Estate planning is concerned with the use, conservation and disposition of a person's property and wealth. This involves two elements: (1) minimizing the gift or estate tax consequences that occur when a person's property is passed to another either during life or at death; and (2) provisions for taking care of the decedent's spouse and family.
Both elements can be enormously complex, interrelated and often operate inversely. For instance, the goal of providing more for one's children or grandchildren and less for a surviving spouse may cause adverse estate tax consequences. This summary describes the fundamentals of estate planning.
I. DEFINITIONS
There are four main methods by which property is transferred at death:
1. Will
A will is a written document that takes effect at the death of the person signing it (the "testator"). A will covers all property owned by the testator at death. A state court proceeding ("probate") is instituted and the provisions of the will are implemented under supervision of the probate court. Both the tax and family estate planning objectives of the decedent can be accomplished with a will.
2. Living Trust
A living trust (sometimes called an "inter-vivos" trust) is a document that is revocable at any time by the person signing it ("grantor"). Living trusts have become quite popular as a method to avoid probate. To avoid probate, the trust must be funded; this means that title to the assets which the grantor owns personally must be actually transferred to the trust -- real property is deeded to the trust; bank accounts are switched to the trust; and stocks, bonds, partnership interests and other holdings are assigned or transferred to the trust.
NOTE : The grantor is usually the trustee and beneficiary of the trust during his or her lifetime.
Use of a Will vs. a Living Trust : Generally, with either a will or a trust the same estate tax consequences occur, and the same opportunities for tax and family planning are available. The debate over the value of each often centers around the savings of the costs incurred in a probate proceeding which typically run between 2 to 4 percent of the value of the probate estate. While a living trust which is fully funded with the grantor's assets prior to his or her death will eliminate probate, there may be advantages to probate which are also lost. In addition, the initial cost and maintenance of the living trust must be considered.
A realistic assessment of the net savings in using a living trust would be approximately 1 to 2 percent of the gross estate; an estate of $1,000,000 should save between $10,000 and $20,000 by using a living trust instead of a will.
The savings must be counter-balanced by the administrative burden of maintaining the assets in the trust over the period of one's life. There are other, non-economic advantages for using a trust which merit consideration such as privacy (a trust is not probated in open court) and upon the incapacity or death of the grantor, the trust continues to operate without court intervention.
3. Joint Tenancy
Joint tenancy is a method of holding title to property when two or more people own property together, but the last survivor will own the property outright. When a joint tenant dies, his or her interest goes automatically to the survivor; there is no probate and a will or living trust has absolutely no effect on joint tenancy property.
There may be adverse tax consequences to the joint tenant who dies first. There is a presumption that the entire fair market value of the property is part of the decedent's estate for estate tax purposes, unless the surviving joint tenant can prove (through financial records) the amount of his or her share of the payments made towards the purchase, improvement or upkeep of the jointly held property. For instance, if the surviving tenant can prove he or she made a 30 percent contribution towards the purchase, improvement or upkeep of the property, then 70 percent of the property will be included in the deceased tenant's estate for estate tax purposes.
4. Community Property
California is a community property state which means that any earnings and assets acquired during the marriage belong equally to both spouses, regardless of who actually earned the income. Property acquired before marriage, or gifts and inheritances received by one spouse during a marriage, are generally the separate property of that spouse.
Upon the death of either spouse, the community property is split equally and the surviving spouse receives his or her share of community property outright. The deceased spouse's 50 percent share of community property is part of his or her estate and is subject to his or her will or living trust.
II. The Gift and Estate Tax Aspect To Estate Planning
There are five basic tax concepts to estate planning:
1. Gift Tax
A person may make a gift of $10,000 per year per recipient ("donee") without incurring a federal gift tax. There is no longer a California gift tax. For a husband and wife, the amount is $20,000 per year, per donee. In order to qualify, the gift must be completed presently; the gift cannot be placed in trust unless the beneficiary has the right to withdraw it within a reasonable period after the gift is made. In most circumstances, it is the person making the gift ("donor") who is taxed, not the donee.
2. Estate Tax
The federal estate tax is a tax levied on the property owned by the decedent at death. The tax is paid by the estate for the privilege of passing property to the donee(s). The tax is based on the fair market value of the property at the date of death or on the alternate valuation date (discussed below). California has eliminated a separate estate tax on the decedent's property.
3. Stepped-up Basis at Death
When a person dies, all assets owned by the decedent are valued at their fair market value, usually by appraisal, by the person (the executor of the will or trustee of the living trust) filing the federal estate tax return. The determination of fair market value is generally made as of the date of death, however, there is an alternative valuation date of 6 months after death available for estates that have decreased in value.
As a corollary to this rule, the tax basis of the decedent's property is "stepped-up" to the estate tax valuation amount. Tax basis refers to the value of the property for computing gain or loss. It is usually the cost of the property plus improvements and less any depreciation.
For example, if the decedent dies owning stock which he or she purchased for $5, but has a current value of $100, the full $100 value is used to determine the estate tax. The stock then receives a stepped-up basis of $100 in the hands of the donee. No income tax will be paid by the donee on the subsequent sale of stock for $100 or less; income tax will only be paid on the sale of stock for an amount in excess of $100 and only for that excess amount.
With community property, even though 50 percent passes outright to the surviving spouse, both portions of the community property receive a stepped-up basis at the death of the first spouse. If a married couple owns a house worth $500,000 which has a tax basis of $45,000, the tax basis for the entire house (both community property shares) is stepped-up to $500,000 upon the death of the first spouse, and a later sale of the house for $560,000 will result in only $60,000 in gain. A sale of the house for the same amount prior to the death of the first spouse would have caused a $515,000 gain.
The stepped-up basis rule does not apply to certain income the decedent earned prior to his or her death. This income is considered income in respect to a decedent ("IRD"). IRD includes income from property sold prior to death, unpaid compensation and retirement benefits.
4. The Unified Estate and Gift Tax Credit and the Credit Exemption Trust
Each person is entitled to a lifetime credit of $600,000 for gift and estate taxes called the "unified credit." This credit applies to gifts made over and above the $10,000 annual gift tax exclusion discussed previously. If a person makes an annual gift to a single donee of $50,000, then the additional $40,000 - which does not qualify for the annual gift tax exclusion - will reduce the unified credit from $600,000 to $560,000. The unified credit is phased out for estates over $10 million.
The unified credit may be used for property left to any donee, either outright or in trust. In a typical estate plan the unified credit amount is used by creating a trust for that amount for the surviving spouse during his or her lifetime. Upon the surviving spouse's death, the children would then become the beneficiaries of the trust. This trust is sometimes called an "exemption trust" or a "by-pass" trust since it is exempt from estate taxes and by-passes the surviving spouse's estate. The exemption trust may provide the surviving spouse with the following rights during his or her life without causing the trust to become part of the surviving spouse's estate for estate tax purposes: (1) all the trust's net income may be payable to the surviving spouse; (2) the trust's principal may be applied to the surviving spouse for his or her health, support, maintenance and education ("ascertainable standards"); and (3) the surviving spouse may have the noncumulative right to withdraw the greater of 5 percent or $5,000 of trust principal per calendar year for any reason ("5&5 power").
The unified credit plays a major role in estate planning because there is no estate tax for estates that are less than or equal to the unified credit. In most circumstances, there is no estate tax on estates of $600,000 or less.
5. The Marital Deduction and the Marital Deduction Q-TIP Trust
The decedent's gross estate is entitled to deduct all amounts passing to a surviving spouse which qualify for the marital deduction. The marital deduction can become extremely complicated, but it represents the most important deduction available to married couples. Property which passes to the surviving spouse under the marital deduction escapes taxation on the death of the first spouse, but that property then becomes part of the surviving spouse's estate for estate tax purposes. Oftentimes, because the surviving spouse is in a higher tax bracket, property passing under a marital deduction is taxed at a higher rate at the death of the surviving spouse.
