Arkansas Estate, Business, and Property Law

When discussing benefits of a Revocable Trust, one subject often covered is the potential to avoid Attorneys’ Fees and Costs associated with Probate.  Simply put, if a person dies without a Trust or other proper Estate Planning, as covered here, Probate will generally be necessary to pass assets to the heirs of the decedent.  (Note – Arkansas Law allows for a “Small Estate” Procedure for Estates under $100,000, to be covered in a future post on this Blog).  Probate involves the initiation of a Court proceeding, filed in Circuit Court in the county of death.  A Judge is appointed to the case, and the Arkansas Probate Code mandates the process pursuant to which assets are collected and distributed to heirs and/or creditors of the Estate.

Under Arkansas Law, both the Personal Representative (the party named in your Will or appointed by the Court to handle your Estate) and the Attorney may be awarded a fee for the work associated with the Probate.  (See here for a copy of the applicable Arkansas Law authorizing fees and costs associated with Probate).   In the event of a $200,000 Estate, the applicable allowable Attorneys’ Fee is $6,050.  For a $400,000 Estate, the allowable fee can reach $11,550.  Again, this is in addition to the fee allowed for your Personal Representative.  Filing fees in excess of several hundred dollars are also associated with opening the case, publishing notice to creditors, etc.   Alternatively, a Trust can be established for a fraction of the cost, which avoids Probate entirely and provides additional benefits as discussed elsewhere in this Blog.

When Do You Need a Revocable Trust?

(Updated for 2011 and 2012)

                       You may have been told that you need to protect your assets by placing them into a “trust”.  While there are many types of trusts, it is the most common is a revocable trust, which is also sometimes referred to as a “living trust”.  In basic terms this trust is a tool pursuant to which a person, during their lifetime, may transfer assets into a trust which will then be distributed to his or her family or lawful heirs at the time of death.

Revocable trusts are powerful tools which may accomplish a variety of goals including reduction of the Estate Tax, avoidance of probate, and the protection of assets.  Determining whether the Estate Tax may apply involves an analysis of the applicable exemption provided by Congress.   For 2011 and 2012, the applicable exemption is approximately $5 million ($5,120,000  in 2012).  This means, generally, that anyone who dies in those years can declare up to $5 million in assets free from the Federal Estate Tax.  On January 1, 2013, the exemption will fall back to $1 million, subject of course to additional action by Congress.  Some experts predict that the exemption rate may eventually stabilize at $5 million, adjusted by the rate of inflation.  However, it is important to remain aware of the applicable exemption as your potential Estate continues to grow during your lifetime.

Any amount left in your estate (including proceedings from life insurance) minus the applicable exemption for the year of death, are potentially subject to the estate tax.  A trust does not avoid the estate tax, but does allow a married person to likely reduce the tax effect upon his or her spouse through proper use of a Bypass Trust (which generally allows both married parties to claim the exemption, separately).

Since the $5 million exemption presently excludes most estates from the tax, the more popular justification for forming a revocable trust is to avoid probate – the sometimes costly and lengthy legal process generally necessary to administer the estate of a person upon death.  Many probate lawyers will charge your family a percentage of the assets which pass through the Estate, regardless of the amount of work which may be necessary to complete the probate.  A typical Probate will take 6-12 months to complete, often limiting the ability to access assets during the completion of the proceedings.  If assets are property titled in name of a Trust, then upon death those assets avoid probate entirely.  Further, since probate records are available to the public a trust provides the additional benefit of privacy.

Trusts may also provide a limited measure of asset protection for the family or heirs of the deceased person.  By including a “spendthrift provision” in the trust, creditors of the beneficiaries may be prevented from reaching the assets placed in the trust.  This might also be used to prevent a younger heir from reaching the full amount of his or her inheritance, which can also be accomplished by placing an age limit on the date of distribution.

There are other benefits to creating a revocable trust, such as avoiding potential issues which may arise upon a future physical or mental disability and the benefit associated with allowing your family to retain control over your assets upon death.  The largest advantage, however, may be the peace of mind associated with knowing that your wishes upon death are specifically, properly organized and detailed in a manner causing the least amount of potential stress and difficulty upon your family or heirs.  For additional information on how a trust may benefit you and your family, please contact Cade Cox of Cox, Sterling & McClure at 501-954-8073 or at clcox@coxandsterling.com.

