the Entirety is a special ownership form for married couples only, that in addition to providing the same survivorship provisions as Joint Tenants with the Right of Survivorship, also gives the owners additional benefits beyond the scope of this article.
[3] If you are the sole owner of a piece of real property, or own the property as Tenants in Common with another person, then the property must pass through probate to get to your heirs.
[4] If you do not have a Will, upon your passing your estate will go through an administration proceeding and your assets will be distributed following the default distribution rules under New York Estates, Powers and Trusts Law §4-1.1.
