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John Sanchez

College Financial Aid Planning

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College Financial Aid Planning

College Financial Aid Planning

Individuals who want to attend college but cannot afford the costs outright must find alternative funding through various types of financial aid. Many factors affect eligibility for federal financial aid; therefore, all students should apply for financial aid every year even if they think they do not otherwise qualify.

FAFSA. The Free Application for Federal Student Aid (FAFSA) is the first step in the financial aid process. Students use the FAFSA to apply for federal student aid, such as grants, loans, and work-study.
The FAFSA must be submitted for each year the student wants financial aid.

Income tax return. If the student (or parents) needs to file an income tax return with the IRS, it is recommended that it is completed before filling out the FAFSA.

Expected Family Contribution. The questions on the FAFSA are required to calculate the student’s Expected Family Contribution (EFC). The EFC measures the student’s family’s financial strength and is used to determine the student’s eligibility for federal student aid. The EFC is split between an expected amount contributed from the student (usually more) and an expected amount being contributed from the parents.

Student Aid Report. A student’s EFC will be listed on their Student Aid Report (SAR). The SAR summarizes the information submitted on the student’s FAFSA.

Financial need. Financial need is the difference between the EFC and the college’s cost of attendance (which can include living expenses), as determined by the college. The college will use the student’s EFC to prepare a financial aid package to help meet financial need.

Need analysis formula. To determine financial need, a need analysis formula measures the parents’ and student’s assets and income. Assets are measured as follows:
• Assets in the student’s name are assessed at a maximum rate of 20%, whereas parents’ assets are assessed at a maximum rate of 12%.
• The assets of other children are not considered by the need analysis formula.
• Specific types of property (automobiles, computers, furniture, books, clothing and school supplies, boats, and appliances) do not count as assets.
• Retirement funds and pensions are generally not considered assets.
• Annuities and life insurance policies are generally not considered assets.
• Small businesses owned and controlled by the student’s family are excluded as assets. However, a partnership where the family owns 50% of the business is not excluded.
• Consumer debt (such as a credit card balance) is not counted against assets and income.
• Only debt secured by property (mortgage on home or business loan for equipment) is counted against assets and income.

Planning Strategies 

Income Strategies
• Avoid selling items that will produce a capital gain during the base year (first year of financial aid application) because capital gains are treated like income.
• Avoid taking money out of a retirement fund to pay for educational expenses. In general, retirement funds are not counted as an asset in the need analysis formula. However, if distributions are made, this converts

College Financial Aid Planning

a sheltered asset into an included asset. Therefore, it is more beneficial to spend down cash in a bank account first.
• Reduce parents’ income to increase eligibility for financial aid when parents’ AGI is close to $50,000. If the parents’ AGI is under $50,000, then the family may qualify for the Simplified Needs Test (SNT) which disregards assets when determining the EFC.

Asset Strategies
• Avoid saving money in the student’s name. Assets should be saved in the parents’ name because parents’ assets are assessed at a much lower rate for determining need (12% for parent versus 20% for student).
• A section 529 college savings plan saved in the parents’ name has minimal impact on financial aid eligibility, and one owned by a grandparent has no impact on the student’s eligibility.
• Avoid paying the student a salary from the family business.
• Spending down the student’s assets, preferably within the first year, before using any parent asset will leave the family with the most money left over after graduation.
• Put parent assets in the name of another sibling not in college because assets of other children are not considered by the need analysis formula.
• Buy necessary purchases prior to applying for financial aid. Specific types of property (automobiles, computers, furniture, books, clothing and school supplies, boats, and appliances) do not count as assets.
• Grandparents who wish to pay for college should pay money directly to the school to avoid increasing parental or student assets by giving money to them outright. Or, if the grandparents wait until the child has graduated, they could pay off the student loans instead.
• Make maximum contributions to retirement funds because these assets are not considered by the needbased formula.
• Buy life insurance policies or tax-deferred annuities because these assets are not considered by the needbased formula.

Consumer Debt
Paying off credit card debt and automobile loans will increase eligibility for financial aid by reducing available cash.

