Estate Planning for Financial Planners

EstatePlanning for Financial Planners Chapter 4: The Probate Process

Definition • The legal proceeding that serves to: • prove the validity of existing wills • supervise the orderly distribution of decedent’s assets to heirs • protect creditors by insuring that valid debts of the estate are paid.

Testate vs. Intestate • Testate – Dying with a valid will. • Intestate – Dying without a valid will. • Legatee – Person who inherits under the will. • Heir – Person who inherits under intestacy laws.

Advantages of Probate • Protect the decedent • Fulfill the decedent’s wishes. • Protect the legatees and the heirs • Orderly administration to prevent one heir from taking priority over the other. • Clean title to heirs. • Requires notice so descendents can claim their share. • Protect the creditors • Makes sure debts are paid.

Disadvantages of Probate • Complex and takes time • Generally takes 6-24 months. • Monetary expenses • Court costs – 5 to 10% (some up to 20%) • Ancillary probate • Loss of privacy • Court proceeding open to public scrutiny.

Nontraditional Relationships (3 of 3) • Avoid probate!!! • Family more likely to contest will • Jeweler • Anna Nicole • Other means of transferring to the nontraditional partner: • Lifetime gifts. • Named beneficiary. • Titling. • Trusts.

Probate Process (1 of 4) • Varies by state • General Process • Someone produces the will. • Takes the will to probate court (usually the domicile of the decedent). • Petitions to open the estate.

Probate Process (2 of 4) • Appointment of executor (testate) or administrator (intestate). • Letters testamentary (for executors) or letters administration (for administrators) are issued. • Surety bonds may have to be posted. • Decedent can waive it in the will for executor. • Waiver is generally valid unless out-of-state executor. • Administrators generally required by state law to post bond. • Premium: .5% - 1% of bond

Executor • Estate’s personal representative appointed • Personal representative (executor or administrator) will manage and distribute the estate • Hearings after notice to interested parties • Notice of Petition to Administer Estate • Published in local paper: in Illinois: three consecutive weeks

Executor • Executor files probate petition within 30 days after nomination • Identify all beneficiaries and heirs at law • Notify within 14 days of will probate and right to contest will within 6 months • In Illinois, notify all who would be intestate heir • Bond: unless waived in will, equal to value of personal assets and one year’s income

Probate Process (3 of 4) • Accountings to the court • Executor files inventory of estate assets with court (in Illinois, within 60 days of appointment) • Public document • Also file annual accounting of income and expenses • Pay debts and costs. • From what assets?

Probate Process (4 of 4) • Manage and distribute estate. • Distribute specific bequests. • What if the asset no longer exists? • Ademption – extinction of right • Distribute remaining assets. • What if there are not enough assets to satisfy all bequests? • Abatement - reduction

Probate administration • Creditors can file claims against estate • All known creditors must receive notice • Claims barred after 6 months of publications of notice or 3 months of mailing, whichever later • Distribution of assets • Can make preliminary distribution • Must be < 50% of estate • Final distribution: after 6 month claim period • Final estate accounting • Fees average 5 – 10% of estate value • Probate attorney • Executor

What Passes through Probate? • Fee Simple Property • Tenancy in Common Property • Community Property • Invalid beneficiary designations

What Passes Outside Probate? • State contract law • Life insurance • Annuities • IRAs, SEPs, SIMPLEs, & qualified plans • Spouse presumed beneficiary of qualified plan unless consented to someone else • Pay-on-Death (bank accounts) & Transfer-on-Death accounts (investment accounts) • State titling • State trust law

Estate Planning for Financial Planners