Law News and Tips
Most married couples own their property, whether real estate, bank accounts, investments (other than retirement accounts), or just about anything else, as “joint tenants.” The full terminology for that is “joint tenants with right of survivorship.” What this means is that when one owner dies, his or her interest in that property passes to the survivor automatically without the need for probate.
In other blog articles I’ve written, I’ve discussed why joint ownership can be a bad thing. With a bank account (where federal law applies), either joint owner can (and yes, they have) cash out the entire account and hightail it for the hills. With other assets (where state law applies), neither joint owner can do anything without the other joint owner joining with them. In addition, if either joint owner gets sued, that account or piece of property can be taken to collect the debt.
In the case of a married couple, things are a little different. When a married couple owns property jointly, it is treated as “tenancy by the entirety” (“TBE”) property. What that means is that the TBE property cannot be taken to collect a debt against one of the spouses, but not the other. This law is a way to protect marriages and families. Marital property could only be taken to collect the joint debt of a married couple, but not the separate debts of married individuals. That’s why a mortgage company always requires both spouses to sign off on the mortgage and loan.
Until 2011, property held by a husband and wife in a joint trust lost that TBE protection. Although it didn’t seem to make sense, if a husband and wife transferred their TBE assets into a joint trust, the transferred assets lost the TBE protection. Go figure. We planned around that with nonprobate transfer options, but it was not really a good solution.
In 2011, the Missouri legislature fixed this oddity. They created what are called “Qualified Spousal Trusts” (“QSTs”). A QST is a joint trust (and it doesn’t matter when it was created) between a husband and wife. The trust must provide either that: (i) the trust assets are held and administered in one trust for the benefit of both spouses, the trust can be revoked by either or both spouses during life, and each spouse has the right to receive trust distributions; or (ii) the trust assets are held and administered in separate shares of a single trust for the separate spouses, with each share revocable by either spouse individually with respect to his or her share, and each spouse has the right to receive income from their separate share. Although this is kind of complicated, it’s a great idea.
The one quirk in Missouri law for QST’s was that to obtain TBE protection in a QST, the property had to be transferred into the trust as TBE property. What that meant was that assets transferred into a QST as separate property did not receive TBE protection.
It’s funny how many non-TBE assets people receive: direct deposit paycheck; pension payments; Social Security payments; and IRA distributions, just to name a few. When non-TBE assets were mixed with TBE assets, it looked like the QST protections were lost, although I never saw those cases. Still, it was a potential problem.
The way we got around this dilemma was that we had spouses keep their joint checking accounts out of the QST. We have the spouses designate their joint checking account as the recipient of all of their non-TBE payments. And then we had the clients put a transfer-on-death beneficiary designation on their checking account so that on the death of the second of them to die, the checking account would automatically rollover into the QST it was kind of an involve strategy, but it worked.
We all kind of figured that the legislature would get around to resolving this odd situation, and over time, they did. Beginning in 2015 married couples could transfer non-TBE assets (whether real estate, bank accounts, or investments) into a QST and still receive TBE protection. This really simplifies the process for married couples with a joint trust. I like when we can simplify things for clients.
Things are tough enough without adding extra administrative layers. It was nice of our legislators to make life a little easier.
Mom and dad had been married for many years. They have three children whom they love very much. The oldest, John, is married with the family. John and his wife don’t have much, but they’ve been making it. They’ve never asked for anything from mom and dad and have always been ready to help.
Their second child is Susan. Susan also is married with four children. Her husband has a good job and has been able to provide for the family, so Susan was a stay-at-home mom and raised the children, bringing them by for their grandma and grandpa to spend time with. Great joy for mom and dad.
Their youngest son was Jason. Jason has had a tough life. His career never took off. His ex-wife got everything in the divorce. Mom and dad have financially bailed Jason out fairly often. They have spent a lot of money on Jason, and he was finally getting to a more stable point in his life.
