The Redcoats are coming! And they’re coming for all you own, too. That scary pronouncement refers to something called “probate court,” which may not sound intimidating on its face, but is actually quite scary in and of itself. Probate court and the IRS go hand in hand, and if you want to avoid your estate getting snatched up, you should consult an estate planner immediately.
In this article, we’ll tell you how to remain Redcoat-free through an estate plan that keeps your assets and your family out of probate court. First, though, you might be wondering: what’s so scary about probate?
Probate Court 101
If you die without giving instructions on how you want your assets distributed after your death, your estate will go to probate court. This court manages peoples’ debts and property after they pass away. The court is state, not federal, as the state is considered the system best in position to manage its own citizens’ affairs.
But in this case, is it? The evidence would say that the person in the best position to manage your affairs is you. Probate court has two goals: pay off your debts and distribute what’s left. After someone files a petition for probate, the probate court appoints an administrator or executor to execute the process. There are a lot of fees associated with this process, ranging from administrative to legal fees, and all of your business becomes public record. The distribution of your assets is not the only thing that the public gets to know: the nature and extent of your debts are also on the record. Your financial situation becomes common knowledge. The process can take six months if you’re lucky. Often, it can take more than a year.
And, of course, you can’t forget about the taxes.
When the IRS Comes to Visit
The IRS wants its cut. Taxes are nothing new any law-abiding citizen, but it’s a pretty common assumption that, if there is a tax loophole, you want to take advantage of it.
When you’re in probate court, the chance to avoid taxes goes out the window. There is a tax on the value of your probate estate. This is called an estate tax, though it is sometimes known as an inheritance tax. In some states, if your estate is over a certain value, that is when the tax is triggered.
Through financial planning, you can often lessen your tax burden to some degree. Gifting money, putting your assets in a trust, and taking advantage of exemptions are just some of the ways to avoid getting hit with a huge bill. If you just go straight to probate with no plan, however, your estate is going to be taxed as is, and your loved ones will merely get what’s left.
How to Avoid This
As mentioned above, placing your assets in a living trust is a very, very beneficial option if you want to stay out of probate. A common misconception is that a last will and testament will keep you out of court—it won’t. The will still must go to probate to be executed by the court. The process is still time-consuming and costly.
A living trust is a fiduciary relationship that puts your possessions in a trust. When you die, your assets are given by the trustee to your beneficiaries, who you designate. This tool allows you to avoid probate and your beneficiaries to receive their assets immediately. Consult an estate planner to discuss this option and many others that will protect your property.