Mortgage Debt
To maximize eligibility for financial aid, reduce cash and other assets by prepaying mortgage debt. In addition, parents could take out a home equity line of credit each year to pay for the student’s school expenses. Interest payments would be tax deductible and the loan would reduce assets considered by the need-based formula.

Change in Financial Circumstances
A student should contact his or her financial aid office if the student or his or her family has unusual circumstances that should be taken into account in determining financial need. Some examples of unusual circumstances are unusual medical or dental expenses or a large change in income from last year to this year.

Non-Federal Assistance
Information about other non-federal assistance may be available from foundations, religious organizations, community organizations, and civic groups, as well as organizations related to a student’s field of interest, such as the American Medical Association or American Bar Association. Check with the parents’ employers or unions to see if they award scholarships or have tuition payment plans.

Independent Status
If a student is considered an independent, he or she does not have to include any parental income or assets on the FAFSA application. A student is considered an independent if he or she:
• Gets married before submitting the FAFSA.
• Attains age 24.

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Early Retirement Distributions — SEPP

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Early Retirement Distributions — SEPP

 Early Retirement Distributions
You may choose, or be forced into choosing, early retirement. Retirement before age 59½ may create income challenges. You are not yet eligible to receive retirement benefits from Social Security. You may or may not have a monthly pension to generate income.

In many situations, you will need to generate income from your assets. Often, most of your assets in a retirement plan through a 401(k) plan at your employer or in an individual retirement arrangement (IRA). Withdrawals of earnings and pre-tax contributions are subject to ordinary income tax. In addition, you may be subject to the 10% early withdrawal penalty tax on distributions taken before you reache age 59½.

Tax Summary
• Withdrawals of earnings and pre-tax contributions
from an IRA are subject to ordinary income tax.
• Unless an exception applies, taxable withdrawals
from an IRA prior to age 59½ are subject to a 10% early withdrawal penalty.
• If you take a series of substantially equal periodic payments from an IRA, you are not subject to the 10% additional tax.

Tax Planning Strategy
One strategy to generate income from retirement accounts if you are under age 59½ is to take periodic distributions from those accounts. If structured properly, the 10% additional tax will not be assessed on the distributions. You can take distributions from various retirement accounts such as 401(k) plans, 403(b) plans, and IRAs.

Substantially Equal Periodic Payments (SEPP)
The Internal Revenue Code allows you to take withdrawals from retirement accounts without incurring the 10% penalty. To do so, very specific rules need to be followed.
• The payments made to you from the IRA are based on one of three calculation methods.
• The payments must be made to you at least annually during the payment years. Payments can be made more frequently, such as monthly, but the total for each year during the SEPP period must meet the payment calculation result for the year or years during the SEPP.
• Payments must be made for a period of at least five years or until the taxpayer reaches age 59½, whichever is later.

Example: Fred, age 52, establishes a SEPP from his IRA. He must continue to take withdrawals until he reaches age 59½. If he discontinues or changes his SEPP withdrawals at any time before he reaches age 59½, the current year withdrawal is subject to the additional 10% tax. In addition, the SEPP withdrawals for previous years are retroactively subject to the additional 10% tax. If, however, Fred begins SEPP withdrawals at age 58, he must continue the withdrawals to age 63 to comply with the 5-year withdrawal requirement.

Calculation Method
Payments are considered to be substantially equal periodic payments if they are made in accordance with one of the three calculation methods allowed.
1) Required minimum distribution method. Under this method, the account balance, the number from the life expectancy table, and the resulting annual payment amount is re-determined each year.

Early Retirement Distributions— SEPP

2) Fixed amortization method. The annual payment for each year is determined by amortizing in level amounts the account balance over a specified number of years determined using a life expectancy table and a chosen interest rate. Under this method, the annual payment is determined once for the first distribution year and the annual payment is the same in each succeeding year.
3) Fixed annuitization method. The annual payment for each year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the taxpayer’s age and continuing for the life of the taxpayer. The annuity factor is derived from a mortality table and a chosen interest rate. Under this method, the annual payment is determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

One-Time Change to Required Amount
If you begin distributions in a year using either the amortization method or the annuitization method you may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years. The change in method will not be treated as a modification. Once a change is made, the required minimum distribution method must be followed in all subsequent years until the required number of years under the plan have been met.

