Myths & Urban Legends About Wills & Probate

Over the years I've heard a lot of misconceptions about wills and probate. Here are a couple of them that keep popping up:

#1. Without a will the state will take your estate.
#2. If you have a will you avoid probate.
#3. Probate costs and death taxes can rob your estate.
#4. I have to leave my child at least a dollar to effectively cut him out of the will.
#5. I can write my spouse out of the well entirely.
#6. You are only allowed to give $12,000 a year to others during your lifetime.

Maybe you already know that these are not correct statements. Let's take a closer look to see where these miss the mark.

#1. Without a will the state will take your estate.
Lawyers who advertise generally will not dispel this rumor, but what they typically say in their ads is that "If you don't have a will, the state has a will for you", which is true. More on that later.

But, really, does the state ever actually take your estate? Yes, but very, very rarely. And they can do this with or without a will. When there are no heirs at law (i.e., family) or no one named in the will can be found, no matter how hard you look, the state will eventually take over the assets. There really is no other place for them to go at that point. It's when the estate “escheat’s” to the state of residence of the deceased.

If a person doesn't have a will, it is called an intestate estate. The state does truly have it's own the will for you. And, as the advertising attorneys are quick to point out, you probably aren't going to like it. Especially if you leave a spouse.

It's reasonable to expect that you would want your entire estate to go to your spouse. But, the states -- and to my knowledge, each and every state -- has decided that you really wanted your kids to get a portion of the estate, too. In most (all?) states the spouse has an automatic claim to fairly a small amount off the top (perhaps $20,000 to $75,000) of the estate. Then a surviving spouse might receive half of the decedent’s estate if there is one child surviving. If there is more than one child, the spouse may only receive one third of the estate. The rest goes to the kids. Each state varies, but the flavor remains the same.

If there is no spouse, the will that is “written by the state” usually makes pretty good sense, assuming you want your closest relatives to receive your estate equally.

#2. If you have a will you will avoid probate.
This is not true. In fact a will virtually guarantees probate. The will just tells the court who is to receive your estate and nominates those whom you want to handle your affairs.

#3. Probate costs and Estate Taxes can rob your estate.
This is not true in Florida and in most other states. Many states have no estate taxes at all. Others have them, but close relatives (e. g., spouse, children, parents, siblings) are exempt. In several other states, the taxes don't kick in until the estate values exceed a very large amount. That's the good news

But, in some states the estate taxes, inheritance taxes, or death taxes (take your pick on the terminology) are still in place. Most of the taxes are graduated, such as the low rate in Iowa at 1%. But Iowa does grow to 15% for the largest estates. The "Greed Factor Award", however, goes to Nebraska which takes 5.6% of estates under $100,000 up to a whopping 16.8% on estates in excess of $9 million.

Therefore, I guess this is an "Urban Legend", if you live in Florida or most states. Give me a call to find out all of the various tax rates in a state that interests you.

Actual court costs for probate is relatively inconsequential. But be aware of attorney fees. Typically, as in Florida, attorneys have the right to negotiate fees based on an hourly rate or a set fee. If no arrangement has been made ahead of time, the default fee – at least in Florida - is 3% of the gross estate. Any amounts charged above that would require court approval. States vary, so don't be afraid to bring up the fee issue with the attorney ahead of time, if they don’t.

#4. I have to leave my child at least a dollar to effectively cut him out of the will.
Not true. But if you don't at least say something about the kid, you could run into complications.

Picture the funeral. The prodigal child shows up and finds out that he is not in the will. He hasn't seen mom in 40 years, but, leaking crocodile tears, he cries, "Poor mom. Towards the end she couldn't remember any of us. She must have forgotten me."

So, it's better to say something. How about, "To my ne'er-do-well son, Alfonzo, whom I promised to remember in my will no matter what, ‘Hello, Alfonzo’”. It works and no one can question if someone had forgotten one of his "objects of natural affection". Maybe you would like to use more polite language.

#5. I can write my spouse out of the well entirely.
Not so. At least not in any state I have seen. The states protect the surviving spouse by granting them an "Elective Share" or “Spousal Share”, which typically runs in the range of 30% to 35% of the gross estate. That is, the Out-of-the Will Spouse gets that much off the top, before the balance goes to the heirs under the will.

Also, since so many assets no longer go through probate without being subject to it, such as insurance death benefits, qualified plans, annuities, transferable on death investment accounts and payable on death bank accounts, the states are also including those assets to be subject to the spousal share claim, even though they did not go through probate.

If this wasn't the case, a spouse could be left completely out in the cold

#6. You are only allowed to give $12,000 a year to others during your lifetime.
This is getting a federal estate tax exemption mixed in with plain old gifting. Federally, if your estate is large enough ($2,000,000 in 2008) to require filing a federal estate tax form on death, then, you can gift $12,000 per year to as many people as you choose, without having to file a gift tax exemption report. That’s all it is and it has nothing to do with probate or any limitation on gifts.

But while we are on the subject, the $12,000 figure also has nothing to do with Medicaid qualification, either. Any gift (i. e., a “transfer for less than value”) is subject to a penalty of Medicaid disqualification, if done within 5 years of needing Medicaid for long term care. The $12,000 has nothing to do with it.

Well now. There you have it. I’m glad we could get together and straighten this out.