The marital deduction applies to property that is left: (1) outright to a spouse; (2) in trust in which the spouse has the right to withdraw any or all of the property during his or her lifetime; and (3) property which is left in trust for the spouse's life under a Q-TIP ("qualified terminable interest property") trust.
A Q-TIP trust is an exception to the general rule that to qualify for a marital deduction, property must be left outright to the spouse or in trust in which all the principal may be withdrawn by the spouse. A Q-TIP trust may qualify for a marital deduction if the spouse is entitled to receive all the trust's income at least annually and during the spouse's lifetime, no person, including the spouse, is permitted to appoint any trust property to anyone other than the spouse. The person filing the estate tax return must properly elect to take a marital deduction for the Q-TIP trust.
The advantage of the Q-TIP trust is that the desires of the decedent spouse will control the ultimate disposition of the trust's assets, and the decedent's estate retains the benefit of the marital deduction. On the death of the surviving spouse, the assets in the Q-TIP trust are taxed in the surviving spouse's estate, but any increase in estate tax resulting from this inclusion is generally taken directly from the Q-TIP assets, not from the surviving spouse's other assets.
By prudently combining the unified credit with the marital deduction, the estate of the first spouse will pay no estate tax. The surviving spouse also has a unified credit that can be applied to any estate tax owing at his or her death. Therefore, for estates under $1,200,000 (2 x $600,000), assuming no increase in value during the time between the death of the first spouse and second spouse and assuming no reduction of the unified credit for either spouse, a properly structured estate plan eliminates taxation on both spouses' estates through the maximum use of the unified credit.
III. Using the Unified Credit in Estate Planning
Assume that:
1. a married couple has all their assets as community property;
2. the value of that community property is $1,000,000;
3. the husband is the first to die and the wife lives another 8 years;
4. the couple has two children; and
5. no gifts were ever made that exceeded the annual gift tax exclusion.
Upon the death of the husband, the husband's estate (50% ofthe community property) is worth $500,000 and his wife retains her 50% share of the community property ($500,000). The husband's estate will pay no estate tax since his unified credit is worth $600,000.
Example 1 : If the husband leaves all his property outright to this wife, then his wife will have an estate totaling $1,000,000. On the death of his wife, assuming no growth in her estate, she will now have a $1,000,000 estate subject to estate tax, but a unified credit worth only $600,000. This means her estate will be subject to estate tax on the balance of $400,000. The tax will be $153,000 according to the current tax rate schedule.
Example 2 : Same facts as Example 1 except husband left his property to an exemption trust, which permitted his wife the right to receive all the income from the trust during her life and certain other powers (such as the power to invade the principal under an ascertainable standard and the 5&5 power discussed previously). Upon her death the trust assets could then be divided between the couple's two children and the exemption trust would not be part of the wife's estate for estate tax purposes. Upon her death, her estate would be worth $500,000 and her unified credit worth $600,000 would eliminate any estate taxes.
If we assume a 4% growth rate during the 8 years she outlives her husband, then under Example 1, her estate will appreciate from $1,000,000 to $1,368,600 and the estate tax will be $255,000.
Under Example 2, her estate consists of her share of community property valued at $500,000 which will appreciate to $684,285 and the estate tax will be $19,400, a reduction of $236,150.
IV. Non-tax Aspects of Estate Planning
Couples with minor children need to carefully plan their estates, although the focus is usually on taking care of the children rather than saving estate taxes. The major assets are usually life insurance and the family home. In case of the deaths of both parents, provisions for the guardian(s) for the children and trustee(s) for the property must be carefully considered. While the funding of these trusts might follow the exemption trust and marital deduction trust pattern, the exemption trust is geared for the care and support of the children.
Also, decisions must be made such as: Should the trustee(s) save and conserve the trust estate for the college education of the children? At what ages should the children receive the trust principal and what amounts and when? All at 21? Half at 25 and the remaining principal at 35? What happens if the children die without having any children? Who then receives the property? The decedent's family, a specified charity or charities?
A carefully planned estate will cover a variety of remote contingencies, provide for the continuing personal and financial care and support of the decedent's spouse and family, and reduce or eliminate estate taxes.
Showing posts with label Probate of an Estate. Show all posts
Showing posts with label Probate of an Estate. Show all posts
Thursday, April 23, 2009
Wednesday, January 21, 2009
Ten Things to Do to Prepare a Will for Probate
If you are the executor of a will there are many things you must do to get that will ready for probate. Probate means the process by which the deceased’s assets are gathered; outstanding debts, taxes, and expenses of the funeral and the probate process are paid; and the assets are distributed to the beneficiaries in the will. Following here are the top ten things needed to prepare for probate.
Get names and addresses of all person named in the will;
Determine if the deceased has any pending financial or legal matters requiring immediate attention;
Arrange for a meeting with everyone named in the will;
Gather, do not destroy, any of the deceased’s records, tax returns, checks, or other documents;
Get death certificates (from funeral home);
Keep careful records of all funeral-related expenses;
Don’t pay debts unless truly necessary;
Change locks on the door if deceased lived alone;
Secure valuable items;
Notify insurance carriers of the recent death.
Get names and addresses of all person named in the will;
Determine if the deceased has any pending financial or legal matters requiring immediate attention;
Arrange for a meeting with everyone named in the will;
Gather, do not destroy, any of the deceased’s records, tax returns, checks, or other documents;
Get death certificates (from funeral home);
Keep careful records of all funeral-related expenses;
Don’t pay debts unless truly necessary;
Change locks on the door if deceased lived alone;
Secure valuable items;
Notify insurance carriers of the recent death.
Tuesday, November 25, 2008
Probate Basics
The legal process of transferring of property upon a person's death is known as "probate." Although probate customs and laws have changed over time, the purpose has remained much the same: people formalize their intentions as to the transfer of their property at the time of their death (typically in a will), their property is collected, certain debts are paid from the estate, and the property is distributed.
Probate Administration
Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will. What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.
What Happens in Probate?
The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested. The basic process of probating an estate includes:
• Collecting all probate property of the decedent;
• Paying all debts, claims and taxes owed by the estate;
• Collecting all rights to income, dividends, etc.;
• Settling any disputes; and
• Distributing or transferring the remaining property to the heirs.
Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.
Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate. Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.
The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
• Fees of the personal representative;
• Attorneys' fees; and
• Court costs.
Probate Administration
Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will. What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.
What Happens in Probate?
The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested. The basic process of probating an estate includes:
• Collecting all probate property of the decedent;
• Paying all debts, claims and taxes owed by the estate;
• Collecting all rights to income, dividends, etc.;
• Settling any disputes; and
• Distributing or transferring the remaining property to the heirs.
Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.
Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate. Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.
The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
• Fees of the personal representative;
• Attorneys' fees; and
• Court costs.
Thursday, October 2, 2008
THE PROBATE PROCESS IN NJ
Probate is the process whereby a Will is proved to be valid by a Surrogate, who has the authority to determine the authenticity of such a document. It also involves appointing an individual for an Estate when someone dies without a Will.
Probate is done when someone dies with assets in their name alone. The individual named in the Will as the Executor/rix (hereinafter referred to as the personal representative) would come to the office of the Surrogate with the original Will and a certified copy of the death certificate.
Application is made to the Surrogate of the County where the decedent resided at the time of death. If the Will is self- proving (language added to the will that allows the document to prove itself), no further proof or testimony will be necessary to probate the Will.
If the Will is not self-proving, a proof of one of the witnesses is necessary to complete the probate.
Certain qualification forms would need to be signed by the personal representative. No probate can be completed until the day following the tenth day after death. Fees will be charged as set forth by the New Jersey legislature. It is a relatively inexpensive process.
If someone dies without a Will, an individual can make application to be appointed as Administrator/rix (also hereinafter referred to as the personal representative) to represent the Estate.
After signing qualification papers, the Administrator/rix would need to post a bond that represents the full value of the Estate and file renunciations from any individual that has a prior or equal right to be appointed.
