Business Planning Services

Business Planning Services: Probate

Silverman Law Offices offers several business planning services. But we also want to make sure you understand what some of those services include and why you might need them. This article will explain the fundamentals of probate, which is something you can easily avoid by having a trusted professional set up the documents required so that your beneficiaries receive everything you want them to.

WHAT IS PROBATE?

Probate generally is a court-supervised process for identifying and gathering the decedent’s assets, paying taxes, claims and expenses of administration, and distributing assets to beneficiaries. The Arizona Probate Code is found in Chapter 14 of the Arizona Statutes.

There are two generally types of probate administrations under Arizona law: informal and formal administration. This article will primarily discuss informal administration.

WHAT ARE PROBATE ASSETS?

Probate administration only applies to probate assets. Probate assets are those assets that the decedent owned in his or her sole name at death, or that were owned by the decedent and one or more co-owners and lacked a provision for automatic succession of ownership at death.

For example:

  • A bank account or investment account in the sole name of a decedent is a probate asset, but a bank account or investment account owned by the decedent and payable on death (POD) or transferable on death (TOD) to another, or held jointly with rights of survivorship (JTWROS) with another, is not a probate asset;
  • A life insurance policy, annuity contract or individual retirement account that is payable to a specific beneficiary is not a probate asset, but a life insurance policy, annuity contract or individual retirement account payable to the decedent’s estate is a probate asset;
  • Real estate titled in the sole name of the decedent, or in the name of the decedent and another person as tenants in common, is a probate asset, but real estate titled in the name of the decedent and one or more other persons as community property with rights of survivorship or joint tenants with rights of survivorship is not a probate asset;

This list is not exclusive, but is intended to be illustrative.

WHY IS PROBATE NECESSARY?

Probate is necessary to pass ownership of the decedent’s probate assets to the decedent’s beneficiaries. If the decedent left a valid will, unless the will is admitted to probate in the Court, it will be ineffective to pass title to the decedent’s beneficiaries. If the decedent had no will, probate is necessary to pass ownership to the decedent’s assets to those persons who are to receive them under Arizona law.

Probate is also necessary to wind up the decedent’s financial affairs after his or her death. Administration of the decedent’s estate ensures that the decedent’s creditors are paid if certain procedures are correctly followed.

WHAT IS A WILL?

A will is a document signed by the decedent and witnesses, that meets the requirements of Arizona law. In his or her will, the decedent can name the beneficiaries whom the decedent wants to receive the decedent’s probate assets. The decedent can also designate a personal representative (Arizona’s term for an executor) of his or her choosing to administer the estate.

If the decedent’s will disposes of all of the decedent’s probate assets and designates a personal representative, the will controls over the default provisions of Arizona law. If the decedent did not have a valid will, or if the will fails in some respect, the identities of the persons who will receive the decedent’s probate assets, and who will be selected as the personal representative of the decedent’s probate estate, will be as provided by Arizona law.

WHAT HAPPENS TO PROBATE ASSETS IF THERE IS NO WILL?

If someone dies without a valid will, he or she is “intestate.” Even if the decedent dies intestate, his or her assets are almost never turned over to the State of Arizona. The State will take the decedent’s assets only if the decedent had no heirs. The decedent’s “heirs” are the persons who are related to the decedent and described in the Arizona statute governing distribution of the decedent’s probate assets if he or she died intestate.

WHO IS INVOLVED IN THE PROBATE PROCESS?

Depending upon the facts of the situation, any of the following may have a role to play in the probate administration of the decedent’s estate:

  • The Clerk of the Superior Court in the county in which the decedent was domiciled at the time of the decedent’s death;
  • The Superior Court (acting through a Superior Court Judge);
  • The person or institution serving as the decedent’s personal representative (or executor);
  • The attorney engaged by the personal representative to provide him or her with legal advice throughout the probate process;
  • Those filing claims in the probate proceeding relative to debts incurred by the decedent during his or her lifetime, such as credit card issuers and health care providers; and
  • The Internal Revenue Service (IRS), as to any federal income taxes that the decedent may owe, any income taxes that the decedent’s estate may owe, and, sometimes as to federal gift, estate or generation-skipping transfer tax matters.

WHERE ARE PROBATE PAPERS FILED?

The decedent’s will, if any, and certain other documents required in order to begin the probate proceeding, are filed with the Clerk of the Superior Court, usually for the county in which the decedent lived. A filing fee must be paid to the Clerk. The Clerk then assigns a file number, and maintains an ongoing record of all papers filed with the Clerk for the administration of the decedent’s estate.

In the interest of protecting the privacy of the decedent’s beneficiaries, any documents that contain financial information pertaining to the decedent’s estate are not available for public inspection.