When mom and dad came to see me, they were sort of conflicted. They equally loved all of their kids, but it seemed to them (to different degrees) that Jason already had received his inheritance. Dad felt stronger about that than mom. And there was some resentment of Jason by John and Susan. When mom and dad did the math, they actually discovered that they had already given Jason much more than John and Susan would receive on their deaths.
In the end, mom and dad decided that Jason had already received his inheritance. They decided to leave their estate only to John and Susan. Mom was torn about this because she knew Jason would feel cheated, but she hoped that over time, he would understand. Still, it was a very difficult decision.
The law allows people to do basically whatever they want with their property on their deaths. They can disinherit any one or more or even all of their children.
However, where a child is disinherited, you need to be careful. If you don’t even mention them in your will or trust, the validity of the will or trust comes into question. A person must be competent, and one requirement for competency is that the person must know the “natural objects of their beneficence.” Good phrase, huh? Learned it in law school. It means a person must know the people who would ordinarily receive that person’s inheritance. If you don’t mention all of your children, then that raises a question of competency.
But even if you mention them, that may not be the end of things. After the death of mom and dad, Jason may feel that John and Susan made mom and dad write him out of the will. Since he has nothing to lose, he could bring a will contest or trust contest based on undue influence. There are plenty of attorneys who could take that case, for one reason or another.
Under these circumstances, I recommended that mom and dad leave Jason something. It had to be an amount or percentage that Jason could not ignore. And the will or trust would include what is called an “in terrorem” clause. That clause says that if you sue, you lose everything. So be afraid; be very afraid.
IRAs and 401(k) plans are great. Amounts an employee contributes to them are tax-deductible up to certain limits. Amounts contributed to them by employers don’t even get included in taxable income when they’re contributed.
And then the amounts in these accounts grow tax-deferred. Even though amounts withdrawn are taxable, when taken out, the tax-deferred growth super-boosts your investment return, while the assets are sheltered in these accounts.
Once an account owner reaches 70 ½ years of age, he or she must begin taking the “required minimum distribution” (“RMD”). You calculate this RMD by dividing the amount in your account by your life expectancy. It’s kind of creepy, but the IRS has determined your life expectancy for you. That’s so kind of our government isn’t it?
When you die, if you’re married, your surviving spouse has the right to roll your IRA or 401(k) over into his or her own name. Assuming the surviving spouse is younger, then they can recalculate the RMD and extend the payment a little more. And all the while the money in the account continues to grow tax-deferred. Great benefit!
When I meet with couples, their biggest asset (or at least one of their biggest assets) is usually their retirement account. But the problem is that if the account owner doesn’t plan carefully, on the death of the surviving spouse, some of the benefits can be wasted.
For instance, I have had a number of estates where the couples failed to name a beneficiary of a retirement account. In that situation, the IRA is payable to the decedent’s estate. When that happens, all the IRA assets must be distributed within five (5) years, and all of these distributions will be fully taxable. You can lose 40% of the account value in pretty short order. It seems a pity to waste all those lifetime tax savings that way, but people do it when they don’t plan.
If people have a charitable inclination, a good plan is to have retirement assets payable to the charity. Although the retirement assets are taxable income to the recipient, since a tax-exempt entity is, well, tax exempt, no taxes are due.
If an IRA owner has children, a lot of people will just name the kids as the beneficiaries. This creates what is called an “inherited IRA” that can be stretched over the life of the recipient, which is a good thing.
But inherited IRAs can also be problematic. If the designated beneficiary dies before the IRA owner dies, then depending on the wording of the designation or the policies of the IRA administrator, the retirement assets may or may not go to the deceased beneficiary’s children and the measuring life will probably be that of the deceased beneficiary.
Inherited IRAs also present another problem. One of the laws that govern IRAs is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. (Where do they come up with these names?). Under that law, an employee’s IRA is protected from bankruptcy. That much was pretty clear.
For several years after that, people wondered if the law also protected inherited IRAs. In the 2014 case of Clark v. Rameker, the Supreme Court decided that the law did not protect inherited IRAs. If inherited IRAs are not exempt from bankruptcy, I wonder if they are protected from a beneficiary’s creditors at all. I haven’t seen any cases on that, but it seems like a logical extension of the Clark case.