The Surrogate, as part of the process, will issue letters and certificates evidencing the appointment of the individual to the Estate which will allow them to access and transfer assets such as bank accounts, stocks, bonds, etc.
Once the probate is complete, the personal representative of the Estate has sixty days in which to notify the heirs at law, next of kin and beneficiaries that application was made for probate.
Probate is done when someone dies with assets in their name alone. The individual named in the Will as the Executor/rix (hereinafter referred to as the personal representative) would come to the office of the Surrogate with the original Will and a certified copy of the death certificate.
Application is made to the Surrogate of the County where the decedent resided at the time of death. If the Will is self- proving (language added to the will that allows the document to prove itself), no further proof or testimony will be necessary to probate the Will.
If the Will is not self-proving, a proof of one of the witnesses is necessary to complete the probate.
Certain qualification forms would need to be signed by the personal representative. No probate can be completed until the day following the tenth day after death. Fees will be charged as set forth by the New Jersey legislature. It is a relatively inexpensive process.
If someone dies without a Will, an individual can make application to be appointed as Administrator/rix (also hereinafter referred to as the personal representative) to represent the Estate.
After signing qualification papers, the Administrator/rix would need to post a bond that represents the full value of the Estate and file renunciations from any individual that has a prior or equal right to be appointed.
The Surrogate, as part of the process, will issue letters and certificates evidencing the appointment of the individual to the Estate which will allow them to access and transfer assets such as bank accounts, stocks, bonds, etc.
Once the probate is complete, the personal representative of the Estate has sixty days in which to notify the heirs at law, next of kin and beneficiaries that application was made for probate.
Thursday, August 7, 2008
Naming Your Executor
You should name an executor in your will. In order to decide who is best to carry out this position, you need to know what responsibilities the position has.
The executor’s job is to start the probate process with the court, gather all of your assets, pay your debts, last expenses, and taxes, and distribute whatever is left over to the persons named in your will. Additionally, your executor will notify Social Security, pension providers, insurers, financial institutions, and other entities of your death. If you have antiques or valuable collections (coins, stamps, collectibles), your executor will need to hire an appraiser to get a value for these items. If anyone owes you money, the executor must collect that debt. At the end of the distribution, the executor must be able to give an accounting to all of your beneficiaries that your wishes, as expressed in your will, were carried out.
The executor owes fiduciary duties to anyone who has an interest in the estate, and the executor must act in the best interests of the estate. For example, if an executor mismanages the estate assets, he or she can be held personally liable and may have to repay the estate for any losses.
The executor for a New Jersey estate is entitled to a fee for services performed. Under New Jersey law, the executor of an estate is generally entitled to the following commissions:
6% on all estate income;
5% of the estate up to $200,000;
3.5% on excess above $200,000 up to $1,000,000;
2% on excess over $1,000,000 or such other percentage as the Superior Court may determine.
There are different rules for commissions when there is more than one executor, or when the executor has rendered unusual or extraordinary services. In some cases family members may choose not to accept (waive) fees. However, a decision to waive fees should be made only after the legal (who will get the money) and tax (what is the cost of the lost deduction) issues are considered.
The executor’s job is to start the probate process with the court, gather all of your assets, pay your debts, last expenses, and taxes, and distribute whatever is left over to the persons named in your will. Additionally, your executor will notify Social Security, pension providers, insurers, financial institutions, and other entities of your death. If you have antiques or valuable collections (coins, stamps, collectibles), your executor will need to hire an appraiser to get a value for these items. If anyone owes you money, the executor must collect that debt. At the end of the distribution, the executor must be able to give an accounting to all of your beneficiaries that your wishes, as expressed in your will, were carried out.
The executor owes fiduciary duties to anyone who has an interest in the estate, and the executor must act in the best interests of the estate. For example, if an executor mismanages the estate assets, he or she can be held personally liable and may have to repay the estate for any losses.
The executor for a New Jersey estate is entitled to a fee for services performed. Under New Jersey law, the executor of an estate is generally entitled to the following commissions:
6% on all estate income;
5% of the estate up to $200,000;
3.5% on excess above $200,000 up to $1,000,000;
2% on excess over $1,000,000 or such other percentage as the Superior Court may determine.
There are different rules for commissions when there is more than one executor, or when the executor has rendered unusual or extraordinary services. In some cases family members may choose not to accept (waive) fees. However, a decision to waive fees should be made only after the legal (who will get the money) and tax (what is the cost of the lost deduction) issues are considered.
Thursday, June 5, 2008
Administrator of a Probate Estate: Duties and Responsibilities
The procedures in an estate administration may take from six months to several years, and a client’s patience may be sorely tried during this time. However, it has been our experience that clients who are forewarned have a much higher tolerance level for the slowly turning wheels of justice.
The following is a portion of the duties of an administrator:
Some of the Duties of the Administrator in Probate Estate Administration
Conduct a thorough search of the decedent’s personal papers and effects for any evidence that might point you in the direction of a potential creditor;
Carefully examine the decedent’s checkbook and check register for recurring payments, as these may indicate an existing debt;
Contact the issuer of each credit card that the decedent had in his or her possession at the time of his or her death;
Contact all parties who provided medical care, treatment, or assistance to the decedent prior to his or her death;
The attorney for the administrator will not be able to file any estate or inheritance tax return until it is clear as to the amounts of the medical bills. Medical expenses can be deducted in determining the amount of any inheritance tax.
In a Supreme Court case, Tulsa Professional Collection Services, Inc., v. Joanne Pope, Executrix of the Estate of H. Everett Pope, Jr., Deceased, the court held that the administrator/personal representative in every estate is personally responsible to provide actual notice to all known or “readily ascertainable” creditors of the decedent. This means that it is the administrator’s responsibility to diligently search for any “readily ascertainable” creditors.
Other Duties of the Administrator
In General
The administrator’s job is to (1) administer the estate—i.e., collect and manage assets, file tax returns and pay taxes and debts—and (2) distribute any assets or make any distributions of bequests, whether personal or charitable in nature, as the deceased directed (under the provisions of the will). Let’s take a look at some of the specific steps involved and what these responsibilities can mean. Chronological order of the various duties may vary.
Probate
The administrator must “probate” the will. Probate is a process by which a will is admitted. This means that the will is given legal effect by the court. The court’s decision that the will was validly executed under state law gives the administrator the power to perform his or her duties under the provisions of the will.
An employer identification number (EIN) must be obtained for the estate; this number must be included on all returns and other tax documents having to do with the estate. The administrator should also file a written notice with the IRS that he or she is serving as the fiduciary of the estate. This gives the administrator the authority to deal with the IRS on the estate’s behalf.
Pay the Debts
The claims of the estate’s creditors must be paid. Sometimes a claim must be litigated to determine if it is valid. All estate administration expenses, such as attorneys’, accountants’, and appraisers’ fees, must also be paid.
Manage the Estate
The administrator takes legal title to the assets in the probate estate. The probate court will sometimes require a public accounting of the estate assets. The assets of the estate must be found and may have to be collected. As part of the asset management function, the administrator may have to liquidate or run a business or manage a securities portfolio. To sell marketable securities or real estate, the administrator will have to obtain stock power, tax waivers, file affidavits, and so on as the case may be.
Take Care of Tax Matters
The administrator is legally responsible for filing necessary income and estate-tax returns (federal and state) and for paying all death taxes (i.e., estate and inheritance). The administrator can, in some cases, be held personally liable for unpaid taxes of the estate. Tax returns that will need to be filed can include the estate’s income tax return (both federal and state), the federal estate-tax return, the state death tax return (estate and inheritance), and the deceased’s final income tax return (federal and state). Taxes usually must be paid before other debts. In many instances, federal estate-tax returns are not needed as the size of the estate will be under the amount for which a federal estate-tax return is required.
Often it is necessary to hire an appraiser to value certain assets of the estate, such as a business, pension, or real estate, because estate taxes are based on the “fair market” value of the assets. After the filing of the returns and payment of taxes, the Internal Revenue Service will generally send some type of estate closing letter accepting the return. Occasionally, the return will be audited.
