The following is for information purposes only and does not constitute legal advice. Please contact us for a consultation regarding your individual situation.
A 401(k) account is an employer-sponsored defined-contribution retirement plan. As the money contributed to this plan is pre-tax, the funds count as income of the beneficiary or the estate.
Assets are the property of a person.
Asset protection describes ways to protect assets from creditors. Retirement funds cannot normally be accessed by creditors. Another simple asset protection form is available to married couples: assets titled as tenancy by the entirety can be accessed only by the creditors of both spouses, but not by the creditors of only one spouse.
More complicated asset protection plans require setting up irrevocable trusts.
Bank accounts of a deceased person pass either through a beneficiary designation, a trust or as part of the probate assets.
The simplest way is through a beneficiary designation. We urge especially all non-US residents to designate a beneficiary for each of their financial accounts.
You may avoid probate on the transfer of some assets at your death through the use of beneficiary designations. Laws regarding what assets may be transferred without probate (non-probate transfer laws) vary from state to state. Some common examples include life insurance and bank accounts. In some states even cars and real estate can be transferred upon death to a designated beneficiary.
A bequest is a specific item that the testator leaves to somebody (-> legatee) under the testament.
Brokerage accounts contain stocks and bonds.
Certificate of Inheritance
In the United States no certificates of inheritance are issued. Clients who need to prove to European authorities who the heirs of a decedent are have the following options:
- If there is a testament, a copy of the testament can be obtained from the probate court.
- If there is no testament, the personal representative of the estate might issue a statement that certifies who the beneficiaries of the decedent’s estate are.
- If the probate proceeding has already ended or if no probate proceeding has taken place (because the assets have been transferred through trusts, joint titling or beneficiary designations), the options are more limited. Our law firm customarily prepares attorney opinions that describe the situation and enclose the pertaining laws. Please ask your local authority that requests the certificate of inheritance what documentation they would accept.
Durable Financial Power of Attorney
This allows you to appoint someone you know and trust to manage your financial affairs when you can no longer do it on your own. If you are incapacitated without these legal documents, then you and your family will be involved in a probate proceeding known as a conservatorship. This is the court proceeding where a judge determines who should make these decisions for you under the ongoing supervision of the court.
Durable Medical Power of Attorney
This document gives a person (or persons) you trust the authority to make health care decisions on your behalf when you are no longer able to do so yourself. If you do not have this document and become incapacitated, a probate proceeding will be commenced at the local court to institute a guardianship. In this proceeding a judge decided who should make decisions related to your person.
The estate is the sum of all assets of a deceased person. In the United States it is considered a legally independent entity. It has to have its own federal tax identification number. It can sue and be sued in court. It is administered by the personal representative designated by the appropriate circuit court.
In the United States the federal government imposes an estate tax on large estates. This is paid before from estate funds, not by the beneficiaries. The federal estate tax is levied on estates valued at approximately USD 11.2 million. NOTE: By contrast, non-US domiciliaries have an exemption of only USD 60’000.
State estate taxes are levied by certain states, such as Maryland and the District of Columbia. Virginia does not levy state estate taxes. The states have various exemption levels.
Please note that certain assets that fall into the estate, such as the proceeds from a qualified retirement plan, are considered income of the estate (and not estate corpus) and are thus subject to an estate income tax. This effect may be mitigated by a bilateral treaty to avoid double taxation. Feel free to contact us for a consulting regarding your particular situation.
Foreign Estate Proceeding
A foreign estate proceeding is also called ancillary probate. It is a proceeding in a state other than the main probate proceeding of the estate. The foreign estate proceeding is designed to handle assets of the decedent outside of his domicile.
A trust may be deemed foreign (non-US) based on a number of factors: the nationality and/or domicile of a trustee, the principal place of the trust administration or the jurisdiction chosen to apply to the trust. The legal and tax situation of foreign trusts is much more complex than that of domestic (US) trusts.
A grantor (or settlor) is a person who funds a trust.
Inheritance tax is a tax payable by the legatee in certain states such as Maryland. It is levied in addition to the state estate tax. In Maryland it is currently 10% on all bequests not made to close relatives.
If you die without a testament (intestate), your assets will be determined according to the laws of your state.
By setting up an irrevocable trust the grantor relinquishes control of the assets placed in the trust. These assets are no longer part of the grantor’ estate. Irrevocable trusts serve especially the purpose of asset protection.
Revocable trusts become irrevocable upon the death of the grantor.
Joint Tenancy with Rights of Survivorship
(in some states “Tenancy by the Entirety” when between spouses)
This is the most common form of asset ownership between spouses. Joint tenancy (or TBE) has the advantage of avoiding probate at the death of the first spouse. However, the surviving spouse should not add the names of other relatives to their assets. Doing so may subject their assets to loss through the debts, bankruptcies, divorces and/or lawsuits of any additional joint tenants. Joint tenancy planning also may result in unnecessary death taxes on the estate of a married couple.
A legatee is the person who is supposed to receive something (a bequest or inheritance) under your testament.
Sometimes called an Advance Medical Directive, a living will allows you to state your wishes in advance regarding what types of medical life support measures you prefer to have, or have withheld/withdrawn if you are in a terminal condition (without reasonable hope of recovery) and cannot express your wishes yourself. Oftentimes a living will is executed along with a Durable Power of Attorney for Health care, which gives someone legal authority to make your health care decisions when you are unable to do so yourself.