Changes to Account Balance
No other contributions or distributions can be taken from the account being distributed from during the SEPP period. This includes nontaxable transfers in or out of the account.
Example: Susan establishes a SEPP distribution from her IRA. Two years later, at age 53, she takes on a new job and wants to make contributions to an IRA with her newly earned income. Susan cannot contribute to the IRA that is making her SEPP distribution. Susan can establish a new, separate IRA account that she can make contributions to.

Depletion of Account Value
If, as a result of following an accepted method of determining SEPP withdrawals, your IRA assets are exhausted, you will not be subject to the additional income tax of 10%. The resulting cessation of payments will not be treated as a modification of the series of payments.
Example: Dick established a SEPP distribution plan at age 54 that required him to take a distribution amount of $25,000 each year. He invested aggressively in his SEPP account and, due to distributions and declines in the stock market, the value of his account was down to $15,000 when Dick took his distribution at age 58. Because the account has been depleted, none of the amounts distributed through the SEPP plan in prior years is subject to the 10% additional tax. In addition, the $15,000 distribution at age 58 is not subject to 10% additional tax. Also, because the account has been depleted, he will face no tax consequences for not being able to take a distribution at age 59.

Possible Risks
• The rules for distributions using the Internal Revenue Code provide very little flexibility. Once the distribution begins, taxpayers need to exert extreme caution in making any changes to the distribution amount and frequency.
• You need to document the calculations used to determine the distribution, as well as any change in distribution. Tax courts have consistently assessed the 10% additional tax for taxpayers who could not substantiate the distributions were, in fact, based on SEPP calculations.

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Buy-Sell Agreements

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Buy-Sell Agreements

Buy-Sell Agreements
Buy-sell agreements are usually part of a succession plan put in place to protect the financial interests of the owners of closely held companies and their heirs and to protect the company’s stability in case of a major event. Funding buy-sell agreements is frequently accomplished using insurance policies under (1) a cross purchase agreement, or (2) a stock redemption agreement.

Cross purchase agreement. Each owner of the company takes out, and is beneficiary of, an insurance policy
on each of the other owners. In the event of an owner’s death, the other owners use the insurance proceeds to buy out the decedent’s ownership share in the company from the decedent’s beneficiaries.

Stock redemption agreement. The company takes out life insurance policies on each of the owners. When an owner dies, the company buys out the deceased owner’s interest.

Valuation. Valuation of a company can change significantly in a relatively short time. The buy-sell agreement should be flexible in its ability to accurately reflect changes in value.

In a cross purchase agreement, the company has no interest in the decedent’s life insurance proceeds, whereas in a stock redemption, the interest is included with the value of the business. Typically, the redemption price of a stock redemption includes a portion of the life insurance proceeds.

Buy-Sell Agreements

Example #1: Abe and George each own 50% of Cherry Tree Inc., a C corporation. The company is currently valued at $250,000. Under a cross purchase agreement, Abe takes out, and is beneficiary of, a $125,000 life insurance policy on George. George takes out a similar policy on Abe. The cross purchase agreement is structured so that additional policies can be taken out over time as the value of the company increases. George dies and Abe collects $125,000 in tax-free proceeds from the life insurance policy. Under the terms of the cross purchase agreement, George’s beneficiaries are required to sell his interest in the company to Abe for $125,000. Since the basis of George’s interest is stepped up to FMV on the date of death, George’s beneficiaries do not realize taxable income.
After the transaction, Abe owns 100% of the company.
George’s beneficiaries receive $125,000 cash, which is not
taxable to them.

Example #2: Assume the same facts as Example #1, except the buy-sell agreement is funded by a stock redemption agreement. Cherry Tree Inc. takes out, and is beneficiary of, a life insurance policy on Abe in the amount of $125,000, and a similar policy on George. When George dies, Cherry Tree Inc. receives $125,000 in life insurance proceeds. The proceeds are not taxable to Cherry Tree Inc., but the $125,000 in life insurance proceeds do increase the corporation’s earnings and profits (E&P) so the amounts will be taxable if distributed to shareholders as dividends. Cherry Tree Inc. uses the proceeds to purchase George’s ownership interest from his beneficiaries. George’s ownership interest was stepped up at his date of death so his beneficiaries do not realize taxable income on the transaction. Abe now owns 100% of the outstanding stock of the corporation.