The way to protect inherited IRAs from a beneficiary’s creditors is to have the IRA paid to a trust. Now it can’t be just any trust. If the IRA can be used to pay the debts of the decedent, trust, or probate administration expenses, court ordered family allowances, various taxes, or other things, then the trust is not qualified and the taxes will be due within five (5) years.
In 1999, the IRS gave us some magic language to qualify a trust to receive IRA benefits. So in order for a trust to qualify, it must include this magic language. In addition, the trust needs to contain what’s called a spendthrift clause. This simply says that the assets of the trust cannot be used to pay the debts of the beneficiary.
An IRA paid to a properly drafted trust will protect the inherited IRA from the beneficiary’s creditors over the life expectancy of the beneficiary. It’s a good plan.
I have a client in her late 80s. Since she has mobility issues, I went by her house to answer some questions she had. Her health has been failing, so she wanted to make sure that her affairs were in order.
She had her estate plan prepared by another attorney over 25 years ago. The laws have changed a lot since then, but not in ways that really affected her plan.
She had a trust. It all looked in order. We checked her various accounts and assets. It looked as if they were all in her name as trustee, which is what I wanted to see. There were some questions about her IRAs, but I told her son and daughter-in-law what they needed to do with those. That was kind of an easy fix.
She also had a pour over will. A pour over will is like a safety net to make sure everything ends up flowing through the trust which is the primary document.
I didn’t see a financial durable power of attorney in her estate planning documents folder which I thought was odd. A durable power of attorney for financial matters authorizes someone to handle your financial assets for your benefit when you are no longer able to do so.
I asked about it, and her son handed me another folder that had the power of attorney in it. It was in a different style from the trust and the will too. When I asked questions about it, they told me they had printed it off the Internet. Evidently the attorney who prepared the will and the trust had not prepared a financial durable power of attorney for her.
Since my client’s health was not good, her daughter-in-law asked about medical decisions. I asked if they had a medical directive. I got blank stares. I asked about a health care power of attorney. More blank stares. I asked about a living will, and they said that they had heard of that. It turns out that apparently their estate planning attorney had not addressed any medical issues with her.
There are really two types of documents or provisions that we use to address health care issues. The first is a medical durable power of attorney. By means of this document, a client authorizes someone to make medical decisions when they are not able to. These are not necessarily end-of-life kind of things. For instance, someone needs to say it’s okay to set your broken arm when you passed out after you broke it.
The other type of healthcare document is the living will. A living will provides that when you are in a persistent vegetative state with no reasonable expectation of recovery, no “extraordinary means” should be taken to continue your life. In Missouri, the phrase “extraordinary means” is not specifically defined. Unless you state otherwise, it is presumed that a patient wants all procedures to be used to keep them alive. You have to specifically indicate if you want the healthcare professionals to withhold chemotherapy, radiation therapy, CPR, artificial nutrition and hydration, and even antibiotics. You do this with a living will.
Typically, the medical durable power of attorney and the living will are combined in a single document referred to as a medical directive or a health care directive. It makes sense to combine them since they deal with different aspects of basically the same situation.
Some time ago, an older couple came into my office to do their estate planning. She was 85, and he was 86.
As with all of my clients, I had sent them an estate planning questionnaire that helps me to gather information I’ll need to make a recommendation on a plan that would work for them. It asks for family information, financial information, and the names of the people they would want to take care of things when they are no longer able to do things for themselves either due to disability or death.
Right in the middle of the questionnaire is a page that is mainly blank. It asks the client to tell me what they want to have happen to their property on their death. The can write it out; they can do a diagram; or they can draw pictures. Based on that, I develop a plan.
When I was meeting with this older couple, they had brought in their questionnaire. They had completed the family information. The financial information was pretty detailed and told me what I needed to know. They also had listed the people they wanted to handle things when they couldn’t. However, they had left the center page completely blank. This was kind of odd.
