1. Probate

Advantages

• Probate court supervision of administration
• Protection of:

• Testator's heirs.
• Testator's creditors.
• Federal and state taxing authorities.

• Income tax planning.
• Close-out of creditors after the four-month statute of limitations following publication of notice.

Disadvantages

• Fees and expenses (attorney and executor fees).
• Delays in distribution and lack of availability of assets to heirs.
• Allegations that losses and excess expense result.
• Inconvenience of dealing with the court and bureaucracy.

2. Procedures available to avoid probate

• Joint tenancy.
• Totten trusts or pay-on-death accounts.
• Private annuities.
• Premarital agreement.
• Postmarital agreement.
• Employee benefit plans.
• Life insurance.
• Powers of appointment.
• Power to withdraw.
• Community property left outright to spouse.
• Series E bonds.
• Stock brokerage accounts.
• Revocable trusts.
• Irrevocable trusts.
• Uniform Transfers to Minors Act.

3. Joint tenancy

Useful for following assets:

• Bank accounts.
• Savings accounts.
• Securities (stocks and bonds).

• Residence or other real estate (joint tenancy between spouses).

Advantages

• Simple for survivor to have property transferred.
• Creditors of deceased joint tenant generally have no claim against deceased joint tenant's interest.
• Useful if asset will decline in value when owned by husband and wife. Survivor's one-half does not get reduced basis on valuation date.

Disadvantages

• Inflexibility. Joint tenant's rights are determined immediately on signing of instrument. No modification without consent of all joint tenants.
• Independence of new joint tenant is instantaneous. Joint tenant has vested right to sell, mortgage, partition, donate, or transfer joint tenancy interest without consent of donor joint tenant. These acts destroy the joint tenancy.
• Incompetence of joint tenant may require conservatorship (inconvenience in sale, transfer, or hypothecation).
• Arguments about management or decision to sell must be resolved by litigation.
• Will has no effect on the joint tenancy property.

Tax consequences.

• Between spouses, no present gift on creation of joint tenancy from assets of one spouse.
• Joint bank accounts and U.S. savings bonds. On creation of joint tenancy, no gift until noncontributing joint tenant withdraws money or cashes bonds.
• On death of first joint tenant, only decedent's one-half gets step-up in basis for federal income tax purposes. If property held as community property, both halves get stepped-up basis.

Totten trusts or pay-on-death accounts.

• Definition: A savings or bank account with depositor (trustor) naming himself as "Trustee for the benefit of ______________________________."
• Depositor owns the account. Beneficiary has no rights while depositor is alive, but receives the money on death of depositor.
• Tax effects
• Federal estate tax: taxed to depositor.
• Gift tax: none.
• Income tax: income is taxed to the depositor unless the trust is not a Totten trust but one in which the beneficiary has a true equitable interest and is entitled to the income.
• Useful in a small estate to avoid probate, or in an estate consisting entirely of bank accounts
• Pay-on-death may be used for bank accounts, savings accounts, credit union accounts, and thrift certificates

Private annuities

• Ordinarily, among family members only.
• Risk for economic and tax reasons
• Requires sophisticated legal draftsmanship and evaluation

Premarital and postmarital agreements

• Appropriate in second and third marriages to a.protect heirs of prior marriages
• For older clients
• Problems of recordkeeping to avoid commingling community property and separate property
• Drafting and disclosure--sensitive emotional problems.
• Transfer of property in premortem settlement may create gift and estate tax consequences (present interest gift)

Employee benefits-the forgotten asset

• Social security
• Deferred compensation plans
• Life insurance
• Qualified profit-sharing plan (watch lump sum distribution)
• Qualified pension plan (watch lump sum distribution)
• Qualified stock bonus plan
• Keogh plan (HR 10) and Individual Retirement Plan (IRA)
• Gift to heirs of employee ($5000 widow's benefit)

Life insurance

• Use: liquidity and creation of estate
• Abuse: excess premiums and excess coverage impoverish client
• Problems in transfer to wife of community or husband-owned policy
• Subsequent marital dissolution--husband not insurable
• Failure to pay premiums from wife's separate bank account (but not if wife is beneficiary)
• If wife predeceases husband, ownership of policy reverts to husband unless wife's will provides otherwise, i.e., to children or trust
• Gift by decedent within three years of death includable in decedent's estate

Power of appointment

• General power: includable in estate of holder for death taxes
• Special power: not includable in estate of holder for death taxes
• Hidden power: includable in estate of holder for death taxes although not recognized as a general power of appointment
• Examples of hidden powers. See IRC 2041.
• Power to invade a trust, not limited by an ascertainable standard: "health, support, maintenance, and education"
• Power to pay estate taxes or any other taxes, debts, or charges in favor of a donee's estate, to pay support for dependents, to end trusts, uncontrolled discretion, ignore fair treatment of beneficiaries, to remove trustee, to borrow without adequate security

Power of withdrawal.

Use in place of automatic distribution to beneficiary of trust; Under these circumstances the beneficiary may not wish to or may be unable to exercise the power.

• Experiencing marital difficulties
• Imprudent business person
• Incompetent physically or mentally
• Unknown whereabouts of beneficiary
• Desire that trust provisions continue

Trusts (revocable and irrevocable)

Advantages

• Reduces probate and administration costs
• Test of trust management during trustor's lifetime (revocable trust)
• Assets more rapidly available to beneficiaries (revocable trusts are subject to estate tax valuation dates and payment of death taxes)
• May avoid conservatorship for assets of aged client
• Reduces likelihood of success of legal contest on dispositive provisions
• Eliminates publicity (protects privacy)
• Court supervision available for disputes and instruction to trustee

Disadvantages

• Recordkeeping requirements and expense if trust is funded
• Tax filings likely if trust is funded and has income
• Expense of trustee if trustee is an institution or professional trustee
• Asset segregation and avoidance of Costs of establishing the trust (legal fees)

Danger of irrevocable trusts for living persons

• Change in circumstances
• Unforeseeable events (economic, family, marital)