Insurance. There are several other insurance policies which should be considered by every business owner.

Key person life insurance. Many business owners are required to sign personal guarantees to secure business debt. In the event of an owner’s death, these debts will remain and, if unpaid by the business, will become the responsibility of the owner’s heirs. By taking out life insurance on the owner, proceeds can be used to retire the debt. The proceeds can also be used to fund the search for a replacement to the deceased business owner or to fund obligations to the owner’s spouse, such as continuing medical insurance coverage or salary payments. The premium payments by the business are not deductible, and the proceeds from the policy are not taxed as income.

Disability insurance. Disability insurance protects the earnings of employees and business owners by providing a stream of payments when a disability resulting in the loss of ability to work occurs.

Professional liability insurance. Professional liability insurance provides coverage for claims arising from professional error or malpractice. It is most commonly used by physicians, attorneys, architects, and accountants. The costs of this coverage are deductible to the business owner and augments the liability protection of incorporating.

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Business Management Tips

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Business Management Tips

Online Business Resources
www.sba.gov. The U.S. Small Business Administration (SBA) provides programs for businesses in the areas of technical assistance, training and counseling, financial assistance, assistance with government contracting, disaster assistance recovery, advocacy laws and regulations, civil rights compliance, and special interests, such as women, veterans, Native Americans, and young entrepreneurs. The website provides links to numerous information resources.

www.score.org. The Service Corps of Retired Executives (SCORE) is dedicated to helping small businesses get off the ground, grow and achieve their goals. SCORE provides volunteer mentors, free confidential business counseling, free business tools, and inexpensive or free business workshops.

Websites

www.archive.org-Internet Archive Wayback Machine
www.bizstats.com- Business/Industry Statistics
www.bls.gov-U.S. Bureau of Labor Statistics
www.entrepreneur.com-Entrepreneur Magazine
www.franchise.org-International Franchise Association

Business Plans
A business plan is a written document created to detail all aspects of a business on a comprehensive level. The process of writing a business plan requires significant research into each of the topics discussed. In some cases, the process of researching and writing a business plan will reveal potential problems or lead the writer to choose not to go into business.
A business plan helps to define short- and long-term goals for the business and the methods for measuring

the level of success in reaching them. Many banks and investors require a written business plan before lending to or investing in a business. Also, by carefully examining each aspect of a business at its beginning, a business can be structured to create the maximum level of tax advantage for the owners.
Explore the website www.score.org for assistance with writing a business plan.

Start-Up Costs and Capitalization
Start-up costs. Start-up costs are incurred before the start of operations. Typical expenses include the costs of organization, professional consulting, capital equipment acquisition, and leasing a space.
Capital. Cash from the owners or investors is the most common source of capital when beginning a new entity. Business loans are also common and can be secured through private banks or the Small Business Administration (SBA).
SBA loans. The SBA is a federal agency which guarantees certain loans and lines of credit made by banks to small businesses. Loans and lines are available for working capital, asset purchase, and debt refinancing needs.

Use of Budgets
Annual budget. Development of an annual budget generally takes place late in the year prior to the year of the budget and is broken down by month. Financial statements from recently completed periods are used to develop estimates for the budget. Using the budget, costs can be reduced, resources properly allocated, and new goals for the year can be set.