So I asked, “What do you want to have happen to your property when you’re gone?” And the wife burst into tears. I don’t mean that she just started weeping. It was kind of like wailing.
I was really surprised. I had never had a client do that before. So I turned to the husband and said, “I’m sorry. What did I say?” He leaned forward a little and in a very gravelly voice, he said, “Aw, don’t worry. She just doesn’t want to admit we’re gonna die.” Talk about denial. Now to her credit, the only time she had even been in a hospital was when her two boys had been born, but still.
People often tell me that they are going to come see me to get a will or a trust done. My standard response is, “OK, but just don’t die in the meantime.” I know it’s a little insensitive, but it is the hard truth.
Nobody wants to think about death, much less their own. It’s hard to comprehend for one thing: one minute you’re here, and the next, you’re gone. It can be pretty depressing.
However, not planning seems kind of irresponsible to me. If you have minor children, you don’t want them to end up in foster care or have your life insurance be administered by the probate court. You don’t want your estate to be probated generally. I would think you want to be able to name the person who is going to take care of your kids and administer your assets.
So when is the best time to plan your estate? Honestly, it’s right before you die. But no one knows when that day will come except maybe when it’s already upon you. We all know people who have died suddenly from a heart attack or some freak accident. We know other people who were struck with a debilitating disease in the prime of life. We never know when our time will come.
So when is the right time to plan your estate? Now. Don’t wait until it’s too late.
I spend a lot of time talking to people about the benefits of trusts. The bottom line is that they avoid probate. As I’ve explained in other articles (columns), probate can be slow, freezing cash and other accounts, so the mortgage, utilities, and other necessary expenses can’t be paid; probate is a public process that can open your private business for general inspection; and probate can be expensive. So why would anyone forgo a trust and only use a will?
There are a few instances when a will is the way. Trusts cost a little more than wills, and for young families, a little added expense can be a large burden. In that case, a will would be far better than to ignore estate planning altogether.
If a young couple with children die without doing any planning, their children’s lives will be caught up in the court system. First, there is the question of who will take care of the children. When working with couples with young children, this may be the most hotly debated (if not contested) issues. She never really liked or trusted his brother, Billy, who is his best buddy. He never really thought much of her sister, Lucy, to whom she is deeply devoted. Even so, I’ve never met a couple who wanted their children to become wards of the state and possibly bounced from home to home. By means of a will, they can name guardians for their children.
In addition, couples don’t really want their assets managed by the probate court, or public administrator. With young families, these assets are typically life insurance proceeds, but they can be substantial. Young children cannot open a bank account; they cannot make investments; they can’t even pay bills. Someone has to be put in charge. Without a will, that would end up being the public administrator and the assets would be in what is called a conservatorship.
Once a conservatorship is set up and the assets are transferred to it, there is the question of how to invest the assets for the good of the children. Most parents would want the assets to be invested for a total maximum return within some conservative limits: nothing very risky – maybe some blue-chip stocks; maybe some bonds.
With a conservatorship, that won’t happen. The assets will be invested in CDs and money market funds; all government insured. Typically, those investments don’t even keep up with inflation. The assets may actually be losing money against inflation.
And then there are expenses. The conservator cannot pay for food, housing, utilities, or anything without a court order, and the court will minimize expenses to conserve assets.
Finally when each child reaches 18, they will get their separate share outright. That rarely seems to be a good idea. Even a relatively small amount to an 18-year-old is a fortune. As I’ve discussed in other articles (columns), too much money too soon can ruin a child. Mercifully, I was saved from that burden.
Parents can avoid the consequences of a conservatorship by having a will. A will allows them to provide for a trust to take care of their children. Until the youngest reaches a certain age, the assets can go into a common trust. Once the youngest has reached the age where they should have completed college, then the common trust assets can be divided and distributed to separate trusts for the benefit of each child. Problem solved.