In the United States only a part of the assets of a deceased person pass through a testament. This part is called “probate estate”. Non-probate assets are those that pass outside of a formal court process.
There are three categories of non-probate assets:
a. Assets titled jointly with right of survivorship
The share of the deceased person disappears, and the surviving joint owner(s)’ share expands automatically, by operation of law, to encompass the decedent’s share.
b. “Payable-on-death” beneficiary designations
This applies to bank accounts, life insurances and retirement accounts.
c. “Transfer-on-death” beneficiary designations
This applies to brokerage accounts. In certain jurisdictions such as in Virginia or the District of Columbia it may also apply to real estate.
In the United States there are no notaries similar to the ones in Europe. The term “notary public” describes a person with no legal background that is solely authorized to authenticate signatures. The type of work done by notaries in Europe is handled by attorneys in the United States.
Payable on Death
“Payable on death” (abbreviated POD) are beneficiary designations on bank accounts that allow the money to pass upon death outside the probate process to the beneficiary designated by the account holder. (see also “transfer on death” designations)
Probate is the court court process that settles a decedent’s estate and transfers the assets to the beneficiaries. Probate proceedings can be expensive and time-consuming. Additionally, the court proceeding and associated documents are part of the public record. Many people choose to avoid probate in order to save money, spare their heirs a legal hassle, and keep the information about their assets private.
Probate avoidance usually involves setting up trusts. These may not be recognized in foreign countries.
Probate assets are those assets of a decedent that pass by a court proceeding.
Qualified Retirement Plan
Register of Wills
Revocable Living Trust
A revocable living trust is an arrangement created by a written agreement or declaration during the life of an individual and can be changed or ended at any time during the individual’s life.
This is an agreement with three parties: the settlor (grantor or trust-maker), the trustees (or trust managers), and the trust beneficiaries. The same person can have several roles in this legal relationship. For example, a husband and wife may name themselves all three parties to create their trust, manage all the assets transferred to the trust, and have full use and enjoyment of all the trust assets as beneficiaries. Further “back-up” managers can step in under the terms of the trust to manage the assets should the couple become incapacitated or die. Special provisions in the trust also control the management and distribution of assets to heirs in the event of the settlor’s death.
A revocable living trust is generally created to manage and distribute trust property. I is usually set up to avoid probate and maintain the confidentiality of the assets. Many people use this type of trust instead of (or in addition to) a will. The expense and time needed to manage the trust must be considered. Simple cases do not warrant trusts.
Because this type of trust is revocable, it is treated as a grantor type trust for tax purposes.
A settlor (or grantor) is the person who funds a trust.
A testator is a person who leaves a testament or will. The antiquated female form is testatrix.
Transfer on Death
Transfer on Death (abbreviated TOD) are beneficiary designations on assets such as brokerage accounts and vehicles. They allow the beneficiary designated by the owner to receive the asset upon death outside the probate process.
A trust is a legal relationship only available in certain common law countries such as the United States. It is not a legal entity. This trust is not to be confused with a business trust, which is a legal entity.
A trust is an arrangement created either by a will or by an inter vivos declaration by which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries.
The trust involves a grantor (the person who funds the trust with assets, also called a settlor), a trustee (the person who manages the assets) and trust beneficiaries (the persons who benefit from the trust assets and their income).
Trusts are usually not recognized as such in civil law countries such as in Europe.
A trustee is a person or an institution (such as a bank or a trust company) who manages trust assets according to the wishes of the grantor laid out in a trust instrument for the benefit of the trust beneficiaries. The trustee is held to high fiduciary standards. The fees that the trustee may be paid are set by state law.
A US Domiciliary is a person who lives in the United States with no present intention to leave. For example, a World Bank employee who lives in Washington, DC, with his children who attend a local school, is a US domiciliary for estate and gift tax purposes. This is very beneficial, as US domiciliaries’ estates have the same high estate tax exemption as that of US citizens, currently around USD 11 million per person.
US persons are US citizens or US domiciliaries.
We have to differentiate between US residents for income tax purposes and US residents for transfer tax (estate and gift tax) purposes.
US residents for income tax purposes are all US citizens, green card holders as well as those foreigners who spend at least approximately half of the year in the United States. Embassy personnel and the employees of certain intergovernmental organizations are excluded.
US residents for transfer tax purposes can also be called US domiciliaries. These are all US citizens and all foreigners who live in the United States with no present intent to leave. A vague plan to move away at some unspecified time in the future does not count.
For example a non-US World Bank employee who lives in Washington, DC with his family is not a US resident for income tax purposes but is a US resident for transfer tax purposes. This means that this employee’s estate would get the approximately USD 11 million estate tax exemption.
There are significant differences between these two categories of US residents. The IRS unhelpfully calls both categories by the same term.
Will or Testament
The document a person signs to provide for the orderly disposition of assets after death. Wills have no legal authority until the testator dies and the original will is delivered to the Probate Court. Still, everyone with minor children needs a will. It is the only way to appoint the new “parent” of an orphaned child. Special testamentary trust provisions in a will can provide for the management and distribution of assets for your heirs. Additionally, assets can be arranged and coordinated with provisions of the testamentary trusts to avoid death taxes.