Business Management Tips

Internal Control
Control procedures. Internal control procedures are designed to safeguard the assets of a business. Without them, dishonest employees or owners can misappropriate assets in the form of cash, property, or supplies with little effort.
Separation of duties. Duties which, if conducted by the same individual, would allow for simple concealment of theft should be kept separate. The following are examples of duties that should be performed by different people.
• Receiving, recording, and depositing customer payments.
• Sourcing, approving, ordering, and receiving supplies or merchandise.
• Inputting, approving for payment, and paying vendor bills and payroll.
• Balancing and inputting transactions into bank accounts.
• Counting cash and merchandise on hand at the beginning and end of the day.
Small businesses generally lack sufficient staff to properly separate all duties which should be separated. In this case, increased involvement of owners and management in daily operations of a business can assist in detecting misappropriation of assets.
Mandatory vacations. Many schemes to steal from a business require constant, manual intervention by the person perpetrating the scheme. By having and enforcing a mandatory vacation policy, the time a perpetrator spends away from work may allow a scheme to be uncovered in the course of daily operations. Mandatory vacations should be a minimum of two weeks, during which time the vacationing person has no access to a business or its records.
Environment of detection. If an employee or owner believes embezzlement will be discovered in the normal course of business, it is much less likely one would choose to embezzle. Creating an environment of detection is the process of alerting all employees and owners that systems are in place to detect embezzlement and theft, and that such acts will be prosecuted if perpetrated. This can be accomplished through training, one-onone conversations, and the establishment of a hotline employees and owners can use to report suspected theft.

Background checks. Background checks during the hiring process allow a business to determine whether
a prospective employee has any criminal history. Many background checks also include credit histories to uncover any financial conditions which may make an employee more likely to steal from a business.

Top 10 Reasons Businesses Fail
Failure rates. Data from the SBA indicates three in 10 new businesses fail within the first two years, and only five in 10 businesses survive five or more years.
Reasons for failure. The 10 most common reasons for failure are listed below.
1) Lack of experience. This can apply to a lack of experience in a specific business or in running a business in general.
2) Insufficient capital. Sufficient capital must be in place to support a business until cash flow from operations is adequate.
3) Poor location.
4) Poor inventory management. Keeping too much inventory uses too much capital unnecessarily, while having too little inventory can lead to shortages and customer dissatisfaction.
5) Over-investment in fixed assets.
6) Poor credit arrangements. Lacking access to sufficient, reasonably priced credit.
7) Personal use of business funds. Business funds should not be used for personal purposes.
8) Low sales.
9) Competition. Not properly assessing competition can potentially leave a business in a position of needing to compete in a market where it cannot do so and survive.
10) Unexpected growth. Growth without sufficient planning for the consequences can lead a thriving business to failure.

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Business Financing— Don’t Intermingle Funds

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Business Financing—
Don’t Intermingle Funds

Intermingling Funds
A common problem with single-owner and other closely-held corporations is intermingling of funds. This occurs when a corporate shareholder uses his or her personal checking account for corporate deposits or payment of corporate expenses. Separation of funds can be a key in preserving the liability protection of the corporate veil. Courts can pierce the corporate veil by finding that the corporation is an “alter ego” of the shareholder, essentially stating that the corporation is not separate and distinct from the individual as evidenced by the intermingling of finances. Also, a shareholder who deposits personal funds or pays personal expenses from the corporate checking account is intermingling funds. For the same reasons as the reverse, courts can cite this as evidence that the corporation is not a separate and distinct entity from the individual.

Tax Problems Caused by Intermingling Funds
Unintended tax consequences can occur when personal and corporate funds are intermingled. When a shareholder provides funds to or on behalf of a corporation, there are several different types of tax treatment that may apply, depending on the circumstances. For example, when a shareholder provides funds to a corporation, it can be classified as one of the following transactions.
• Capital contribution.
• Loan to the corporation.
• Repayment of a loan from the corporation.
• Expense reimbursement.
• Purchase.

When a shareholder purchases an item for the corporation from his or her personal funds, that shareholder is considered to have provided funds, or made a contribution, to the corporation. Classification is determined by how the transaction is structured and the circumstances surrounding the transaction. Providing funds to corporations without careful planning can cause unintended tax consequences.
If an individual takes funds from a corporation checking account, the transaction can be classified as:
• Taxable dividend.
• Nontaxable distribution.
• Nontaxable expense reimbursement.
• Wages.
• Loan to the shareholder.
• Repayment of a loan from the shareholder.
Failure to carefully structure transactions when taking
disbursements from a corporation can result in otherwise nontaxable transactions becoming taxable, in addition to opening the corporation up for a court to pierce the corporate veil.

