Wills, Estates, and Probate Incapacity and Asset Management Living Trusts In South Carolina

WHAT IS A WILL?

A will is a legal document that you write to give instructions about how your property should pass to your survivors after your death. In South Carolina, for a will to be valid, it must be a written document, and signed by you before two unrelated witnesses. A will names one or more beneficiaries. These are the people or organizations who will benefit from your estate. A will describes your property, and specifies the amount or share that passes to each beneficiary. If you have minor children, a will is also the means by which to name your choice of a guardian for your children.

A will also names a person, called the personal representative, who is responsible for paying the bills and carrying out the instructions in your win. Most people name a close relative or friend as their personal representative.

WHAT IS PROBATE?

Probate is the process by which the assets of the estate are inventoried and accounted for, the debts and taxes paid, and the remainder passed along to the beneficiaries and titled in their names. The probate process can take as few as eight months or as long as several years if complications arise. However, for almost all estates the probate process lasts one year or less.

The Probate Court oversees the probate process, which has several steps. The first step proving the will's validity or that no will exists (intestate) - gave probate its name. Probate comes from the Latin word meaning "to prove." A will must be presented to the probate court and its validity proved. If the will was not properly prepared or witnessed, the probate judge can decide to ignore the will's instructions.

In addition to "proving the will," probate's other steps include: (1) officially confirming the personal representative named in the will, or appointing one when there is no will, (2) informing the affected parties, such as creditors, heirs and other beneficiaries, that probate has started, (3) filing an inventory and appraisal of the property, (4) paying creditors, taxes, and fees, (5) preparing a final accounting, (6) distributing the remaining property to beneficiaries, and (7) closing the estate.

Probate is not always necessary if you die owning only the type of property called "non- probate property." This is property which is jointly owned and which passes by law to the surviving co-owner(s) through what is known as right of survivorship. Non-probate property includes jointly owned bank accounts, life insurance and pension benefits that are paid to others, and property owned in trust. Non-probate property passes to survivors outside the probate process and outside the terms of a will.

Property that is subject to probate is called "Probate Property." Generally it includes (1) property that is owned - titled - in your name alone, (2) property owned jointly without a right of survivorship (tenants in common), and (3) life insurance paid to your estate, not to a specific person or organization.

A will affects only "probate property. " If a person dies with a will, the Personal Representative carries out the will's instructions by distributing the probate property as the deceased person specified in the will. If a person dies without a will (called dying intestate), the court allots the property according to a formula set by state law. Thus, one good reason to write a will is to make sure that your probate property gets to people you wish, and not the people set out in the state formula.

It may be possible to partially avoid probate through the use of Living Trusts and Joint Accounts. These are discussed in more detail below.

ESTATE AND GIFT TAXES

While a discussion of estate and gift taxes is beyond the scope of this material, briefly estate and gift taxes are taxes imposed by the federal and state government on the transfer of assets during and individuals life and at death. Currently every person has a $10,000 per person per year exclusion from gift taxes, and a once in a life time $600,000 exclusion from estate and gift taxes. If prior to death an individual transfers more than $10,000 in a year to another person a gift tax return must be filed. If at a persons death the value of his estate (as defined by the internal revenue code), including life insurance, exceeds $600,000 and estate tax return must be filed.

DECISION MAKING AND INCAPACITY

ASSET MANAGEMENT

JOINT OWNERSHIP

Many people own property jointly with another person or persons. In the case of joint tenants (co-owners with a right of survivorship) when one owner dies, the jointly owned property passes directly to the other(s). This arrangement has the advantages of avoiding probate, passing property quickly to the survivor(s) and making the assets available for use in the event of incapacity of one of the co-owners of the account. However, joint ownership can produce significant problems as shown in the example below.

Mary and Tom, sister and brother, jointly owned a checking account and certificates of deposit (CDs). Mary has no children and Tom has one son, Tom, Jr. When Tom died, these assets passed directly to Mary outside of probate and outside of the provisions of Tom's will. But when Mary dies, provided she owns the checking account and CDs in her name alone, they will pass through probate and according to her will.

To avoid probate at her death, Mary could make her nephew, Tom, Jr. a joint owner of the accounts. But what about while Mary is living? Tom, Jr. could draw all of the money out of the accounts at any time without Mary's consent. If Tom, Jr. can be trusted this is not a problem. However, if he cannot be trusted or if he has financial problems, Mary could lose everything. Moreover, the checking account and CDs could be exposed to the claims of Tom, Jr.'s creditors if he fails to pay his debts or if he faces a money judgment after losing a lawsuit.

In many cases, owning property with relatives or friends works out fine. However, if one wishes to give someone else access to their funds for certain purposes, but joint ownership is not appropriate for the above reasons a "living trust" could be the answer.

