Probate and Estate Tax

Many people confuse probate court costs with federal estate tax. The two are very different.

Probate

Probate proceedings are nothing more than establishing the validity of a will. However, this process is a long and expensive formality. For example, to probate an estate of $1,000,000.00, it could cost a decedent’s estate from $23,000 to $46,000 or more in fees. A living trust can avoid this outcome.

Federal Estate Tax

A living trust is not a guarantee that you will avoid all federal estate taxes. In 2011, $1 million may be passed by testamentary gift without incurring any type of federal estate tax. Any amount above that will be taxed at a rate of 55%.

Living Trust

A living trust can be a very useful tax savings device if drafted properly and funded. For example, if a husband and wife have a combined estate of $2 million, only $1 million of that amount could be passed to the couples’ heirs without being subject to estate tax in 2011. The remaining $1 million would be subject to a tentative federal estate tax bill of approximately $435,000.00. A living trust, however, can be drafted to allow this entire amount to pass to the couples’ heirs without any federal estate tax consequences. This is what is known as an A/B Living Trust.

Probate Court

The importance of funding your living trust to avoid probate court proceedings cannot be overemphasized. If your assets are in your living trust, the probate court never becomes involved. This is what makes a living trust so valuable. If just one bank account is in one name alone instead of in the trust, then your estate may have to go through probate and incur all the costs of probate on top of what you paid to set up a living trust.

Avoiding Probate

The purpose of avoiding probate is to free up your estate from the lengthy court proceeding and legal fees. Typically probate fees are up to 5% or more of the value of the estate property. Probate is also public and your will is registered at the courthouse for all to examine and read. However, if you transfer property outside of probate with joint tenancy, your living trust or beneficiary or payable-on-death account designations, the transactions are kept private. Property passed outside of probate will transfer to your spouse and loved ones quicker, often within weeks, instead of a year or longer required by probate laws.