Distribute the Assets
After all debts and expenses have been paid, the administrator will distribute the assets. Frequently, beneficiaries can receive partial distributions of their inheritance without having to wait for the closing of the estate.
Under increasingly complex laws and rulings, particularly with respect to taxes, in larger estates an administrator can be in charge for two or three years before the estate administration is completed. If the job is to be done without unnecessary cost and without causing undue hardship and delay for the beneficiaries of the estate, the administrator should have an understanding of the many problems involved and an organization created for settling estates. In short, an administrator should have experience.
At some point in time, you may be asked to serve as the administrator of the estate of a relative or friend, or you may ask someone to serve as your administrator. An administrator’s job comes with many legal obligations. Under certain circumstances, an administrator can even be held personally liable for unpaid estate taxes. Review the major duties involved before you accept such a responsibility.
By Kenneth A. Vercammen
Kenneth A. Vercammen is a Middlesex County, New Jersey, trial attorney who has published 125 articles in national and New Jersey publications on probate and litigation topics. He is chair of the ABA General Practice, Solo & Small Firm Division's Estate Planning, Probate & Trust Committee.
The following is a portion of the duties of an administrator:
Some of the Duties of the Administrator in Probate Estate Administration
Conduct a thorough search of the decedent’s personal papers and effects for any evidence that might point you in the direction of a potential creditor;
Carefully examine the decedent’s checkbook and check register for recurring payments, as these may indicate an existing debt;
Contact the issuer of each credit card that the decedent had in his or her possession at the time of his or her death;
Contact all parties who provided medical care, treatment, or assistance to the decedent prior to his or her death;
The attorney for the administrator will not be able to file any estate or inheritance tax return until it is clear as to the amounts of the medical bills. Medical expenses can be deducted in determining the amount of any inheritance tax.
In a Supreme Court case, Tulsa Professional Collection Services, Inc., v. Joanne Pope, Executrix of the Estate of H. Everett Pope, Jr., Deceased, the court held that the administrator/personal representative in every estate is personally responsible to provide actual notice to all known or “readily ascertainable” creditors of the decedent. This means that it is the administrator’s responsibility to diligently search for any “readily ascertainable” creditors.
Other Duties of the Administrator
In General
The administrator’s job is to (1) administer the estate—i.e., collect and manage assets, file tax returns and pay taxes and debts—and (2) distribute any assets or make any distributions of bequests, whether personal or charitable in nature, as the deceased directed (under the provisions of the will). Let’s take a look at some of the specific steps involved and what these responsibilities can mean. Chronological order of the various duties may vary.
Probate
The administrator must “probate” the will. Probate is a process by which a will is admitted. This means that the will is given legal effect by the court. The court’s decision that the will was validly executed under state law gives the administrator the power to perform his or her duties under the provisions of the will.
An employer identification number (EIN) must be obtained for the estate; this number must be included on all returns and other tax documents having to do with the estate. The administrator should also file a written notice with the IRS that he or she is serving as the fiduciary of the estate. This gives the administrator the authority to deal with the IRS on the estate’s behalf.
Pay the Debts
The claims of the estate’s creditors must be paid. Sometimes a claim must be litigated to determine if it is valid. All estate administration expenses, such as attorneys’, accountants’, and appraisers’ fees, must also be paid.
Manage the Estate
The administrator takes legal title to the assets in the probate estate. The probate court will sometimes require a public accounting of the estate assets. The assets of the estate must be found and may have to be collected. As part of the asset management function, the administrator may have to liquidate or run a business or manage a securities portfolio. To sell marketable securities or real estate, the administrator will have to obtain stock power, tax waivers, file affidavits, and so on as the case may be.
Take Care of Tax Matters
The administrator is legally responsible for filing necessary income and estate-tax returns (federal and state) and for paying all death taxes (i.e., estate and inheritance). The administrator can, in some cases, be held personally liable for unpaid taxes of the estate. Tax returns that will need to be filed can include the estate’s income tax return (both federal and state), the federal estate-tax return, the state death tax return (estate and inheritance), and the deceased’s final income tax return (federal and state). Taxes usually must be paid before other debts. In many instances, federal estate-tax returns are not needed as the size of the estate will be under the amount for which a federal estate-tax return is required.
Often it is necessary to hire an appraiser to value certain assets of the estate, such as a business, pension, or real estate, because estate taxes are based on the “fair market” value of the assets. After the filing of the returns and payment of taxes, the Internal Revenue Service will generally send some type of estate closing letter accepting the return. Occasionally, the return will be audited.
Distribute the Assets
After all debts and expenses have been paid, the administrator will distribute the assets. Frequently, beneficiaries can receive partial distributions of their inheritance without having to wait for the closing of the estate.
Under increasingly complex laws and rulings, particularly with respect to taxes, in larger estates an administrator can be in charge for two or three years before the estate administration is completed. If the job is to be done without unnecessary cost and without causing undue hardship and delay for the beneficiaries of the estate, the administrator should have an understanding of the many problems involved and an organization created for settling estates. In short, an administrator should have experience.
At some point in time, you may be asked to serve as the administrator of the estate of a relative or friend, or you may ask someone to serve as your administrator. An administrator’s job comes with many legal obligations. Under certain circumstances, an administrator can even be held personally liable for unpaid estate taxes. Review the major duties involved before you accept such a responsibility.
By Kenneth A. Vercammen
Kenneth A. Vercammen is a Middlesex County, New Jersey, trial attorney who has published 125 articles in national and New Jersey publications on probate and litigation topics. He is chair of the ABA General Practice, Solo & Small Firm Division's Estate Planning, Probate & Trust Committee.
Saturday, March 15, 2008
Mediating Probate Disputes
A lawyer involved in a probate dispute must be able to advise his or her client both about the client's legal rights and remedies and about the client's options for resolving the dispute. If the lawyer advises the client only about the costs and chances for successfully litigating the dispute, the lawyer will not have served the client well. The lawyer should be able to discuss knowledgeably the alternative forms of dispute resolution available to the client and to advise the client on which approach is most appropriate.
Mediation has played a role in dispute resolution for centuries in legal systems as diverse as those of China and various American Indian groups. In the United States, interest in mediation has grown dramatically since the 1970s. One area of the law in which mediation plays an increasingly important role is family law, where parties routinely use mediation to resolve divorce and custody disputes. Surprisingly, in probate, another area of the law in which family issues predominate, mediation is still in its infancy. Although mediation will not be appropriate for all probate disputes, in many cases mediation may allow parties to reach agreements preferable to the decision a court would reach and may promote healing of strained family relationships. This article examines the potential uses of mediation in probate proceedings.
Nature of Probate Disputes
Disputes arise in probate for a variety of reasons. Conflict may occur over the disposition of a decedent's property because relatives are dissatisfied with the decedent's estate plan. Grief associated with the death of a loved one creates tensions, and lawsuits may follow from misdirected anger over the death. Death may cause dormant family disputes to resurface and a dispute nominally over property may in fact be a dispute over family relationships.
Disputes may arise because family members have different views of a fair distribution of a decedent's property. For example, one of a decedent's children may regard equal distribution among all the children as fair, while another child may believe that he or she should have received more because of care given an older or incapacitated parent. A dispute may arise between children of one marriage and the surviving spouse of a later marriage. The decedent's children may view the decedent's property as theirs, while the surviving spouse may feel a right to a sizable portion of the property. Litigated solutions to these problems ignore the complex emotional issues that may underlie the dispute.
Probate courts are also the forum for conservatorship and guardianship proceedings. Disputes may arise in these proceedings if the proposed protected person contests the guardianship or if family members disagree among themselves over the appropriate approach for their older relative. Disputes may develop between a care facility and family members. These disputes all involve emotional issues.