LIVING TRUSTS

A revocable living trust is a trust which is establish by agreement between an individual and a trustee during your lifetime to hold property for the benefit the individual or his family. Because the trust is created during a persons lifetime, it is called a "living" trust as distinguished from a "testamentary" trust created by a will and effective at death. Any person, including the person, his attorney, or his bank can be the trustee of a revocable living trust. The creator of the trust, often called the settlor, retains the right to revoke the trust at any time.

A revocable living trust can be funded prior to your death, or it may remain entirely unfunded until the time of your death, at which time it can be funded from your estate, life insurance or other benefits payable upon your death. If you elect to fund your living trust during your lifetime , the property to be placed in the trust must be retitled into the name of the trustee.

The primary advantage of a revocable living trust, whether or not it is funded by you during your lifetime, is the preservation of privacy as to the manner in which you have disposed of your assets after death. In South Carolina, a will is required to be filed with the Probate Court and becomes a matter of public record. A trust agreement, on the other hand, is not required to be filed with the court. Therefore, if the provisions disposing of your assets after your death are contained in a trust agreement rather than in a will, only the trustee and the beneficiaries will know the details of your estate plan.

There are, however, certain additional advantages to a funded living trust which are not available through an unfunded living trust. The most often mentioned of these are (i) avoidance or reduction of probate costs, (ii) preservation of privacy as to the nature of assets, and (iii) management of assets by a third party. In weighing these advantages, however, you should keep in mind that funding a revocable living trust may cost you time, money and inconvenience in retitling property into the name of the trustee and in keeping accurate records of the trust property and its income.

A funded revocable living trust can prove very useful in providing a convenient vehicle for the management of assets of individuals who desire professional assistance or who become incompetent. Although assets can also be managed under an agency relationship, including a durable power of attorney of an incompetent person, a revocable living trust is usually preferable.

Under a living trust arrangement, a person can name a relative, friend, or professional trust manager to manage the assets in the event of incapacity. Typical professional managers are bank trust departments and attorneys. If one is not utilizing a professional manager, the trustee could be your spouse, a son or daughter, or friend. He or she can also be one of the trust beneficiaries. One should obviously name someone who is trustworthy, capable of handling money, and able to follow instructions for transferring trust property to the beneficiaries.

Professional trust managers may be a good idea in cases where another successor trustee is unavailable or where the trust's assets require careful management or involved tax accounting. Typically, bank trust departments charge fees for their services, based either on a percentage of the trust property's annual interest income or the principal's value. Most banks will deal only with trusts that are funded to a minimum amount, sometimes $200,000 or more.

Attorneys who serve as trustees typically charge for their services based on an hourly rate. This rate may range from $100 to $175 per hour of work, depending on the attorney's age and experience. While this may sound high, most law firms who actively practice estate planning have paralegals to assist them in the trust administration process. Paralegals handle most of the day to day trust administration duties leaving the more complicated legal and asset management issues to the attorney. The paralegal hourly rate should be significantly lower than that of the attorney, typically $40 to $50 per hour of work. While some attorneys charge for trust administration services based on a percentage of assets under administration, the hourly rate method generally results in significantly fees to the trust.

SUMMARY REVOCABLE TRUST

WHAT CAN A LIVING TRUST ACCOMPLISH?

1. Avoidance of Probate - First of all, a Living Trust is a vehicle by which an individual can avoid certain aspect of probate. For example, there is no statutory duty to account to the Court for the assets in the Living Trust. Furthermore, depending on the amount of assets in the Living Trust at the Settlor's death the Living Trust can reduce some of the delays commonly associated with probates.

2. Privacy - For many individuals, the particular assets in his or her estate or the disposition of those assets is very personal and the person may wish to avoid publicity of these assets or dispositive scheme at all costs. In the case of a Living Trust, the value of the assets are reported to the Court in the aggregate and any specific assets held in the trust are not itemized and disclosed to the Court and, therefore, the public. Furthermore, unlike the will, the majority of time the Court will never see the trust and it will never become part of a court record. However, this is not guaranteed and if a court proceeding arises (e.g. construction of the document, fighting between fiduciary and beneficiaries, etc.), the trust becomes part of the court record. Also if questions of title to real estate arise, the governing instrument may need to be recorded.

3. Multistate Assets - The Living Trust is particularly useful when a person has assets in more than one state. By transferring title to those assets during the person's lifetime, ancillary administration in the foreign state at the person's death may be avoided. However, an estate tax return for that state will most likely still be necessary.

