Losing Control with A WILL

Contrary to what you've probably heard (and been led to believe), a will may not be the best plan for you and your family primarily because a will does not avoid probate when you die. All wills including those with trusts in them-must be admitted to the probate court before they can go into effect. Also, a will provides no protection if you become physically or mentally incapacitated. And it probably doesn't give you the control you think it does if you have minor children or grandchildren.

Let's look at each of these situations and see what happens when you have a will.

What is probate and why do we have to go through it?
Probate is the legal process through which the court makes sure that, when you die, your will is legally valid, your debts are paid and your assets are distributed according to the instructions in your will. Probate is the only legal way to take your name off the title of an asset after you have died and put a new owner's name on.

Not everything you own is automatically subject to probate. Jointly owned assets that transfer to the surviving owner and assets with a valid beneficiary designation (like an insurance policy) generally do not go through probate. But there can be some significant problems with both. You'll want to finish reading this booklet before you rely on them.

Probate does not happen automatically. Someone, usually a relative or your executor, must petition the court for probate proceedings to begin-for example, when checks need to be written, or when an asset needs to be sold or transferred to a new owner.

What's bad about probate?
It can be expensive. A survey by AARP (American Association for Retired Persons) found that probate is big business. In fact, AARP estimates that probate costs could top $2 billion a year $1.5 billion for attorneys, and hundreds of millions more for bonding companies, appraisers and probate courts.

Assets titled in just your name must go through probate before they can be distributed to your heirs.

Probate costs must be paid from your estate before your assets can be fully distributed to your heirs. They vary widely from state to state, but usually are estimated at 3-8% of an estate's gross value.

Some states actually calculate probate costs on the total gross value of an estate-before debts are paid. So if your home is valued at $100,000 when you die, probate costs would be calculated on the full $100,000-even if the mortgage is $95,000.

Who gets most of this money? The biggest expense is legal and executor fees. Some states have regulated (statutory) fee schedules for attorneys and executors-so you can look up a chart and determine what it should cost to probate an estate.

Other states use what is called a "reasonable" fee system. The problem with "reasonable" fees is there is no way for you to know what the cost will be until the entire process has been completed.

Why should I care about probate fees in other states? If you own assets (especially real estate, like a vacation home) in other states, your family will probably face multiple probates, each one according to the probate laws and costs of that state. They will also probably need to hire an attorney in each state.

But I don't own that much. Why should I be concerned about probate? Generally, probate costs take a larger percentage from smaller estates (which can least afford it) than from larger ones. If someone tells you probate is not expensive, ask for a written estimate of what it would cost to probate your estate if you and your spouse died today.

The following chart shows fees in California, Florida and New York for just the attorney and executor. (Probate fees in your state may be higher or lower.)

 Estate Value Combined Fees For Attorney and Executor* 
   California  Florida  New York
 $100,000  $8,000  $6,000  $10,000
 $200,000  $14,000  $12,000  $18,000
 $500,000 $26,000   $30,000  $38,000
$1,000,000   $46,000  $60,000  $68,000
$2,000,000   $66,000  $110,000  $118,000
$5,000,000   $126,000  $250,000  $268,000

*Statutory fees for California and Florida. New York fees based on attorney's "reasonable" fees being equal to statutory executor fees. Filing, appraisal, and publication fees, bonds and legal fees for "extraordinary" services (will contest, tax advice, tax returns, and real estate transactions, for example) are in addition.

Regardless of how fees are initially calculated, a judge can (and often will) allow higher fees, depending on the time and/or circumstances involved. Generally speaking, the more time the attorney and executor have to spend probating an estate, the more it will cost.

Probate takes time - usually nine months to two years. During part of this time, your assets will probably be frozen so an accurate inventory can be taken, and nothing can be distributed or sold without the court's and/or executor's approval. If your family needs money to live on, they must request a living allowance, which may or may not be approved. Also, assets could drop in value if the court and/or executor cannot react quickly enough to sell them - for example, if your family wanted to sell stocks in a declining market.

Your family has no privacy. Probate is a public process. Any "interested party" can find out details about your estate including who the heirs are, what they will receive, their addresses, etc. This information is often used for leads by unscrupulous solicitors. If your estate goes through probate, some may call on your family.

You may have intentionally left one or more heirs out of your will. But the probate process invites them to contest, and the court-not you or your family-will decide what (if anything) they will receive. If you are a business owner, the lack of privacy can be devastating to your business. Competitors can get valuable "inside information" about your financial records and personal family affairs courtesy of the probate system.

You and your family lose control. The probate process-not you or your family-has control over how your will is interpreted, how much probate will cost, how long it will take, and what information is made public. Families are used to handling their affairs privately and independently. Suddenly losing that control to a legal process and having to pay for it can be frustrating.

Note: Just as probate fees vary from state to state, probate procedures also vary. Most states allow very small estates to bypass probate. But few qualify because the limits are typically very low in some states, as low as $15,000 in total estate value. A few states have special processes for surviving spouses. Also, some states now allow informal probate; however, AARP's survey concluded that it frequently doesn't save the time and money it was intended to save.

WILLS - AND INCAPACITY

Becoming incapacitated and losing control is a valid concern of millions of older Americans-and those who will care for them. With advancements in health care, people are living longer. But this also means that more of us will reach the point where we can no longer take care of ourselves. Few people plan for this possibility-or they mistakenly think a will is all they need. As a result, many people end up under control of the courts before they die.