When counseling parties who are drafting their Will and/or Trust, I often advise that they should consider writing a letter to their heirs, meant to be read after death, advising of specific issues that will help their family with the Estate.  This letter can also be used to accomplish the provisions of Ark. Code Ann. Section 28-25-107 (1987), an Arkansas Law which allows parties to make a list of personal items of property, with designated recipients, attached to their Will subsequent to its execution.  Specifically, the law allows parties, after they have completed their Will, to create a handwritten or signed list of items they would like to specifically pass to certain member of their family or estate.  Using this process, a person can move forward with drafting a Will even at a younger age, without having to worry about changing the Will in later years simply because they acquire property that may not have covered in the earlier Will.

Writing this letter may assist with even more important issues, as well.  The letter clarifies requests to be carried out upon your death and provides essential information, thereby relieving surviving family members of needless worry and speculation.  Below is an example of items you may wish to consider:

“Dear Loved Ones,

*(obviously the letter will likely start with an emotional message to your family.  Following these sentiments, the “business” part of your letter will begin):

Please allow this letter to serve as the correspondence contemplated by Ark. Code Ann. § 28-25-107 (1987), which allows me to make disposition of tangible personal property by attaching or associating with my Will subsequent to its execution a statement and list signed by me designating the devisees of items of specific tangible personal property.  I desire to leave my coin collection to my Nephew, ____.  I desire to leave all of my artwork in my home to my Wife, ____.  (You can list as many items as you would like, here, whether or not they were included in your Will).

Further, I direct my Executor to a list of passwords and computer related information left in my safety deposit box with ABC Bank.  This list also includes information concerning my various investment accounts, banking accounts, and other financial data necessary to probate my Estate.  (We live in a complicated world, and all of your electronic data will need to be accessed after your death. So, make sure you have  a list of websites, blogs, and any other electronic sources (with passwords) you frequently access, and leave this where your Executor can find it upon your death). 

My safety deposit box also includes copies of my will; birth, baptismal, and marriage certificates; communion and confirmation certificates; diplomas; military papers; naturalization papers; and birth certificates for my children.  It also includes copies of tax returns, leases, and additional personal financial data.  Finally, it contains paperwork associated with the two businesses discussed further below.

I am a one-third owner of XYZ Business located in Little Rock, Arkansas.  My Partners and I have drafted Articles of Incorporation and Bylaws which specifically detail how my interest in the business should be handled upon my death.   Please work with my Partners to effectuate the terms of these agreements, which allow for my partners to purchase the business from my heirs based upon a formulated value agreed upon by the partnership as a whole. The line of credit for the business should be re-financed to remove my name.  You will find additional paperwork associated with my business in the bottom left-hand drawer of the desk in my office. 

I own investment property in North Little Rock, Arkansas. It is owned in a LLC, and the co-owner and I have completed an Operating Agreement which states that in the event of my death, my family will receive a liquidated payment in an amount specified by the agreement.

I have pre-arranged funeral services with ABC Funeral Home.  It is my desire that I be buried next to my parents.   I would prefer that in lieu of flowers, donations are made to the Humane Society of Little Rock.  Please ensure that my obituary mentions by name all of my children and grand-children, including any that may have pre-deceased me. 

Please notify the following organizations to which I belong of my death:  Little Rock Chamber of Commerce, XYZ Professional Association, and the Board of Directors of the Humane Society.  Please cancel my automobile insurance policy, disability policy, and credit life insurance.  Also please cancel my credit cards with Generic Department Store and Generic Bank.  I have a life insurance policy with Generic Insurance Company of Omaha, Nebraska.  My spouse has a copy of the policy.  (Include a list of all accounts, company names, and addresses). “

Write your letter clearly so that even a stranger could understand it. Be sure to sign and date your letter.  As always, consult with our office concerning various additional ideas to be included with this letter, as well as to ensure you have a valid and complete Will, Trust, and effective agreements concerning your business and property holdings.  Email me anytime at clcox@coxandsterling.com.)