4. Management of the Assets - An individual can serve as Trustee of his or her own Living Trust, or a family member, friend or corporate entity can be designated and immediately be given the responsibility of investing the assets and making all the management decisions for the person with respect to those investments. For a person who has no desire or ability to be involved in the day-to-day decisions concerning investment of his assets, a Living Trust would be an excellent vehicle for that person to transfer those decisions and responsibilities, while retaining the right to revoke the Living Trust or replace the trustee at any time. As discussed below, establishment of a living Trust also gives the trusted family member, friend or corporate entity the authority to invest and make decisions on behalf of the person upon his or her incapacity.

5. Recipient of Insurance Policies - Although the testamentary trustee of a will may be designated as the beneficiary of an insurance policy and still avoid the probate of those proceeds, there is more flexibility in making the beneficiary of the insurance policy the trustee of the Living Trust. This flexibility is advantageous because the trustee of the Living Trust can take the proceeds of the insurance policy along with all other assets which were in the Living Trust or which pour-over to the Living Trust upon the client's death and assure through the formula clause in the Living Trust that the credit shelter, marital, and any generation slopping trusts are fully funded.

WHAT A LIVING TRUST CANNOT ACCOMPLISH

1. Minimization of Estate Taxes - Perhaps the most common misconception that individuals may have with respect to a Living Trust is that it can save estate taxes. No estate taxes will be saved by the use of a Living Trust because any assets in the Living Trust are included in the Settlor's gross estate at his death. The Living Trust must contain the same formula clauses, credit shelter, generation slopping and marital deduction provisions which would otherwise be contained in a will with a testamentary trust. Therefore, there is no estate tax savings simply by using the Living Trust that could not be accomplished in a property drafted will.

2. Quicker Distribution - One justification for living trusts is that assets will be immediately available to beneficiaries with no messy delays for the creditor's claims period or waiting for fiduciary letters in order to transfer assets. If an estate tax return must be filed,, however, final funding of marital, credit shelter, and generation slopping transfers will be delayed until the estate tax closing letter is obtained, estate tax values are determined, tax elections are made, and the source of tax payment has been identified. Therefore, with the taxable estate, the time difference for distribution between probate and non-probate plans may be minimal.

3. Protection Against Challenge - If a challenge to the estate plan by a disgruntled beneficiary is anticipated, possible advantages are offered by a will submitted for probate. If a will is admitted to probate, the time frame for challenge is very short. The time period for challenging a Living Trust is more open-ended.

4. Claims of Settlor's Creditors - Because during his lifetime the Settlor of the trust is deemed the absolute owner of the trust assets and he or she retains the right to revoke the trust, there is generally no protection against creditors or bankruptcy by the establishment of the Living Trust, even if it purports to be a spendthrift trust. Furthermore, the general rule is that after death, the Living Trust provides no protection as to creditors of the settlor or the Settlor's estate. In addition the definition for capacity is easier to meet for wills than for trusts.

5. Elective Share Claims - A surviving spouse can make an elective share claim against the assets in the deceased spouse's Living Trust.

GENERAL POWER OF ATTORNEY

A General Power Of Attorney is a document whereby one grants to another person the right to manage his assets. In other words, the holder of the power has the right to deal with his assets as if he were you - with a few exceptions. The primary exception is that the power holder must act in the principals best interest. This means that absent a specific grant of power the Power of Attorney cannot be used to make gifts. Any person who is considering entering a long term care facility or is concerned about his or her ability to continue managing his or her assets should have a power of attorney in place. In addition, it is important that the power of attorney be "durable" (i.e. have language that causes the power to survive incompetence) and it should most likely provide for 'gifting" by the power holder. If incapacity is eminent one may wish to use a Revocable Living Trust as opposed to a General Power of Attorney.

Guardianship and Conservatorship

Guardianship and Conservatorship are the processes by which the probate court appoints an individual to be responsible for the physical and financial decisions of an incompetent person. A Guardian is the person responsible for the physical and medical decisions, and the Conservator manages the incompetent person's assets. The Guardian and Conservator may be either the same person or two different persons.

A guardian and conservator may be appointed for an individual only if that person is physically or mentally incapable of managing his or her own affairs. If an interested party (primarily relatives, creditors or friends) believe an individual is physically or mentally incapable of managing his or her affairs. That party may petition the Probate Court of the residence of the person in question for a determination of incapacity and appointment of a guardian or conservator. This petition will be served upon the individual and if he is not represented by an attorney a guardian ad litem will be appointed to represent him. The individual filing the petition must be able to present proof of the individual's incapacity. This is done in the form of doctor reports and visitor reports. If the court finds the individual to be incapable of managing his personal or financial decisions, the court will appoint a guardian, conservator or both; depending on what is needed by the individual.