Example: Lucy owns a home and garden store. She recently incorporated in order to shield herself from liabilities of the business. Lucy meant to open a corporation checking account, but she never got around to it. Since she had been doing business with her suppliers for many years as a sole proprietor,
she continued to purchase supplies and inventory on account and pay the invoices from her personal checking account. Unfortunately, Lucy had a particularly bad year, and she was successfully sued for $1 million by a customer injured by a Venus Flytrap purchased at Lucy’s store. She also fell under audit by the IRS.

Business Financing— Don’t Intermingle Funds

Since Lucy’s equity in the store was only one thousand dollars ($1,000), the plaintiff’s attorney asked the court to pierce the corporate veil. The court agreed, stating that as evidenced by the intermingling of funds, the corporation did not operate as a separate legal entity and was a mere alter ego for Lucy.
Lucy became personally liable for the damages caused by the carnivorous plant. When Lucy made purchases for her business from personal funds, she had been writing off those amounts as expenses on her corporation tax return. The IRS determined that the amounts paid amounted to capital contributions, not payment of expenses, and adjusted her taxable income upward for the year under investigation. Lucy’s accountant tried to cheer her up by noting that in some cases, expenses paid by a shareholder have been disallowed altogether and the deductions permanently lost.

Court Case: A taxpayer operated a tax preparation business as a sole proprietor. The taxpayer later incorporated but continued to have clients make checks out to him personally and treated funds received from the business as his own. No evidence of any employment agreement existed between the taxpayer and his corporation. The court ruled that the taxpayer operated his business as a sole proprietor and the income earned should be treated as earned not by the corporation but by the individual and be subject to self-employment tax.
(Reginald Jarrett, et al, T.C. Summary 2008-94)

Personal use of corporate assets. A similar situation with intermingling funds occurs when personal assets are used by the corporation and vice versa. If corporate assets are used for personal purposes, the IRS can reclassify expenses reported on the corporation tax return as expenses attributable to the shareholder rather than the corporation. On the other hand, if a corporation uses personal assets owned by the shareholder, this could indicate lack of separation of the shareholder and corporation, opening up the possibility of having the corporate veil pierced.

Court Case: The taxpayer was engaged in several business activities, including real estate, entertainment services, and interior design. She incorporated her business in New York under the name Real Services, Inc. The taxpayer’s books were not well-kept, and she frequently used the corporation checking account to intermingle funds. Business deposits were made into the account, but checks were written for items such as birthday presents for family members, tuition costs for the daughter of a friend, and contact lenses for her friend. The taxpayer was audited by the IRS and taxes were assessed on unreported income.

The taxpayer argued she was not individually liable for the taxes. Instead, her corporation, Real Services, Inc., should be liable because the corporation received the funds in question. The court decision determined the corporation was a sham and stated the corporation had the characteristics of an alter ego, including:

“The intermingling of corporate and personal funds, undercapitalization of the corporation, failure to observe corporate formalities, such as the maintenance
of separate books and records, failure to pay dividends, insolvency at the time of a transaction, siphoning off funds by the dominant shareholder, and in the inactivity of other officers and directors.” (Zabetti Pappas, T.C. Memo 2002-127)

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Estate Planning, Wills, Probate, and Transfer of Assets

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Estate Planning, Wills, Probate, and Transfer of Assets

Wills and Intestacy
A will allows the testator (the person creating the will) to specify:
• Who receives property at the testator’s death.
• Whether beneficiaries receive gifts outright or in trust.
• Who will act as personal representative.
• Who will be the guardian of minor children.
In the absence of a will, these matters are settled by state law.

Who Needs a Will?
• Include persons who are not heirs. Wills are needed to provide for a person who is not an heir under state law, such as unmarried partners, stepchildren,
friends, charities, in-laws, etc.
• Exclude an heir. Heirs are the persons who inherit an estate under state law in the absence of a will. A will is needed to prevent an heir from inheriting probate assets.
• Minors and disabled adults. Trust provisions can be included in a will to delay receipt of an inheritance or to allow assets to be used on behalf of an adult who is disabled.
• Estate tax planning. Married couples can include trust provisions to reduce estate tax. Dying Intestate—Without a Will
State law determines who receives probate property if a decedent dies without a will.
• Most states provide first for the surviving spouse and children. Children of the decedent always inherit a share in some states while in others they inherit only if they are not also children of the surviving spouse.