Estate planning vehicles such as Wills and Trusts are necessary and useful options for many Arkansas residents.  However, there is a simple tool most people can put into place immediately:  having your bank and investment accounts designated “transfer upon death (TOD)” or “payable upon death (POD)”.

The term POD is generally associated with bank accounts (checking and savings), while TOD is more often used with investment vehicles (retirement, 401k, etc.)   These accounts are essentially joint accounts for which a beneficiary has been designated.  Upon the death of the account owner, the beneficiary acquires ownership.  In most cases, this will allow avoidance of probate.   Establishing a TOD/POD is simple, most financial institutions will have forms available.  When determining whether this option is best for you, however, there are several factors to consider:

• The transfer is revocable, therefore the account assets are not controlled by the beneficiary.  You retain control of your accounts.  Further, some protection may be offered against creditors of your beneficiary.
• These accounts may restrict the way you name your beneficiaries, however, and limit the number of parties you can list as beneficiary.  You are also restricted in your ability to name contingent or alternate beneficiaries. 
• As referenced on this blog in the Intestacy Law Section, a spouse has the right to receive an elective share of all property in the Estate, regardless of your designation.
• TOD/POD designations may not be consistent with your estate plan, since these designations are not subject to your Will or Trust.  Difficulties may ensue when only one Child is listed on the account, contrary to general testamentary provisions allowing for equal distributions to all Children.  An even larger problem exists if you have minor Children under the age of 18, since you will not want a minor as beneficiary. All of these issues are more properly addressed in a Will or Trust, which will also allow you to place restrictions on your gift (such as the requirement the Child reaches the age of 21, or graduates college).  

TOD/POD designations are a simple tool which may be attractive in limited circumstances.  As always, you should consult with an attorney or financial services professional to determine the best option for you and your family.

What happens if you die without a Will? What is the law of intestate succession? How does this affect Arkansas residents?

These are all popular questions in the world of estate planning.  The answers may be found in several Arkansas statutes which are discussed in a very general terms within this article.  For a full understanding of applicable law, see the notation at the end of this article.  Arkansas law provides a procedure for “intestate succession” which is followed when you die without a Will (known as “dying intestate”). There are other times that intestate succession may apply, such as when someone has a Will that is not properly submitted to probate, or when property is not adequately addressed in an otherwise valid Will. These are rare situations, however, and for the most part intestacy is only an issue when someone dies without a Will.

So, again, what happens if you die without a Will?  Your heirs can still proceed with probate, but the law of intestacy will direct the distribution of your assets (instead of your Will). As a preliminary matter, there are several statutory exemptions which must be addressed before your property will be distributed to anyone.  The Court will first address (1) the dower or curtesy of your surviving spouse (these are generally known as “marital rights”, and will be discussed in future blog articles); (2) the homestead right of your surviving spouse; and (3) additional statutory rights and allowances to the surviving spouse and minor children. 

After allowing for these exemptions, the remainder of your property will be distributed in the order prescribed by the Arkansas statute:

• First, to your children (or, if one of your children died before you, then to their children).
• Second, to your surviving spouse (unless you were married for less than three years, in which case the spouse receives only fifty percent of the estate).
• Third, to your parents.
• Fourth, the rest of your estate will pass to your surviving spouse, even if you have been married less than three years.
• Fifth, to your surviving brothers and sisters.
• Sixth, to your grandparents, uncles and aunts.
• Seventh, to your great-grandparents and great-uncles and great-aunts.
• Eighth, to the county where you resided at the time of death.

There are multiple additional complexities which arise when you die without a Will.  Who will be responsible for initiating the intestacy process for you? How will they be paid? Will they need to file a bond with the Court? (the Answer is “yes”)  How will they know where your assets are located, and the value of your assets?   How will they know where to find all of your aunts, uncles, etc. as necessary under the intestacy law?  Who will be the guardian of your minor children, and who will handle their assets until they reach a responsible age (and who will decide the proper age for your children)?

All of these problems are avoided by a simple Will, which will provide peace of mind and provide for a clear execution of all of your wishes upon death.

This article, as well as all other content contained on this Blog, should not be considered a substitute for legal advice. Please contact our office or the probate attorney of your choice for additional details concerning your Estate. The full text of the Arkansas Intestacy Law is provided on our Estate Law Page. 