So one situation where a will might be appropriate (or sufficient) is when a young family needs to do some planning but is on a tight budget. Sometimes a will might be the best planning tool for the elderly as well. In any event, a general power of appointment, and a medical directive should be included in the mix. It would be a very rare instance when no estate planning is the solution. Rather, no planning is first step to problems.
New Year’s Day is fast approaching. That got me thinking about New Year’s resolutions. They’ve always struck me as kind of an odd tradition, so I wondered where this practice started.
It turns out that the practice of making resolutions at the beginning of the year is a very old practice … at least 4000 years old, in fact.
The earliest record of New Year’s resolutions comes from Babylon. For them, the new year began with the spring equinox. They would return borrowed items and pay their debts. They would also make vows to their gods in the form of resolutions. Whereas we routinely forget our resolutions, the Babylonians were more fastidious about keeping them because they felt they would please the gods if they kept them and anger the gods if they broke them. That’s pretty good motivation. You don’t want to anger the gods.
The practice of making resolutions at the beginning of a new year was continued by the Romans about 2000 years later. Julius Caesar, however, changed the beginning of the year to the winter solstice and said the resolutions should only be made to one of their gods, the two-faced Janus. Janus had the peculiar ability to look to the past and to the future, but I don’t think he could see the present. That would’ve made driving difficult.
The early Christians also had a type of New Year’s resolution. They would pause to reflect on the failings of the past year, and resolve to amend their ways in the coming year. This tradition has continued in some Christian denominations that hold “watch night services.”
In our current society, New Year’s resolutions have a less moral tone to them. Yes, some people resolve be better people; to be nicer, more charitable to others. But most resolutions seem to be more about self-improvement: lose weight, stop smoking, exercise, and reduce stress, that sort of thing. So many times people make resolutions only to abandon them (if not forget them) within a week. As Americans, we don’t seem to have much fortitude for self-improvement. Self-indulgence, yes, but not self-improvement.
I’d like to propose a resolution for you. If you have an estate plan that is 10 years old, or even 20 years old, take it out and look at it. See if it does what you want it to do now. Consider whether the laws have changed. Do you still want the people you named to be in charge of things? If your plan needs a tune-up, resolve to get things in order.
If you don’t have a plan in place, resolve to do an estate plan in 2016. Not one off the Internet since those have landmines in them. And not just “pay-on-death” or “transfer-on-death” clauses, since those are only Band-Aids fixes. Talk to an attorney, and get a real plan.
But most importantly, resolve to keep this resolution. I run into a lot of people whose parents waited too long to do something. It’s too late to plan after death.
If you watch TV, read magazines or newspapers, or even look at billboards, you get kind of a funny picture of our society. Our media is filled with emaciated, augmented women and men who must spend 8 to 10 hours a day at the gym. And they’re all young, healthy, and apparently well-adjusted and happy. We all know that this picture is kind of a cruel parody of life.
People are kind of messy. They come in all kinds of shapes and sizes and with different personality types. Although none of us really wants to talk about it, according to the Census Bureau about 20% of the population has special needs. Those special needs can be emotional, psychological, or physical. And they can vary in intensity from almost imperceptible to crushing. Those needs can be long-lasting or they can be life-threatening. Reportedly about half of those with special needs suffer from a “severe” disability. Life is way more complex than we see in the media.
For parents of special needs children, this makes life challenging. They may need special medication; they may need special equipment, including chairs and lift; and they may need special care.
Being maybe a little more sensitive to this than many people, I see families struggling to care for their special needs children all the time. It may be special education, therapy, or home modifications. And then there are the daily care needs.
But the scary question is what happens when both (or either) mom or dad is/are unable to provide that care? What happens when mom and dad are gone? Is there still some way to provide for them?
In planning the estate of people with special needs children, there are several options available, although in my mind only one good one. For instance, you could simply leave that child out of your will or trust. Leave them nothing. After all, they are probably on some government benefit programs. They’ll be taken care of, right?
Well, yes and no. The government programs are God-sends for most people in these situations, but they really only provide the minimums. It’s kind of Spartan, even under the best circumstances. So that’s probably not a great solution.
