Asset Protection Primer

ASSET PROTECTION PRIMER - PROBATE, THE BASICS

You can't take it with you (as they say), but you can definitely say where it goes. So, just to make sure your loved ones get your estate when you're gone (rather than handing it over to Uncle Sam or an attorney), take a few minutes for a short course in probate. It's a lesson that could save you and your heirs time, trouble and money.

Probate is the legal process of gathering your assets at your death, making sure creditors and the various governments get their due, and transferring what's left to your rightful heirs. It includes a lengthy check list of responsibilities, including: evaluating claims and paying outstanding bills and final expenses; filing and paying estate taxes; identifying heirs; and, if necessary, resolving disputes.

Two key drawbacks of probate: The first is loss of privacy. When your estate goes into probate, your assets become public record. The second is cost. Estate taxes pose unique problems. According to the 2001 tax law, estate taxes are being phased out gradually. The top rate in 2001 was 55%, with a $675,000 exemption. The rate gradually drops and the exemption rises until, in 2010, the estate tax disappears completely. However, the next year, 2011, when the law sunsets, the maximum rate returns to 2001 levels. That's where the problem comes in.

However, "what will actually happen is hard to predict," stresses Leo C. Hodges, J.D., CLU, ChFC. "Between now and then, we will have five Congresses and two or possibly three presidents." Hodges is Executive Vice President and Director of Advanced Underwriting for the Pentera Group, Inc., an organization that provides training, education and marketing materials for the insurance industry.

"This creates uncertainty," Hodges explained in an interview. "An estate plan that was appropriate today or even several years from now may not work at all ten years in the future. This throws a wrench into the concept of long-term planning. As a result, estate planning has to go pretty much year by year."

Benefits of avoiding probate: For many people, taking steps to reduce the size of their probatable estates has its pluses. It can reduce fees associated with the probate process; assure that assets go where intended, without conflict; maintain confidentiality; and, most of all, reduce or eliminate estate taxes.

Legal tools you can use to help reduce the impact of probate:

Your will. This is your "voice from the grave" that declares how you want your estate distributed. Your will can speed the probate process, assure that your wishes are carried out, and reduce the possibility that your estate will be challenged.
Lifetime gifts of assets to bring the size of your estate under taxable threshold levels. In general, you can give up to $10,000 ($20,000 if married) each year to any number of people you choose.
Trusts. In many instances, assets placed in trust for the benefit of an heir can sidestep the probate process. There are many types of trusts. Talk to your attorney about your options.
Joint ownership. If you own property jointly with another person, ownership can often be transferred directly to the other party at your death.
The marital deduction. You can transfer unlimited assets to your spouse at your death free of estate tax. Note, however, that this can sometimes cause serious tax consequences at your spouse's death.
Life insurance. Life insurance is often used to reduce the financial sting of probate by providing cash to carry out your wishes and pay expenses, including taxes. Note that life insurance in your name, or with your estate named as beneficiary, will be included in your estate. This is why many people transfer ownership to a spouse or other third party.

Recommendation: Get more detailed information about the probate process and ways to avoid it or use it to your family's advantage. Talk to your attorney and your representative for specific ideas.