You may have been told by an accountant, financial advisor, insurance agent, attorney, or other trusted advisor that you need to protect your assets by placing them into a “trust”.  While there are many types of trusts, it is likely that your advisor is referring to a revocable trust, which is also commonly referred to as a ”living trust” or a “loving trust”.  In basic terms this trust is a tool pursuant to which a person, during their lifetime, may transfer assets into a trust which will then be distributed to his or her family or lawful heirs at the time of death.

Revocable trusts are powerful tools which may accomplish a variety of goals including reduction of the estate tax, avoidance of probate, and the protection of assets.  Issues concerning the estate tax are discussed in more detail here and here.  Any amounts left in your estate (including proceedings from life insurance) minus the applicable exemption for the year of death ($1 million for 2011), are potentially subject to the estate tax.  A trust does not avoid the estate tax in full, but does allow a married person to delay payment at death and likely reduce the tax effect upon his or her spouse through proper use of a Bypass Trust.

A second major advantage provided by a revocable trust is the ability to avoid probate – the sometimes costly and lengthy legal process generally necessary to administer the estate of a person upon death.  Please see additional articles available on this blog concerning issues associated with probate.  Many probate lawyers will charge your family a percentage of the assets which pass through the Estate, regardless of the amount of work which may be necessary to complete the probate.  The legal costs, in addition to the wait associated with the Court system, make trusts an attractive alternative for many people.  Upon death all assets properly conveyed to a trust avoid probate entirely, and since probate records are available to the public a trust provides the additional benefit of privacy.

Finally, trusts may also provide a measure of asset protection for the family or heirs of the deceased person.  By including a “spendthrift provision” in the trust, creditors of the beneficiaries may be prevented from reaching the assets placed in the trust.  This might also be used to prevent a younger heir from reaching the full amount of his or her inheritance, which can also be accomplished by placing an age limit on the date of distribution.

There are other benefits to creating a revocable trust, such as avoiding potential issues which may arise upon a future physical or mental disability and the benefit associated with allowing your family to retain control over your assets upon death.  The largest advantage, however, may be the peace of mind associated with knowing that your wishes upon death are specifically, properly organized and detailed in a manner causing the least amount of potential stress and difficulty upon your family or heirs.  For additional information on how a trust may benefit you and your family, please contact Cox, Sterling & McClure at 501-954-8073 or via the Internet at coxandsterling.com.

When determining whether the Federal Estate Tax (“the Estate Tax”) may apply to you, the first step is to determine the amount which may be excluded under the Federal Tax Code.  For 2009, the exclusion is $3.5 million per person.  This means, for a person who dies in 2009, the first $3.5 million of their “taxable estate” is not subject to the Estate Tax.  The “taxable estate” is calculated from the “gross estate”, which is a broad spectrum including most assets owned by the party at the time of death, including any life insurance proceeds left to the person’s beneficiaries.  For a discussion of the taxable estate and recommended tools for reducing the estate, see “What is the Estate Tax.”

After 2009, the situation becomes significantly less clear.  Under current law, a person dying in 2010 will be subject to no estate tax.  Generally, this means that regardless of the value of the assets of the decedent, there will be absolutely no tax liability for purposes of the estate tax.  In 2011, the exclusion drops to $1 million, unless the present law is changed before that date by Congress.  In the event the law remains in effect, we will see a drastic increase in the number of estates subject to the death tax. 

Due to the fluidity of the tax laws and uncertainty regarding death, proper estate planning is necessary to protect your assets.  Under the present tax law, anyone who dies after 2010 will maintain only a $1 million exemption from the death tax, and the value of the primary residence, life insurance, and retirement savings alone will place many people in a position where the death tax will present a real problem for which adequate planning is necessary. 

The goal, of course, is to eliminate the death tax and ensure that all of the assets earned during your lifetime may be passed to your heirs.  Any amounts left subject to the estate tax are subject to the “tentative tax” rates allocated by the IRS.  Various articles on this blog will discuss tools which can be used to reduce your taxable estate, including:

• Revocable Trusts
• Gifts
• Business Ownership
• Life Insurance Trusts
• Bypass and Marital Trusts
• Charitable Gifts