Finally, disputes may arise between beneficiaries of a trust or estate and a fiduciary. The family may disagree over who should act as fiduciary, or the beneficiaries may be concerned about investment decisions or property management issues under the fiduciary's control. If the fiduciary is also a beneficiary, the other beneficiaries may perceive inequities or conflicts of interest, whether real or imagined.
Benefits of Mediation
Family members involved in a dispute often resolve their differences without seeking assistance outside the family. Even after one party contacts a lawyer, a negotiated settlement may be possible. For some families, however, a more formal dispute resolution process becomes necessary. Some benefits of using mediation instead of litigation to resolve disputes are of particular interest in the probate context.
Confidentiality. Mediation allows parties to a dispute to air their grievances in a private setting. Although the level of confidentiality depends on agreement between the parties and varies depending on state law, the parties may keep much of what they discuss out of the public record. The mediator usually asks the parties to sign an agreement not to disclose information conveyed during the mediation. In addition, state law generally limits the disclosure of information obtained in settlement discussions and extends that protection to mediation. Some states grant additional evidentiary privileges for mediation, but many states also impose a duty to report specified information, such as disclosures of abuse or threats of harm.
If a family involved in a will contest is airing "dirty laundry" or if information about an older person's eccentric behavior is relevant to a guardianship proceeding, the family will benefit from privacy if they mediate the dispute. If the parties agree not to disclose information revealed during the mediation, they might speak more freely and address messy relationship issues in crafting solutions to their dispute. Both sides may be more open, and that willingness to discuss difficult issues may lead to a better understanding between the parties.
Emotional benefits. The emotional benefits of mediation can be significant. Mediation gives parties a chance to be heard. For some family members, being able to air grievances and receiving an apology or explanation for troubling behavior may be more important than receiving a property settlement. In addition, giving parties more control over the outcome may increase psychological well-being.
In a guardianship proceeding, mediation involves the older adult in the process, giving that person a voice and helping him or her listen to the concerns of other family members. Mediation may leave the person less angry and confused than a more formal court proceeding.
Mediation also helps families avoid some of the emotional costs of litigation. Mediation may be less stressful and traumatic than litigation because litigation pits parties against each other and tends to escalate the conflict. Mediation may even have emotional benefits when compared with disputes that remain unresolved. If a family member knows that he or she will not likely prevail in a lawsuit, that person may not pursue a legal remedy. Although no lawsuit ensues, the conflict within the family may persist. Anger and estrangement between family members may continue for years.
Improved ongoing relationships. Mediation can repair, maintain or improve ongoing relationships. Probate disputes involve family members. In most cases, continuing the relationships among the various family members will benefit the family. Because the parties must work together during the mediation to develop a solution to their conflict, they may acquire communication and problem solving skills that will aid them in the future. Mediation is less likely than litigation to drive family members farther apart.
Unique solutions. Mediation allows the parties to forge their own solution to a dispute. There are limited remedies available to a judge to resolve a dispute over property. Mediation allows the parties to take nonlegal as well as legal interests into consideration. Parties may best handle the division of property with sentimental value in this way. For example, if two siblings who are to receive the decedent's tangible personal property work together to divide the property, they will likely achieve a better result for both of them than they would if a court divided the property to reach a financially equal result.
In guardianship proceedings in most states, the court faces an all or nothing choice--the court can either appoint a guardian and deprive the protected person of all rights or decide not to appoint a guardian and leave the person on his or her own. Through mediation, the older person, family members and others can develop less intrusive solutions that will protect the older person while minimizing the loss of rights. The mediated solutions can also take into account the interests of family members who are concerned about the care of the older person.
Cost-effectiveness. Mediation may also be more cost-effective than litigation. Particularly in small estates, litigation costs may be disproportionate to the amount at issue. More parties may be able to protect their interests if a less expensive alternative is available.
Potential Problems with Mediation
Although mediation is appropriate in many situations, some characteristics of probate disputes may make mediation difficult or even inappropriate.
Grief. If the dispute involves a decedent's estate, the family may still be grieving over the death of a loved one. Grief may be a factor in the dispute itself because one family member may blame another for the death. If, for example, parents of a decedent have not accepted the fact that the decedent is homosexual, they may misdirect their grief over the death as anger at the decedent's domestic partner who is the primary beneficiary under the decedent's will. Grief may also affect the parties' ability to mediate. Delay may be necessary to allow the parties to progress through the grieving process.
Power imbalance. Power imbalances are always a concern in mediation, but may be of particular concern in probate disputes. In a guardianship proceeding, if the older person contests the guardianship, mediation will be appropriate only if he or she can participate effectively. An advocate can assist the older person, not by taking the older person's place but by facilitating the older person's expression of his or her concerns. If the older person cannot participate, even with assistance, mediation is inappropriate.
Power imbalances may also exist in disputes between family members over a guardianship for a relative or in disputes over property. An older surviving spouse may be intimidated by younger family members, or preexisting power imbalances between siblings may adversely affect the mediation. If minors are involved, it may be necessary to arrange for one or more advocates to represent their interests. A skilled mediator should be aware of potential power imbalances and manage them during the mediation so that all parties are protected. In some situations, however, the power imbalance may be too great for mediation to be appropriate.
Long-term dispute. Although triggered by a family death, some probate disputes may grow out of a longstanding family feud. If parties have become entrenched in their positions after years of animosity, mediation may not be appropriate.
Need for a precedent. In some situations, litigation may be appropriate to create a precedent for use in subsequent cases. This situation is less likely to occur in the probate context than in other areas of the law, such as racial discrimination cases. If, however, the situation is one for which establishing a precedent is important, that will be a factor in weighing the merits of litigation versus mediation.
Guidelines for Using Mediation
In considering mediation to resolve probate disputes, a lawyer should evaluate a number of factors. The presence of some factors makes mediation more appropriate, while other factors may mean that the lawyer should recommend against the use of mediation. Each case is unique, and a lawyer should evaluate each case individually. The guidelines that follow may help to determine whether a lawyer should recommend mediation.
Ongoing relationship. If the parties would benefit from an ongoing relationship--the case with most family relationships--mediation may help. Further, if the parties express concern about maintaining an ongoing relationship, they are likely to work together constructively in mediation. Parties may be more concerned with rebuilding or preserving a family relationship among siblings than one between a stepparent and stepchildren. Even in the latter situation, though, a family relationship may be important, if only out of respect for the decedent.
Willing parties. Mediation works best if all parties want to participate. If the parties come to mediation willingly, they are more likely to work together to resolve their dispute. Mandatory mediation has been criticized and is inappropriate in probate. If the parties have entrenched positions due to a longstanding dispute or moral or religious beliefs, then a negotiated or litigated resolution of their dispute will be more appropriate than mediation.
Competent parties. All parties must be able to participate effectively. The mediator may need to make accommodations for older persons who may have restricted mobility, may have difficulty hearing or may be confused by new settings. Arranging the mediation to take personal concerns into consideration and allowing an advocate to participate when necessary may make mediation possible. If any party is mentally incapacitated, so overcome by grief that he or she cannot function or physically unable to attend the mediation, the lawyer should not recommend mediation.
Nonlegal issues. If a dispute involves nonlegal issues, mediation may benefit the parties. Mediation permits parties to create their own solution to the dispute and allows them to address both nonlegal and legal issues in reaching that solution. Mediation also allows parties to express their personal concerns, anger or grief. Being heard by other family members may be part of what some disputants want or need.
Confidentiality. If parties want confidentiality because of the sensitive nature of the dispute, mediation will provide greater privacy than litigation. In family disputes, minimizing the public record may benefit the parties. If one of the disputants is a public figure, this factor may be of particular importance. If the dispute involves relationships outside of society's accepted norms, the privacy associated with mediation may also be desirable.
