If you are like many business owners, this recession has hit your business hard. Your immediate focus has been on survival, eliminating losses, and returning to profitability. Probably, you feel the least of your concerns is how your business, real estate and other assets would be impacted if you, the owner, suddenly passed away. But considering how many others would be affected by such an unfortunate event, it may be important for you to consider even now.
In estate planning and probate matters, the question clients ask most often is, “Should I put everything that I own into a trust to avoid probate?” Often clients want to avoid “probate,” but they really don’t know what probate is and what assets must be probated. How you own your business, real estate and other assets at the time of your death determines whether those assets must be probated.
What is probate? Probate is the legal process used to pass good title and distribute a deceased person’s assets. The probate process includes: (i) filing the Will, if any, (ii) appointing a personal representative, (iii) preparing and filing court accountings, (iv) publishing notice to creditors, (v) determining the validity of claims against the estate, and (vi) paying the debts of the deceased. Probate can cost thousands of dollars and often can take a year or longer depending on the size and complexity of the estate.
What are probate assets? Probate assets vary by state so it is important to consult with a probate attorney in the state where the deceased was a resident and each state in which the deceased owned real property at the time of death. In North Carolina probate assets include accounts solely in the deceased’s name that pass either through a Will, or in the absence of a Will, according to state law. North Carolina non-probate assets include accounts owned jointly with right of survivorship, assets held in trust, IRAs and life insurance payable to beneficiaries.
Is a closely held business a probate or non-probate asset? Well, it depends whether the stock or membership interest is owned in the owner’s name individually or owned by a trust. If the stock or membership interest is owned in the owner’s name individually, then it is a probate asset. If the stock or membership interest is owned by a trust, then it is a non-probate asset.
Often, it makes sense for business owners to separate voting and non-voting stock or membership interest and treat them differently as part of their overall succession and estate plan. For example, the voting stock or membership interest may be owned by one trust and the non-voting stock or membership interest may be owned by another trust. It is important to address whether the current ownership of your closely held business makes sense.
Is real estate a probate or non-probate asset? It depends how the real estate is owned and how it passes upon death. As a business owner, it is very important that ownership of real estate is structured so that business leases and operations are not adversely impacted upon an owner’s death. Also, if at the time of your death, you own real estate in a state other than the state of which you are a resident, then that real estate (depending how it is owned) will require a separate probate proceeding known as an “ancillary proceeding” to get good title to the new owners. An estate planning attorney can advise on ownership, title, possession, custody and control of real estate.
Is probate ever necessary? Yes, it is often necessary. A primary function of probate is to pass good title to the new owners. You can’t pass good title to a new owner if you never received good title. Thus, it is never recommended to ignore a necessary probate. Probate may be necessary if the deceased owned probate assets at death such as:
• Assets only in the deceased’s name without properly designated beneficiaries.
• Assets owned as tenants in common or joint tenancy without right of survivorship.
• Assets that designate the deceased’s estate as the beneficiary.
The form of ownership typically determines whether an asset is a probate or non-probate asset. Generally, it is advisable to have a trust own assets like closely held business interests, certain real estate, and other assets vs. the individual owning the assets in his or her name alone.
An experienced estate planning attorney that understands income, gift, and estate taxes can advise you as to what assets, if any, to put into a trust based on your specific estate and tax planning objectives. Given the current depressed values of many business interests, real estate, and other assets, and given the anticipated changes in tax laws, now is an excellent time to review your estate plan and the ownership of your assets.
Danica L. Little, CPA, CMA, CFM is an attorney with Wishart, Norris, Henninger & Pittman, P.A., a law firm with offices in Charlotte and Burlington serving institutions, professionals, businesses and business owners. Contact her at 704-363-0010 or visit www.wnhplaw.com.