WHO SUPERVISES PROBATE ADMINISTRATION?

A Superior Court Judge presides over probate proceedings. However, most probate proceedings are initiated as informal probates. This means that the initial paperwork is filed with the Probate Registrar, and if all is in order, the person applying is appointed as Personal Representative without the need for a court hearing. However, there are occasions where informal probate is not available, and in those instances, a formal probate proceeding is filed. At the initial hearing in a formal probate, the Judge will rule on the validity of the decedent’s will, or if the decedent died intestate, the Judge will consider evidence to confirm the identities of the decedent’s heirs as those who will receive the decedent’s probate estate.

If the decedent had a will that nominated a personal representative, the Judge will also decide whether the person nominated is qualified to serve in that position. If the nominated personal representative meets the statutory qualifications, the Court will issue “Letters of Administration,” also referred to simply as “letters.” These “letters” are important evidence of the personal representative’s authority to administer the decedent’s estate.

Most probates, whether initiated as formal or informal, are thereafter administered informally and without the need for court appearances. The reason is that the personal representative is vested with broad powers to properly administer the estate without court approval. If any questions or disputes arise during the course of administering the decedent’s estate, the Judge will hold a hearing as necessary to resolve the matter in question. The Judge’s decision will be set forth in a written direction called an “Order.”

WHAT IS A PERSONAL REPRESENTATIVE, AND WHAT DOES THE PERSONAL REPRESENTATIVE DO?

The personal representative is the person, bank, or trust company appointed by the Court to be in charge of the administration of the decedent’s estate. In Arizona, the term “personal representative” is used instead of such terms as “executor, executrix, administrator and administratrix.”

The personal representative has a legal duty to administer the estate pursuant to Arizona law. The personal representative must:

  • Identify, gather, value and safeguard the decedent’s probate assets;
  • Publish a “Notice to Creditors” in a local newspaper in order to give notice to potential claimants to file claims in the manner required by law;
  • Serve a “Notice of Administration” to provide information about the estate administration and notice of the procedures required to be followed by those having an interest in the administration of the decedent’s estate;
  • Conduct a diligent search to locate “known or reasonably ascertainable” creditors, and notify these creditors of the time by which their claims must be filed;
  • Object to improper claims, and defend suits brought on such claims;
  • Pay valid claims;
  • File tax returns and pay any taxes properly due;
  • Employ professionals to assist in the administration of the estate (i.e., attorneys, certified public accountants, appraisers and investment advisors);
  • Pay expenses of administering the estate;
  • Pay statutory amounts to the decedent’s surviving spouse or family;
  • Distribute assets to beneficiaries; and
  • Close the estate.

WHO CAN BE A PERSONAL REPRESENTATIVE?

The personal representative can be an individual, or a bank or trust company, subject to certain restrictions. A trust company incorporated under the laws of Arizona, or a bank or savings and loan authorized and qualified to exercise fiduciary powers in Arizona, can serve as personal representative.

WHO WILL THE COURT APPOINT TO SERVE AS PERSONAL REPRESENTATIVE?

If the decedent had a valid will, the Court will appoint the person named by the decedent in his or her will to serve as personal representative, as long as named person or bank or trust company is legally qualified to serve.

If the decedent did not have a valid will, the surviving spouse has the first right to be appointed by the Judge to serve as personal representative. If the decedent was not married at his or her death, or if the decedent’s surviving spouse declines to serve, there is a list of other persons having priority to serve as personal representative. These include, for example, adult children of the decedent.

WHY DOES THE PERSONAL REPRESENTATIVE NEED AN ATTORNEY?

A personal representative should always engage a qualified attorney to assist in the administration of the decedent’s estate. Many legal issues arise, even in the simplest estate administration, and most of these issues will be novel and unfamiliar to non-attorneys.

The attorney for the personal representative advises the personal representative on their rights and duties under the law, and represents the personal representative in estate proceedings. The attorney for the personal representative is not the attorney for any of the beneficiaries of the decedent’s estate. However, if the personal representative mismanages the decedent’s estate, the personal representative may be liable to the beneficiaries for any harm they may suffer.

A provision in a will mandating that a particular attorney or firm be employed as attorney for the personal representative is not binding. Instead, the personal representative may engage the attorney of his or her choosing.

WHAT ARE THE ESTATE’S OBLIGATIONS TO ESTATE CREDITORS?

The primary purpose of probate is to ensure that the decedent’s debts are paid in an orderly fashion. The personal representative must use diligent efforts to give actual notice of the probate proceeding to “known or reasonably ascertainable” creditors. This gives the creditors an opportunity to file claims in the decedent’s estate, if any. Creditors who receive notice of the probate administration generally have three months to file a claim with the Clerk of the Superior Court. The personal representative, or any other interested persons, may file an objection to the statement of claim. If an objection is filed, the court will sometimes conduct a hearing to determine the validity of the claim. A claimant who files a claim in the probate proceeding must be treated fairly as a person interested in the estate until the claim has been paid, or until the claim is determined to be invalid.