Minimal power imbalances. A lawyer recommending mediation should consider whether power imbalances might adversely affect the mediation. Although a skilled mediator can manage some power imbalances, and although power imbalances can affect litigation as well as mediation, effective participation remains an important factor. An older person with weakened physical or mental abilities may not be able to participate adequately. If there is a history of dominance in the family, between either generations, spouses or siblings, the power imbalances may be too great to overcome. If there is an indication of physical or mental abuse, mediation will be inappropriate. In addition, if an entity such as a hospital or nursing home is on one side of the dispute and an older person or the person's family is on the other side, the individual or family may feel intimidated by the institution. Mediation may not adequately protect the rights of someone who feels overwhelmed by the other party.
Example
A probate dispute has legal issues that a court can resolve. A litigated outcome will likely mean that one party "wins" and the other party "loses," based on legal rules. A dispute, however, may also involve a number of emotional issues. For example, parties may disagree on what would be a "fair" distribution of the decedent's estate. The court can determine whether the will was valid but will not be able to address the underlying family issues. In contrast, parties who mediate their dispute may construct a solution that allows both sides to win.
To demonstrate a situation for which mediation would be appropriate, consider a family consisting of a mother, a father and their two adult daughters, Alice and Barbara. After the father died, the mother moved in with Alice and lived with her for eight years until the mother died. In the last two years before her death, the mother was bedridden, and Alice cared for her at home. Barbara lived in another state. She called frequently but was unable to visit much or to help with the care of her mother. On the mother's death, the mother's will left her entire estate to Alice. A prior will that the mother executed before the father's death gave the estate to the father, or if he predeceased the mother, divided the estate equally between the two daughters.
Alice thinks that the result under the will is fair because she cared for her mother for many years. Alice thinks that Barbara does not need the money and that Barbara does not deserve a share of the estate. Barbara is hurt by her mother's will. She thinks that if her mother loved the daughters equally, she would have divided the estate equally. She thinks Alice convinced her mother to leave the estate to Alice.
Barbara talks to a lawyer about what she can do. The lawyer first considers the legal issues around whether the will disinheriting Barbara is valid. The lawyer looks for evidence of undue influence and lack of mental capacity. Several facts raise suspicions about the will and about whether Alice unduly influenced her mother to execute a new will. The mother was in declining health, she lived with Alice, and Alice had both the motive and opportunity to influence her mother. Other factors, such as when the mother executed the will, whether the mother was under medication and whether witnesses can speak about the mother's mental capacity, could be important. After gathering this information, the lawyer might be able to put together a case of undue influence by Alice and lack of the mother's testamentary capacity. The facts, however, may be difficult to establish. Alice may have neighbors who can testify that the mother told them repeatedly that she was thankful for Alice's care and that she would reward Alice in her will. The will does not give property outside the family and could be viewed as rewarding Alice. The evidence will likely go both ways, and it will be difficult to predict the outcome in court.
If Alice and Barbara litigate the case, one of them will win and the other will lose. In addition, they will lose their relationship with each other, at a time when they have lost their mother and would otherwise benefit from family connections. They will also face legal bills and the emotional strains of litigation.
After reviewing the facts, weighing the legal arguments and considering the potential benefits of mediation for these particular parties--repairing the sibling relationship and addressing the emotional issues involved in this dispute--Barbara's lawyer might suggest mediation. Even if Alice thinks that she would win in a lawsuit, she may be willing to mediate to avoid the litigation and because she cannot be sure of the outcome in court. Barbara may be willing to mediate for the same reasons.
Assuming Alice and Barbara agree to mediate, they will meet with the mediator, either with or without their lawyers present. If the lawyers are not present at the mediation, the parties most likely will agree to have their lawyers review any agreement that they reach before they sign it. The mediation process may benefit the sisters in a number of ways. During the mediation each sister will have a chance to tell her story and will listen to her sibling's story. Barbara may be able to understand the sacrifices that Alice has made and the toll that the years of caring for their mother took. Alice may be able to understand Barbara's hurt feelings and her distress over feeling that their mother did not love her. Alice may even be able to soothe those hurt feelings by telling Barbara that their mother did love both daughters but changed her will in gratitude for the care Alice provided and not because she loved Barbara less. The daughters may be able to reach an agreement on dividing the property, for example, by agreeing that Barbara will take some sentimental items or a small share of the estate. In addition to whatever Alice and Barbara agree to do with the property in the estate, they will have opened channels of communication and may be able to build a better sibling relationship. The result may well be a "win" for both of them.
Although this example provides a best case scenario for mediation, the example is not unrealistic. Many probate conflicts could benefit from mediation rather than litigation.
Conclusion
Mediation will not be desirable in every case, but the personal and family aspects of probate make this area of the law particularly appropriate for mediation. Lawyers practicing in this area should familiarize themselves with the benefits of mediation and be able to recommend it to their clients when appropriate.
By Susan N. Gary
Copr. (C) 2005 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Section
Mediation has played a role in dispute resolution for centuries in legal systems as diverse as those of China and various American Indian groups. In the United States, interest in mediation has grown dramatically since the 1970s. One area of the law in which mediation plays an increasingly important role is family law, where parties routinely use mediation to resolve divorce and custody disputes. Surprisingly, in probate, another area of the law in which family issues predominate, mediation is still in its infancy. Although mediation will not be appropriate for all probate disputes, in many cases mediation may allow parties to reach agreements preferable to the decision a court would reach and may promote healing of strained family relationships. This article examines the potential uses of mediation in probate proceedings.
Nature of Probate Disputes
Disputes arise in probate for a variety of reasons. Conflict may occur over the disposition of a decedent's property because relatives are dissatisfied with the decedent's estate plan. Grief associated with the death of a loved one creates tensions, and lawsuits may follow from misdirected anger over the death. Death may cause dormant family disputes to resurface and a dispute nominally over property may in fact be a dispute over family relationships.
Disputes may arise because family members have different views of a fair distribution of a decedent's property. For example, one of a decedent's children may regard equal distribution among all the children as fair, while another child may believe that he or she should have received more because of care given an older or incapacitated parent. A dispute may arise between children of one marriage and the surviving spouse of a later marriage. The decedent's children may view the decedent's property as theirs, while the surviving spouse may feel a right to a sizable portion of the property. Litigated solutions to these problems ignore the complex emotional issues that may underlie the dispute.
Probate courts are also the forum for conservatorship and guardianship proceedings. Disputes may arise in these proceedings if the proposed protected person contests the guardianship or if family members disagree among themselves over the appropriate approach for their older relative. Disputes may develop between a care facility and family members. These disputes all involve emotional issues.
Finally, disputes may arise between beneficiaries of a trust or estate and a fiduciary. The family may disagree over who should act as fiduciary, or the beneficiaries may be concerned about investment decisions or property management issues under the fiduciary's control. If the fiduciary is also a beneficiary, the other beneficiaries may perceive inequities or conflicts of interest, whether real or imagined.
Benefits of Mediation
Family members involved in a dispute often resolve their differences without seeking assistance outside the family. Even after one party contacts a lawyer, a negotiated settlement may be possible. For some families, however, a more formal dispute resolution process becomes necessary. Some benefits of using mediation instead of litigation to resolve disputes are of particular interest in the probate context.
Confidentiality. Mediation allows parties to a dispute to air their grievances in a private setting. Although the level of confidentiality depends on agreement between the parties and varies depending on state law, the parties may keep much of what they discuss out of the public record. The mediator usually asks the parties to sign an agreement not to disclose information conveyed during the mediation. In addition, state law generally limits the disclosure of information obtained in settlement discussions and extends that protection to mediation. Some states grant additional evidentiary privileges for mediation, but many states also impose a duty to report specified information, such as disclosures of abuse or threats of harm.
If a family involved in a will contest is airing "dirty laundry" or if information about an older person's eccentric behavior is relevant to a guardianship proceeding, the family will benefit from privacy if they mediate the dispute. If the parties agree not to disclose information revealed during the mediation, they might speak more freely and address messy relationship issues in crafting solutions to their dispute. Both sides may be more open, and that willingness to discuss difficult issues may lead to a better understanding between the parties.