Why would the court get involved if I have a will?
Think about this for a few moments. If you can't handle your affairs because of mental or physical incapacity-for example, if you have a stroke or a heart attack, develop Alzheimer's Disease, or are injured in an accident-who will conduct business for you?

Sooner or later, your signature will probably be required for something-to withdraw savings, sell/refinance assets to pay your expenses, etc. Of course, you may still be able to sign your name but, in the opinion of others, are unable to make sound decisions.

Some people think the person they have named as executor in their will can automatically step in and take care of their affairs. But your will can't go into effect until you die. So it can't help. Your family or friends can't just take over and sign your name for you. Someone (a relative or friend) will have to petition the court to declare you incompetent and appoint someone to act for you whether or not you have a will.

What happens when the court gets involved?
A public hearing will be held to determine your competency. If the court agrees that you are unable to handle your affairs and finds you "incompetent," you will lose most of your rights as a citizen. And you and your family will lose control, because once the court gets involved, it usually stays involved-to "protect" your interests-until you recover or die.

In some states, this court-controlled process is called a "conservatorship." In others, it's called a "guardianship." Some people refer to it as a "living probate" because it's similar to probate at death-but you're still alive.

This process can be embarrassing-because records and proceedings are open to the public. It can be expensive-because of court costs, examinations and testimony by a qualified physician(s), attorney fees, auditor fees, and bonds. It can be time consuming because the person the court appoints to act for you must keep detailed records and submit all expenses to the court for approval. And you'll have no say in who this "court appointee" is. The court could appoint your spouse, but it could also appoint a relative you dislike, or even a "professional guardian/conservator" who is a stranger to you.

If you recover, you must prove to the court that you are now competent and can handle your own affairs (which may be difficult, since the court has declared you incompetent). And this process does not replace probate at death. So when you die, your family will still have to go through probate to have your will enforced.

Wouldn't a power of attorney prevent court control of assets at incapacity?
Maybe-but then, maybe not. A power of attorney is a legal document that gives someone authority to conduct business for you if you are unable to do so. However, all powers of attorney end at death, so they can't be used to avoid probate (a surprise to some people). Many also end at incapacity. A durable power of attorney does remain valid through incapacity-but it may not work then, either.

That's because some financial institutions won't accept any power of attorney. Others will only accept one if it is on their own form and they know this is what you want. The reason is they have no way of knowing if you have changed your mind. And they don't want to be held liable for giving your assets to someone you didn't want to have them.

If the power of attorney does work, it may work too well. Giving someone power of attorney is like giving that person a blank check to do whatever he/she wants with your assets. You have no control. Even if you leave instructions, you have no guarantee they will be followed. You could even recover to find you own nothing in your own name.

A power of attorney has benefits when used under proper circumstances, but relying on one to prevent the court from taking control of assets at incapacity is risky at best.

WILLS - AND YOUR MINOR CHILDREN OR GRANDCHILDREN
Most parents think if they name a guardian for their minor children in their wills and something happens to them, that person will automatically be able to use the inheritance to take care of the children. But that's not what happens.

Instead, when the will is probated, the court will set up a guardianship for the child and will appoint a guardian to raise the child. Usually the court will appoint the person named in the parent's will, but it could appoint someone else.

However, the court, not the guardian, will control the inheritance until the child reaches legal age (18 or 21). At that time, the child automatically receives the entire inheritance. Most parents prefer that their children inherit at a later age but, with a simple will, you have no choice.

Special Note to Divorced or Separated Parents: Courts typically prefer to see a natural parent as guardian, whenever possible so, even if you name someone else, the court will probably appoint your "ex" as guardian. A disinterested or irresponsible parent may suddenly become very interested in the child when he/she learns that guardians are entitled to be paid for their services. Also, many courts simply do not have the resources to monitor all guardianships carefully. So it's possible your "ex" may have unsupervised access to the child's inheritance. (Also, divorced or separated parents often unintentionally disinherit their children; see "Losing Control with Joint Ownership" on the next page.)

Wouldn't a children's trust in a will prevent court control of the assets?
It would prevent the court from controlling the inheritance after you die, but the will must be probated first. The children's trust is funded with your assets after your will is probated. And by the time the assets get into the trust (and expenses are paid), it could be "too little, too late" to provide for your children the way you had planned.

And what if you become incapacitated due to illness or injury? Since you are still alive, your will can't be probated-so the children's trust can't go into effect. If a single parent becomes incapacitated, or if both parents become incapacitated, the parent(s) and child will probably be placed under control of the courts.

Can the court take control of assets I leave to my minor child or grandchild?
If you leave titled assets directly to a minor child in your will, make a minor a joint owner, or give a titled asset to a minor child, you could unknowingly be setting up a court guardianship.

That's because minor children can be on a title, but they cannot conduct business in their own names. So as soon as the owner's signature is required to sell, refinance, or transact other business, the court will have to get involved. Only a court appointee can legally sign for the child (not even a parent can do it). And the court will stay involved to "protect" the child's asset(s) until he/she reaches legal age.

You could also cause a court guardianship if you list a minor as a beneficiary (for example, on a life insurance policy, your IRA, retirement benefits, etc.). That's because the institutions that pay beneficiary proceeds (like an insurance company) will not knowingly pay large sums of money to a minor child. Nor will they pay to another person for the child (such as to a parent). They just don't want the legal responsibility and will usually insist on paying through the court.

If you've been surprised by some of this, you're not alone. Most people are not aware of how little control they actually have with a will.

 

 

 

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