The legitimate debts of the decedent, specifically including proper claims, taxes, and expenses of the administration of the decedent’s estate, must be paid before making distributions to the estate beneficiaries.

HOW IS THE INTERNAL REVENUE SERVICE (“IRS”) INVOLVED?

The decedent’s death has two significant tax consequences: It ends the decedent’s last tax year for purposes of filing the decedent’s federal income tax return, and it establishes a new tax entity, the “estate.”

The personal representative may be required to file one or more of the following returns, depending upon the circumstances:

  • The decedent’s final Form 1040, Federal Income Tax Return, reporting the decedent’s income for the year of the decedent’s death.
  • One or more Forms 1041, Federal Income Tax Returns for the Estate, reporting the estate’s taxable income.
  • Form 709, Federal Gift Tax Return(s), reporting gifts made by the decedent prior to death.
  • Form 706, Federal Estate Tax Return, reporting the decedent’s gross estate, depending upon the value of the gross estate.

The personal representative may also be required to file other returns not specifically mentioned here. The personal representative has the responsibility to pay amounts owed by the decedent or the estate to the IRS. Taxes are normally paid from assets in the decedent’s estate, and not by the personal representative from his or her own assets; however, under certain circumstances, the personal representative may be personally liable for those taxes if they are not properly paid.

The estate will not have any tax filing or payment obligations to the State of Arizona; however, if the decedent owed Arizona intangibles taxes for any year prior to the repeal of the intangibles tax as of January 1, 2007, the personal representative must pay those taxes to the Arizona Department of Revenue.

WHAT RIGHTS DO OTHER POTENTIAL BENEFICIARIES HAVE IN THE DECEDENT’S PROBATE ESTATE?

An Arizona resident has the right to entirely disinherit anyone. It is not necessary to give the disinherited beneficiary a nominal gift of, for example, $1.00. However, a surviving spouse may have community property rights that may not be infringed by one spouse’s will.

HOW LONG DOES PROBATE TAKE?

It depends on the facts of each situation; some probate administrations take longer than others. For example, the personal representative may need to sell real estate prior to settling the estate, or to resolve a disputed claim filed by a creditor, or a lawsuit filed to challenge the validity of the will. Any of these circumstances, if present, would tend to lengthen the process of administration. Even the simplest of estates must be open for at least the four month creditor claim period; it is reasonable to expect that a simple estate will take about five or six months to properly handle.

HOW ARE THE PERSONAL REPRESENTATIVE’S COMPENSATION AND PROFESSIONAL FEES DETERMINED?

The personal representative, the attorney, and other professionals whose services may be required in administering the estate (such as appraisers and accountants), are entitled by law to reasonable compensation. The personal representative’s compensation is usually determined in one of five ways: (1) as set forth in the will; (2) as set forth in a contract between the personal representative and the decedent; (3) as agreed among the personal representative and the persons who will bear the impact of the personal representative’s compensation; (4) the amount presumed to be reasonable as calculated under Arizona law, if the amount is not objected to by any of the beneficiaries; or (5) as determined by the Judge.

The fee for the attorney for the personal representative is usually determined (1) as agreed among the attorney and the personal representative (in most cases an hourly fee), or (2) as determined by the Judge.

WHAT ALTERNATIVES TO INFORMAL OR FORMAL ADMINISTRATION ARE AVAILABLE?

Arizona law provides for several alternate abbreviated procedures other than the formal administration process. These procedures are available for smaller estates, generally of less than $100,000 in value. These allow administration without the need for court.

WHAT IF THERE IS A REVOCABLE TRUST?

If the decedent had established what is commonly referred to as a “Revocable Trust,” a “Living Trust,” or a “Revocable Living Trust,” in certain circumstances, the trustee may be required to pay expenses of administration of the decedent’s estate, enforceable claims of the decedent’s creditors and any federal estate taxes payable from the trust assets.

All of the tasks which must be performed by a personal representative in connection with the administration of a probate estate must also be performed by the trustee of a revocable trust, though the trustee generally will not need to file any documents with the court. This is generally considered to be one of the advantages of a Living Trust – the avoidance of probate. The assets in the decedent’s revocable trust are a part of his or her gross estate for purposes of determining federal estate tax liability.

Silverman’s Business Planning Services

This has been a general summary of probate law and of course each individual case must be examined on its own considerations and merits. If you are looking for additional business planning services or need further explanation of Arizona probate law or any other estate planning terms or procedures, please contact us.

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