Children also receive a share in some states if the surviving spouse has any children who are not also children of the decedent.
• Intestacy laws generally provide for distribution by representation, also known as per stirpes distribution.
The share of any heir who dies before the decedent passes in equal shares to that heir’s children.
• When there are no descendants, the surviving spouse receives the entire estate in some states but more commonly shares the estate with the decedent’s parents.
• When there is no spouse and no descendants, parents and siblings share the estate in some states. In others, parents inherit the entire estate, and siblings inherit only if there is no surviving parent.
• If there are no parents or descendants of parents, grandparents generally inherit next, followed by their descendants.
• The final beneficiary under intestacy law is the state. Only relations up to a certain degree inherit under each state’s laws. After that point, the decedent’s property “escheats” to the state. State laws vary—a third cousin thrice removed may inherit in one state but a second cousin may be too remotely related to inherit in another state.
Example: Nola died at age 103 without a will. Under state law, her property passes to her descendants per stirpes. Nola’s three children, Brian, Kyle, and Lloyd, all died before Nola. Nola’s six grandchildren inherit her $900,000 estate. Brian’s only child receives $300,000. Kyle’s two children each receive $150,000. Lloyd’s three children each receive $100,000.

Estate Planning, Wills, Probate, and Transfer of Assets

Property Passing at Death
The disposition of property after death depends on the form of ownership of each asset. Some assets may need to be probated (go through a court process) while others pass automatically to new owners. Property ownership rules vary by state law. Generally:
• Joint assets. Joint tenancies and tenancies by the entirety pass to the surviving joint tenant. Bank accounts in joint tenancy only for convenience and not intended to pass the property to the surviving joint tenant may be probate assets in some states.
• Assets with designated beneficiaries. Life insurance policies, annuities, IRAs, and similar assets pass to designated beneficiaries if the beneficiaries are alive
when the insured or plan owner dies. Pay-on-death (POD) bank accounts and transfer-on-death (TOD) security registrations also pass assets to beneficiaries.
TOD deeds (available in some states) allow real property to pass to a beneficiary without probate.
• Trust assets. Property passes to beneficiaries specified in the trust document.
• Life estates and remainders. Property passes to the remainder owners at the death of the life tenant.

Probate Assets
Other assets—those that will not pass automatically to new owners at death—are subject to state probate rules. These assets pass to the beneficiaries named in the decedent’s will or, if none, according to state intestacy law

Probate
Probate is the court-monitored process for administering the estate of a decedent. The process includes notifying heirs, submitting and validating the will, collecting decedent’s assets, paying taxes and creditors, and distributing property to the estate’s beneficiaries.
An estate is probated in the decedent’s state of domicile. If the decedent owned real property outside his or her home state, an ancillary probate proceeding in that state may also be required. Probate is required if the decedent’s probate assets are above the state’s threshold (generally $10,000 –$100,000). When probate is required, nonprobate assets are not included in the proceeding.

Small Estates—Collection of Personal Property By Affidavit
If the decedent’s probate assets are less than the state threshold, no court proceeding is required. The assets can be collected using an affidavit under state procedures for small estates. Typically, the decedent’s successors (those entitled to property under the will or state law) complete an affidavit following the form specified by state law. The affidavit is given to anyone in possession of decedent’s assets (banks, brokerages, DMVs, etc.). Ownership of the assets passes directly to successors, who also report any after-death income.

Wills and Nonprobate Assets
Only probate assets pass according to the terms of a decedent’s will. Nonprobate assets pass to the surviving joint tenant or beneficiary.

Example: Betty’s will leaves half her estate to her church and half to her children. In 2018, Betty changed title to her home to joint tenancy with her children. When Betty died, the only probate asset was her car. Her church is entitled to onehalf of the value of Betty’s car.

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