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Strategic heir command: How to keep your estate out of probate.

"I don't need an estate plan. I have a will so my family and business are covered. I don't own enough to worry about estate planning."

I can't help cringing a bit inside when I hear people say these things. Not because they hurt my feelings as an accountant, but because not having an estate plan or trust will cost their heirs a lot of money and time while waiting for the estate to go through probate. And the truth is, while it's hard for some to think their estate is valuable enough to require estate planning, many are.

For example, an estate worth $5 million or more may be subject to federal estate taxes; however, Washington state has an exemption of only $2 million. So for many Washington residents, anything over $2 million may be subject to estate tax rates of between 10 percent and 19 percent, which could cost heirs hundreds of thousands of dollars in taxes even before the estate gets divided according to the will's instructions.

To many, $2 million might sound like a lot. But between life insurance policies, homes, businesses, retirement accounts, and other assets, it's much easier to exceed that figure than many think. And who gets burdened with the tax? Your beneficiaries. Of course, there are several things you can do to reduce your estate's size and hence ease its tax burden for example, properly structuring insurance and retirement accounts, donating to charity, or gifting your assets to your heirs while living. In fact, thanks to recent federal legislation, you can gift up to $5 million tax-free.

But even if you own less than $2 million in assets, a separate issue is probate court. In Washington state, assets from an individual estate valued at $100,000 or more go into probate court, which freezes everything until items can be doled out according to the will. It may take up to a year for probate court to handle the assets in some cases, with the typical estate taking four months.

If you own a business, operations would continue as normal. However, heirs may not benefit from ownership until the estate, including the business assets, passes through probate. If your heirs wanted to sell the business, make any major changes to it, or receive dividends, they may be prevented from doing so until it passes through probate. This can take up to a year as well.

Probate also makes the affairs of the estate public--something many prefer to avoid, especially if there are things they want to keep private from the rest of the family or the general public. Having all members of the family know the shares of others benefitting from the estate can be painful, even when the deceased had the best intentions of being fair.

Probate applies to real property in other states as well, which means any vacation or investment property owned outside of Washington may require a separate probate in that state, adding to the administrative burden and expense of your estate.

One option to keep assets out of probate is to establish a living trust, which would change nothing during your lifetime but makes a large legal difference when dealing with your estate. It speeds delivery of assets to heirs, it's private and may help avoid multiple state probates.

Anyone who owns a business or has assets that may approach the exemption limit should consider an estate plan and talk to an accountant, financial advisor, or attorney who specializes in estate planning to determine whether a will truly is enough. For the sake of your heirs and business, it's time well spent.


Manager, CPA

Moss Adams LLP
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Title Annotation:BBJ COMMUNITY
Author:Rothbauer, Nate
Publication:Bellingham Business Journal
Date:May 1, 2011
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