“Avoiding probate” is a buzz word that is often stated and sometimes confused. The probate process is often misunderstood, even by people who are sure it should be avoided. Wills do not “avoid probate”, and probate does not subject an estate to taxation, though both concepts are often believed to be true. So, what is probate? And should it be avoided? There is more than one way to avoid probate, but not all ways are created equal.
This article will explain the probate process, the reasons people typically want to avoid it and the best way to plan an estate to avoid the probate process.
“Probate” generally refers to the process by which an estate is handled after a person dies. It is not the only process, but it is the default process. If a person has not done the estate planning to provide for a different process, probate is the process created by state statute for handling the estate of a decedent (a person who has died). Characterized a different way, probate is the process required to handle “probate assets; and assets are considered “probate assets” when no other mechanism exists to transfer the assets a person owns when he/she dies.
Mechanisms that avoid probate will be discussed below, but first we need to understand what the probate process is and why one might want to avoid it. The probate process is a court proceeding that takes place through the court system. The person with the authority to handle the probate administration is an executor (if there is a Will) or administrator (if no Will). The probate administration includes dealing with claims of creditors and other “interested” persons, paying expenses, debts and taxes, and ultimately distributing the assets to the heirs (if no Will) and/or legatees (if there is a Will).
The probate process is a long one because state law requires certain minimum things to be done, starting with a petition to open the probate estate that includes certain minimum information and documentation. Then notices must be mailed to all heirs, legatees and creditors and ample opportunity must be given (6 months) for them to assert claims or raise issues that need to be resolved. The claims period in Illinois is six (6) months after all the required notices are sent and published in the newspaper. Even after the claims period ends, the process is not completed until a full accounting is prepared, a final inventory is done, attorneys’ fees and administrative fees are approved and paid and all the interested parties sign off on the documentation to close the estate.
The probate process involves the time and effort on the part of the executor or administrator, who is entitled to be compensated. It requires the retention of an attorney who is also entitled to be paid. It involves costs including court filing fees, publication and other things. Generally, the probate process in Illinois usually takes nine (9) months on the short end to a year or more, even for a simple estate. The process is overseen by a judge who sits in the probate court. It may involve court appearances and the filing of documentation, including an inventory of the estate and an accounting before the estate can be closed. Like most court proceedings, it is also a public process, and the probate files are public documents.
The main negatives of the probate process are the delay in the ultimate distribution of the estate, the cost of the process, and the public nature of the proceeding and the records. These are the primary reasons people want to avoid probate.
There are different ways that probate can be avoided. For starters, probate can be avoided by the way in which property is owned. For instance, all property owned in joint tenancy will automatically transfer to the surviving joint tenant(s) when one joint tenant dies. Property owned in joint tenancy, therefore, is a non-probate asset (as long as there is a surviving joint tenant). When there are no surviving joint tenants, the property will default to the probate process (because there is no joint tenant to which it will automatically transfer).
Other non-probate assets include life insurance (with designated beneficiaries), 401(k) and IRA accounts (with designated beneficiaries), and payable on death accounts (with designated payees on death). All of those assets will transfer as a result of the death of the owner to the persons designated and are not subject to the probate process (as long as the designated persons survive the decedent). If a designated person does not survive the decedent, the assets designated for that person default to the probate process.
A person could arrange one’s entire estate using some combination of the forms of ownership described above and effectively avoid probate for the entire estate – if all the people designated survive. If designated beneficiaries or joint tenants do not survive, then the plan to avoid probate is foiled.
Another major issue is the payment of the decedent’s expenses, debts and taxes. Who will pay them if there is no estate? Creditors can pursue payment from the people who received the decedent’s assets and open a probate estate to collect the money owed to them. Thus, there might end up being a probate estate anyway – one that is not even controlled by you. If a child or other beneficiary pays the creditors and bills, there is no way to force the others to contribute to those costs without opening a probate estate.
There is also a lack of control over the assets after death. For instance, minor children can not take title to the assets in their own names. A surviving parent or guardian might end up in control of the assets and might not spend them for the benefit of the minor children the way the decedent intended. A parent or guardian may spend them on support, for instance, instead of saving them to pay for college or to give to the child when the child becomes an adult. Further, the assets will pass to the children on reaching adulthood (18) whether they are ready for the responsibility or not.
There is one other way to hold title to assets that avoids the problems with other methods of avoiding probate. The final category of non-probate assets are assets held in trusts. Property owned in a trust is not subject to the probate process because the trust controls the ultimate disposition of the property, both before death and after death.
Living trusts are the best way to avoid probate and to pass an estate on after death. Living trusts are trusts set up during life. The person who created the trust (settlor), funded the trust (grantor) and oversees the trust (trustee) controls the property in the same way as the property was controlled before it was transferred to the trust because he/she is also the benefactor of the trust (beneficiary). A living trust is just another way of owning your own property, but there are tremendous estate planning advantages.
A living trust protects assets during one’s life. Typically, a living trust names a spouse or other trusted person as successor trustee. The successor trustee takes over the trust if you become unable to manage your own assets (for example, due to Alzheimers or other conditions) and after you die. Additional successor trustees can also be named to ensure that a trusted person will always be in place to carry out the instructions you leave for Trust.
The trust, therefore, directs exactly how the assets are to be handled during your life and after your death. While you are alive, the trust directs the trustee to use the property for your benefit. As long as you are the trustee of your own trust, you carry on with your life as you do now. If you become incapacitated so that you are unable to manage your own affairs, then the successor trustee steps in and takes over.
When you pass on, whoever you have named as the successor trustee carries out the directions of the trust ending with the distribution of the trust property to you named beneficiaries as you have instructed. In this way, a Trust takes the place of a Will and directs how the assets are to be distributed upon death. There is no need for probate because the Trust contains all of the instructions for handling the estate, and the property in a the trust is not subject to probate. The Trust contains all of the terms for passing on the property after death.
A trust takes a bit more work and expense to set up. The trust document is more involved than a Will, and the Trust needs to be “funded” (assets need to be transferred into it). A trust, however, avoids the cost and delay of setting up a guardianship (if the settlor/grantor becomes incapacitated during life) and streamlines the administration of the estate after death by avoiding the cost, delay and burdens of the probate process. All of the assets are together under the control of the trustee, who can pay the expenses, pay off the debts and pay the taxes for the estate, ensuring that no beneficiary is slighted and pays more than his or her share. The trustee will handle any claims or challenges to the trust estate or trust property, and the trustee will distribute the trust assets to the named individuals according to the trust instructions. Those instructions can include delay in their distribution of assets to a minor child or young adult until they are old enough and mature enough to handle them.
Finally, the trust is also not a public document. No one is entitled to receive information regarding the trust except for the trustee(s) and named beneficiaries without a court order.
If avoiding probate is a goal, a living trust is the best tool to achieve that goal. It is comprehensive and provides control during life and after death. Setting up a trust and funding it does involve more effort, cost and attention than a Will, but it makes handling the estate after death much easier for loved ones who will be left to handle it.Kevin G. Drendel Drendel & Jansons Law Group 111 Flinn Street Batavia, IL 60510 (630) 406-5440 (630) 406-6179 fax [email protected] foxvalleyestateplanning.com