Estate planning can become complicated and confusing, especially when discussing terms such as per capita and per stirpes. However, how a person wants his or her estate divided after they have passed can be dictated based on these terms.
A legal Latin term, per stirpes literally means “by branch” and refers to the division of an estate’s distribution of shares. Per stirpes distribution is when a group of estate beneficiaries, such as grandchildren, are entitled to an equal distribution of the share of the residuary estate that their deceased parent would have received.
For example, if a widow passes and leaves her estate to her surviving children and grandchildren per stirpes, then her estate would be equally distributed to each branch of her children and their children if her child has passed. So, if child #1 is still living, they would get 1/3 of the estate. If child #2 has passed but has a surviving child (the widow’s grandchild), then that grandchild would get 1/3 of the estate also. If child #3 has passed and has 3 children who are still living, each would get 1/9th of the estate (1/3 divided into 3 equal parts). In simplicity, an estate is divided equally among any children and if the child has passed their portion is divided equally between their children.
Alternatively, per capita is another way to distribute the estate’s assets. Under per capita distribution, all persons of equal relationship to the deceased, such as all children and then grandchildren, receive equal shares of the residuary estate.
For example, if a widow chooses per capita distribution, then child #1 would get 1/3 of the estate, then the remaining amount would be divided among the grandchildren from child #2 and child #3. Even if child #2 only has one heir and child #3 has 5, each of the 6 grandchildren would split the remaining 2/3rds equally among themselves.
Probate, Latin for proving, is the process by which a will is brought before a court to prove that a will is valid. Probate courts are charged with this responsibility. States vary on the supervision and settlement of an estate.
State statutes concerning the probate process have 3 primary objectives:
- Preservation of estate assets
- Protection of the rights of creditors in the payment of any claims before the estate distributes the assets
- Assurance that the heirs receive their inheritance according to the terms of the estate owner’s will
The probate process continues after the estate’s personal representative, executor, or administrator is approved and posts any bond that is required.
- First, the personal representative must prove that the will is valid and legally signed by the estate owner who was not under duress, influence, or mental defect at the time of signing.
- Next, all creditors must be given the notice to make claims for any money owed to them by the estate.
- Then, an inventory and appraisal of estate assets are prepared and filed by the personal representative.
- Estate assets must be managed and liquidated as appropriate by the personal representative in order to pay any taxes, fees, or debts owed by the estate.
- Finally, after all, debts have been satisfied, the remaining amount is distributed to the heirs in consensus with the will or the state laws of intestacy if there was no will.
This sometimes-complicated process can take a year or more to settle. This can be costly and unnecessary. With proper planning, the impact of the probate process can be considerably lessened.
The good news is that there are steps that can be taken to avoid or minimize probate.
- State Status – Many states make provision for certain estates to be administered without the supervision of the probate court if specific requirements are met. This can result in a quicker distribution to heirs and less overall cost.
- Form of Property Ownership – If a joint tenancy form has been completed, then the title to property automatically passes to the surviving joint tenant, usually the spouse.
- Transfer on Death – Several states have now enacted a Transfer on Death statute. These laws allow a person to name a successor owner at the time of their death for any property title certificates including but not limited to real estate, savings accounts, and securities.
- Life Insurance – Rarely subject to the probate process, life insurance is not affected unless it is payable to the estate. Then, it must go through the probate process.
- Lifetime Giving – To avoid the probate process, gifts can be given during life.
- Trusts – There are two types of trusts: Totten and revocable living. A Totten trust is a bank savings account held in trust for a particularly named individual and can be used to pass estate assets at death without going through probate. A revocable living trust, when created during an estate owner’s lifetime, can be a cost-effective way to avoid the expensive and time-consuming probate process. In addition, the estate owner still retains control over the assets prior to death.
With so many different ways to bypass the probate process, all different avenues should be explored and evaluated in terms of its income and estate tax consequences, as well as the potential impact on the estate owner’s goals and objectives for the estate.
Since this process can become complicated, it is wise to find a qualified financial manager to handle this process.
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