You could also just leave them their fair share of your estate in trust with the trustee appointed to take care of things. The problem with this option is that these trust funds will in all likelihood be treated as “available funds” which will be counted in calculating the child’s financial need. These funds will probably result in the termination of their state aid until those assets are completely used up.
You could also leave a share of your estate to another child with the understanding (but not the obligation) that they will use the money for the benefit of the special needs sibling. My experience is that this arrangement imposes an awkward burden on the non-disabled child. Also, over time, that money gets mixed up (co-mingled) with other assets. Without meaning to, the money gets absorbed into the person’s other assets and becomes indistinguishable. Finally, those funds can be exposed to the non-disabled child’s creditors and caught up in a divorce.
In the final analysis, the best option under these circumstances is a special needs trust (an “SNT”). A special needs trust is a trust for the benefit of a disabled child. Although such a trust can be set up by the individual (a “self-settled trust”) for his or her own benefit, using his or her own assets (such as insurance proceeds from a debilitating accident), that is not what I am talking about here.
This is a “third-party SNT”. The statute approving third-party SNTs specifically refers to trusts established by parents, grandparents, or guardians, so it is clear those trusts are acceptable. However, courts in most states have authorized the rights of siblings, friends, or caregivers to establish these trusts as well.
The trustee of such a trust generally cannot provide for housing or food ( there are exceptions). However, the trustee can clearly provide for the disabled child’s care by family members; medical services and equipment not covered by government programs; housekeeping, grooming, and meal preparation; certain household costs; certain computer and communication equipment; televisions and tablets; home decoration; vehicles or other transportation; vacations and travel costs; and the list goes on.
One of the drawbacks of a self-settled SNT is that on the beneficiary’s death, the trust will probably have to repay the government for any amounts the beneficiary received before making any distributions to family members. Not so with the third-party SNT. With a properly drafted trust, there is no reimbursement obligation. The remaining trust assets can go to the surviving family members.
Esther was in a bad marriage. Her husband drank a lot, and when he was drunk… well, let’s just say it was a bad marriage.
He couldn’t hold a job, so Esther did what she could to support them. One day she happened to see a University of Tennessee football game. She didn’t know the first thing about football, but she thought the cheerleader uniforms were really cute. She had an idea.
She put her dilapidated sewing machine on the kitchen table, and she started to sew. She sewed several different sizes of little girl versions of the cheerleader uniforms. Then she went to the University of Tennessee bookstore. She showed the little uniforms to the manager who scoffed at them. But Esther was so persuasive, the manager agreed to take them on consignment. No investment on her part; but if they sold, she agreed to pay Esther
That was a good weekend for the University of Tennessee. They won their game. Whenever that happens, the bookstore is busy. And that weekend, they were particularly busy.
Early Monday morning Esther’s phone rang. It was the bookstore manager. It turns out that all of Esther’s little uniforms had sold. In fact, there were backorders. The manager placed a big order.
But Esther had a problem. She only had one old sewing machine, 24 hours in a day, and a big order. So she talked to a few friends there in Alamo, Tennessee, and they came to help, all bringing their own dilapidated sewing machines. Sewing in Esther’s kitchen, they filled that order, and more orders came in from the bookstore.
It’s hard to keep a good thing quiet, and college football is really competitive. Several other schools heard about and tracked down Esther. She had more orders than she and her friends could fill out of her kitchen and dining. The local bank made her a loan, and she built an extension off her kitchen. Pretty soon, 25 of the local ladies were sewing little cheerleader outfits, even for hated rivals.
A man from a neighboring state heard about Esther’s business, and he came to visit her. He had this idea about a chain of stores. Esther didn’t necessarily understand everything he said, but she liked Sam. She also had more money than she had ever imagined. She bought some Walmart stock. Needless to say, she did well with that investment. Who says investing is hard?
I never heard what happened to Esther’s husband, but he evidently was quietly out of the picture.