Emotional benefits. The emotional benefits of mediation can be significant. Mediation gives parties a chance to be heard. For some family members, being able to air grievances and receiving an apology or explanation for troubling behavior may be more important than receiving a property settlement. In addition, giving parties more control over the outcome may increase psychological well-being.
In a guardianship proceeding, mediation involves the older adult in the process, giving that person a voice and helping him or her listen to the concerns of other family members. Mediation may leave the person less angry and confused than a more formal court proceeding.
Mediation also helps families avoid some of the emotional costs of litigation. Mediation may be less stressful and traumatic than litigation because litigation pits parties against each other and tends to escalate the conflict. Mediation may even have emotional benefits when compared with disputes that remain unresolved. If a family member knows that he or she will not likely prevail in a lawsuit, that person may not pursue a legal remedy. Although no lawsuit ensues, the conflict within the family may persist. Anger and estrangement between family members may continue for years.
Improved ongoing relationships. Mediation can repair, maintain or improve ongoing relationships. Probate disputes involve family members. In most cases, continuing the relationships among the various family members will benefit the family. Because the parties must work together during the mediation to develop a solution to their conflict, they may acquire communication and problem solving skills that will aid them in the future. Mediation is less likely than litigation to drive family members farther apart.
Unique solutions. Mediation allows the parties to forge their own solution to a dispute. There are limited remedies available to a judge to resolve a dispute over property. Mediation allows the parties to take nonlegal as well as legal interests into consideration. Parties may best handle the division of property with sentimental value in this way. For example, if two siblings who are to receive the decedent's tangible personal property work together to divide the property, they will likely achieve a better result for both of them than they would if a court divided the property to reach a financially equal result.
In guardianship proceedings in most states, the court faces an all or nothing choice--the court can either appoint a guardian and deprive the protected person of all rights or decide not to appoint a guardian and leave the person on his or her own. Through mediation, the older person, family members and others can develop less intrusive solutions that will protect the older person while minimizing the loss of rights. The mediated solutions can also take into account the interests of family members who are concerned about the care of the older person.
Cost-effectiveness. Mediation may also be more cost-effective than litigation. Particularly in small estates, litigation costs may be disproportionate to the amount at issue. More parties may be able to protect their interests if a less expensive alternative is available.
Potential Problems with Mediation
Although mediation is appropriate in many situations, some characteristics of probate disputes may make mediation difficult or even inappropriate.
Grief. If the dispute involves a decedent's estate, the family may still be grieving over the death of a loved one. Grief may be a factor in the dispute itself because one family member may blame another for the death. If, for example, parents of a decedent have not accepted the fact that the decedent is homosexual, they may misdirect their grief over the death as anger at the decedent's domestic partner who is the primary beneficiary under the decedent's will. Grief may also affect the parties' ability to mediate. Delay may be necessary to allow the parties to progress through the grieving process.
Power imbalance. Power imbalances are always a concern in mediation, but may be of particular concern in probate disputes. In a guardianship proceeding, if the older person contests the guardianship, mediation will be appropriate only if he or she can participate effectively. An advocate can assist the older person, not by taking the older person's place but by facilitating the older person's expression of his or her concerns. If the older person cannot participate, even with assistance, mediation is inappropriate.
Power imbalances may also exist in disputes between family members over a guardianship for a relative or in disputes over property. An older surviving spouse may be intimidated by younger family members, or preexisting power imbalances between siblings may adversely affect the mediation. If minors are involved, it may be necessary to arrange for one or more advocates to represent their interests. A skilled mediator should be aware of potential power imbalances and manage them during the mediation so that all parties are protected. In some situations, however, the power imbalance may be too great for mediation to be appropriate.
Long-term dispute. Although triggered by a family death, some probate disputes may grow out of a longstanding family feud. If parties have become entrenched in their positions after years of animosity, mediation may not be appropriate.
Need for a precedent. In some situations, litigation may be appropriate to create a precedent for use in subsequent cases. This situation is less likely to occur in the probate context than in other areas of the law, such as racial discrimination cases. If, however, the situation is one for which establishing a precedent is important, that will be a factor in weighing the merits of litigation versus mediation.
Guidelines for Using Mediation
In considering mediation to resolve probate disputes, a lawyer should evaluate a number of factors. The presence of some factors makes mediation more appropriate, while other factors may mean that the lawyer should recommend against the use of mediation. Each case is unique, and a lawyer should evaluate each case individually. The guidelines that follow may help to determine whether a lawyer should recommend mediation.
Ongoing relationship. If the parties would benefit from an ongoing relationship--the case with most family relationships--mediation may help. Further, if the parties express concern about maintaining an ongoing relationship, they are likely to work together constructively in mediation. Parties may be more concerned with rebuilding or preserving a family relationship among siblings than one between a stepparent and stepchildren. Even in the latter situation, though, a family relationship may be important, if only out of respect for the decedent.
Willing parties. Mediation works best if all parties want to participate. If the parties come to mediation willingly, they are more likely to work together to resolve their dispute. Mandatory mediation has been criticized and is inappropriate in probate. If the parties have entrenched positions due to a longstanding dispute or moral or religious beliefs, then a negotiated or litigated resolution of their dispute will be more appropriate than mediation.
Competent parties. All parties must be able to participate effectively. The mediator may need to make accommodations for older persons who may have restricted mobility, may have difficulty hearing or may be confused by new settings. Arranging the mediation to take personal concerns into consideration and allowing an advocate to participate when necessary may make mediation possible. If any party is mentally incapacitated, so overcome by grief that he or she cannot function or physically unable to attend the mediation, the lawyer should not recommend mediation.
Nonlegal issues. If a dispute involves nonlegal issues, mediation may benefit the parties. Mediation permits parties to create their own solution to the dispute and allows them to address both nonlegal and legal issues in reaching that solution. Mediation also allows parties to express their personal concerns, anger or grief. Being heard by other family members may be part of what some disputants want or need.
Confidentiality. If parties want confidentiality because of the sensitive nature of the dispute, mediation will provide greater privacy than litigation. In family disputes, minimizing the public record may benefit the parties. If one of the disputants is a public figure, this factor may be of particular importance. If the dispute involves relationships outside of society's accepted norms, the privacy associated with mediation may also be desirable.
Minimal power imbalances. A lawyer recommending mediation should consider whether power imbalances might adversely affect the mediation. Although a skilled mediator can manage some power imbalances, and although power imbalances can affect litigation as well as mediation, effective participation remains an important factor. An older person with weakened physical or mental abilities may not be able to participate adequately. If there is a history of dominance in the family, between either generations, spouses or siblings, the power imbalances may be too great to overcome. If there is an indication of physical or mental abuse, mediation will be inappropriate. In addition, if an entity such as a hospital or nursing home is on one side of the dispute and an older person or the person's family is on the other side, the individual or family may feel intimidated by the institution. Mediation may not adequately protect the rights of someone who feels overwhelmed by the other party.
Example
A probate dispute has legal issues that a court can resolve. A litigated outcome will likely mean that one party "wins" and the other party "loses," based on legal rules. A dispute, however, may also involve a number of emotional issues. For example, parties may disagree on what would be a "fair" distribution of the decedent's estate. The court can determine whether the will was valid but will not be able to address the underlying family issues. In contrast, parties who mediate their dispute may construct a solution that allows both sides to win.
To demonstrate a situation for which mediation would be appropriate, consider a family consisting of a mother, a father and their two adult daughters, Alice and Barbara. After the father died, the mother moved in with Alice and lived with her for eight years until the mother died. In the last two years before her death, the mother was bedridden, and Alice cared for her at home. Barbara lived in another state. She called frequently but was unable to visit much or to help with the care of her mother. On the mother's death, the mother's will left her entire estate to Alice. A prior will that the mother executed before the father's death gave the estate to the father, or if he predeceased the mother, divided the estate equally between the two daughters.
Alice thinks that the result under the will is fair because she cared for her mother for many years. Alice thinks that Barbara does not need the money and that Barbara does not deserve a share of the estate. Barbara is hurt by her mother's will. She thinks that if her mother loved the daughters equally, she would have divided the estate equally. She thinks Alice convinced her mother to leave the estate to Alice.