Esther was getting older. She didn’t have any children. She wasn’t interested in leaving her estate to her nieces and nephews. A lot of money (or even a little money in Alamo, Tennessee) can really ruin a kid.
There are a lot of things that motivate people to give to charities. Sometimes it’s just a sense of altruism… it’s the right thing to do. Other times it’s a desire to leave a legacy and have a building named after them.
In Esther’s case, she was a religious woman. She recognized that God had had a hand in creating her wealth. So she contacted her church about creating an endowment.
When I met her, she was pretty much out of the business. She came to meet me in St. Louis so she could go to a Cardinals game. She’d only heard the games on the radio. Having no connections, I was only able to get tickets for seats way at the top of the stadium in left field. She was ecstatic.
Her endowment has helped several poor congregations in her denomination and has supported several outreach ministries. Without her gift, none of that would have happened. It’s funny what a little idea can grow into and how much good you can do with it. As far as she was concerned, Esther had received a gift from God, and she only wanted to give it back. What an idea!
When I meet with clients to talk about their estate planning, there are a lot of things to discuss. If there are minor children, then who will get the kids? If you don’t name guardians, the court does that for you.
If you have life insurance, who will handle the money for the benefit of your family? If you don’t set something up, then the court will set up a conservatorship. Someone you don’t know will handle investments and distributions. Court approved investments are basically CDs and money market funds. Court-approved distributions are pretty narrow in scope, which may or may not be a good thing for you. Since you won’t know who is handling the money, you won’t know if you can trust their judgment.
These issues can, of course, be handled in either a will or a trust. Many people think that if they have a will, they’ll avoid probate. That couldn’t be further from the truth. A will virtually guarantees probate.
So the question is whether it’s important to avoid probate? I usually give three reasons why clients want to avoid probate. The first is a loss of privacy. When you open a probate estate, you have to file the will. When the estate is opened, you have to send notices (including the will) to potential heirs and beneficiaries. I have literally had people come out of the backwoods of Minnesota, claiming that Aunt Martha meant to leave them half of her estate. We had trouble finding the guy, so there was no way he had been in touch with Aunt Martha. These notices can invite will contests.
Also, when you open a probate estate, you have to publish a notice in “a newspaper of general circulation.” That’s when the cards and letters start coming. People wanting to buy the house or invest the money.
Within 30 days after the estate is opened, the personal representative has to file an inventory of everything the decedent owned and all of the debts he or she owed. Although there are some protections, probate is basically a public record. A persistent snoop can probably get to see the file. That is not helpful and can create problems for heirs. Wealthy (and that is a relative term) heirs appear to have a target on them.
Another reason why people want to avoid probate is the cost. If we assume a person owns a house, has a little IRA, and a little life insurance, it’s easy to have an estate worth $500,000. Out of that pot of money, the State by statute allows the personal representative a fee of approximately $14,000. That same amount goes to the attorney as well. Probate estates can be very profitable for lawyers.
As I’ve discussed in other articles, some people try to avoid probate by naming their children as beneficiaries of certain assets. Depending upon the asset, there are several questions to consider. 1) Do you want a 20-year-old to get a big life insurance distribution? 2) Will all of your children be able to work together to get your house ready for sale and then to sell it? 3) Do you want the IRA you worked so hard to build up to get taken in litigation when your son or daughter inherits it?
The last reason to avoid probate is time. This was rather forcefully brought home recently when we were trying to open a probate estate. Even with all of the paperwork in proper form, it took almost 2 months to open the estates now that the process has been “automated.” Once a person dies, his or her assets are frozen. No bills can be paid, including the mortgage or utilities. Usually family kicks in and gets reimbursed, but that’s kind of an imposition. And what if you have a business? That could kill it.
And once the estate is opened, it has to stay open for a minimum of six months for any creditors to file claims. After six months, the personal representative has to file an accounting and a proposed order of distribution. Further delay! And if you didn’t plan properly, the only distributions that can be made are those that are approved by the court. Most all of this can be avoided with the trust.