Barbara talks to a lawyer about what she can do. The lawyer first considers the legal issues around whether the will disinheriting Barbara is valid. The lawyer looks for evidence of undue influence and lack of mental capacity. Several facts raise suspicions about the will and about whether Alice unduly influenced her mother to execute a new will. The mother was in declining health, she lived with Alice, and Alice had both the motive and opportunity to influence her mother. Other factors, such as when the mother executed the will, whether the mother was under medication and whether witnesses can speak about the mother's mental capacity, could be important. After gathering this information, the lawyer might be able to put together a case of undue influence by Alice and lack of the mother's testamentary capacity. The facts, however, may be difficult to establish. Alice may have neighbors who can testify that the mother told them repeatedly that she was thankful for Alice's care and that she would reward Alice in her will. The will does not give property outside the family and could be viewed as rewarding Alice. The evidence will likely go both ways, and it will be difficult to predict the outcome in court.
If Alice and Barbara litigate the case, one of them will win and the other will lose. In addition, they will lose their relationship with each other, at a time when they have lost their mother and would otherwise benefit from family connections. They will also face legal bills and the emotional strains of litigation.
After reviewing the facts, weighing the legal arguments and considering the potential benefits of mediation for these particular parties--repairing the sibling relationship and addressing the emotional issues involved in this dispute--Barbara's lawyer might suggest mediation. Even if Alice thinks that she would win in a lawsuit, she may be willing to mediate to avoid the litigation and because she cannot be sure of the outcome in court. Barbara may be willing to mediate for the same reasons.
Assuming Alice and Barbara agree to mediate, they will meet with the mediator, either with or without their lawyers present. If the lawyers are not present at the mediation, the parties most likely will agree to have their lawyers review any agreement that they reach before they sign it. The mediation process may benefit the sisters in a number of ways. During the mediation each sister will have a chance to tell her story and will listen to her sibling's story. Barbara may be able to understand the sacrifices that Alice has made and the toll that the years of caring for their mother took. Alice may be able to understand Barbara's hurt feelings and her distress over feeling that their mother did not love her. Alice may even be able to soothe those hurt feelings by telling Barbara that their mother did love both daughters but changed her will in gratitude for the care Alice provided and not because she loved Barbara less. The daughters may be able to reach an agreement on dividing the property, for example, by agreeing that Barbara will take some sentimental items or a small share of the estate. In addition to whatever Alice and Barbara agree to do with the property in the estate, they will have opened channels of communication and may be able to build a better sibling relationship. The result may well be a "win" for both of them.
Although this example provides a best case scenario for mediation, the example is not unrealistic. Many probate conflicts could benefit from mediation rather than litigation.
Conclusion
Mediation will not be desirable in every case, but the personal and family aspects of probate make this area of the law particularly appropriate for mediation. Lawyers practicing in this area should familiarize themselves with the benefits of mediation and be able to recommend it to their clients when appropriate.
By Susan N. Gary
Copr. (C) 2005 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Section
Monday, November 5, 2007
Sale of Real Property from an Estate
There are some special issues to consider when the seller of real estate is the estate of a decedent.
Real estate held by a decedent’s estate is subject to liens for the payment of any New Jersey Transfer Inheritance Tax, New Jersey Estate Tax, Federal Estate Tax and debts of the decedent.
The N.J. Transfer Inheritance Tax is a state tax imposed on the transfer of property made upon the death of a New Jersey resident and certain non-residents, or made by such a decedent in contemplation of death. N.J.S.A. 54:34-1 et seq. The Inheritance Tax lien lasts for a period of fifteen years following the date of death. N.J.S.A. 54:35-5. This lien is discharged when the tax is paid or a bond given to the State. The N.J. Division of Taxation issues a tax waiver which is then recorded in the county clerk’s office of the county in which the property is situated. Tax waivers can be obtained before a return has been audited by the State upon submission of the estate’s Inheritance Tax return and payment of an amount deemed sufficient by the Inheritance Tax Bureau of the N.J. Division of Taxation.
New Jersey also imposes an Estate Tax on estates of resident decedents dying after December 31, 2001 if the gross value of the estate exceeds $675,000 . N.J.S.A. 54:38-1 et seq. A New Jersey estate may be subject to the N.J. Estate Tax even if it is not subject to the Federal Estate Tax. The N.J. Estate Tax also becomes a lien against property. The N.J. Estate tax lien exists as a lien against the property as of the date of decedent’s death until paid. N.J.S.A. 54:38-6. This lien can be discharged in the same manner as the N. J. Transfer Inheritance Tax lien by the issuance of a tax waiver from the N. J. Division of Taxation.
The Federal Estate Tax may be imposed on estates in the amount of $2.0 million for decedents dying in 2007 ($3.5 million commencing 2008). The Federal Estate Tax becomes a lien on the property in the estate for ten years from the date of death. I.R.C. §6324 (a)(1). To discharge the lien, a Certificate of Release of Estate Tax Lien can be obtained from the IRS and recorded with the County Clerk in the county in which the property is located.
If a tax waiver or release of lien cannot be obtained prior to closing, the buyer’s title company will frequently agree to escrow funds to cover any possible liability and to insure that the selling estate will obtain and record the waiver or release.
Finally, real estate of a decedent is liable for the debts of the decedent for one year after date of death. N.J.S.A. 3B:22-22. If the property is being sold within a year of decedent’s death, the buyer’s title company with generally require information concerning the assets and debts of the estate and a bond from the executor before agreeing to insure the property.
Real estate held by a decedent’s estate is subject to liens for the payment of any New Jersey Transfer Inheritance Tax, New Jersey Estate Tax, Federal Estate Tax and debts of the decedent.
The N.J. Transfer Inheritance Tax is a state tax imposed on the transfer of property made upon the death of a New Jersey resident and certain non-residents, or made by such a decedent in contemplation of death. N.J.S.A. 54:34-1 et seq. The Inheritance Tax lien lasts for a period of fifteen years following the date of death. N.J.S.A. 54:35-5. This lien is discharged when the tax is paid or a bond given to the State. The N.J. Division of Taxation issues a tax waiver which is then recorded in the county clerk’s office of the county in which the property is situated. Tax waivers can be obtained before a return has been audited by the State upon submission of the estate’s Inheritance Tax return and payment of an amount deemed sufficient by the Inheritance Tax Bureau of the N.J. Division of Taxation.
New Jersey also imposes an Estate Tax on estates of resident decedents dying after December 31, 2001 if the gross value of the estate exceeds $675,000 . N.J.S.A. 54:38-1 et seq. A New Jersey estate may be subject to the N.J. Estate Tax even if it is not subject to the Federal Estate Tax. The N.J. Estate Tax also becomes a lien against property. The N.J. Estate tax lien exists as a lien against the property as of the date of decedent’s death until paid. N.J.S.A. 54:38-6. This lien can be discharged in the same manner as the N. J. Transfer Inheritance Tax lien by the issuance of a tax waiver from the N. J. Division of Taxation.
The Federal Estate Tax may be imposed on estates in the amount of $2.0 million for decedents dying in 2007 ($3.5 million commencing 2008). The Federal Estate Tax becomes a lien on the property in the estate for ten years from the date of death. I.R.C. §6324 (a)(1). To discharge the lien, a Certificate of Release of Estate Tax Lien can be obtained from the IRS and recorded with the County Clerk in the county in which the property is located.
If a tax waiver or release of lien cannot be obtained prior to closing, the buyer’s title company will frequently agree to escrow funds to cover any possible liability and to insure that the selling estate will obtain and record the waiver or release.
Finally, real estate of a decedent is liable for the debts of the decedent for one year after date of death. N.J.S.A. 3B:22-22. If the property is being sold within a year of decedent’s death, the buyer’s title company with generally require information concerning the assets and debts of the estate and a bond from the executor before agreeing to insure the property.
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