Posts Tagged ‘probate avoidance’

Is Dispute Inevitable When Two Children are Named as Co-Trustees?

MAY 18, 2015 VOLUME 22 NUMBER 19

So often our clients assure us that their children are different from other children. Our clients know that their children will fundamentally get along. They are sure that there will be no big problems when they die, and that the children will communicate and cooperate. Fortunately, that turns out to be the case for our clients. But other lawyers’ clients seem to be very different.

Betty Lundquist (not her real name) must have thought her two daughters could work well together, because she named them as successor co-trustees of the revocable living trust she set up. She directed that the daughters (Peggy and Lisa) were to split her estate equally. She also signed a “pour-over” will, directing transfer to her trust of any assets not already properly titled at her death. For whatever reason, she named Lisa as the sole personal representative of her probate estate.

Betty had actually transferred pretty much everything to her trust, and so probably envisioned that there wouldn’t be much need for a probate at all. As she approached death, however, things were already getting tense between Peggy and Lisa. The day before Betty’s death, Peggy and her husband tried to transfer some of her trust accounts into their own name. They got the original will and trust documents from Betty’s accountant, and declined to share them with Lisa. Peggy was living in Betty’s home, and wouldn’t let Lisa even into the home to look at — and inventory — their mother’s belongings.

When Betty died in 2011, Lisa filed an emergency petition with the probate court seeking release of the original will and other documentation. She ultimately was appointed personal representative, and Betty’s will was admitted to probate. Peggy thereafter refused to co-sign trust checks to pay Betty’s bills, or motor vehicle affidavits to transfer car titles.

Eventually the probate proceedings were wrapped up, though the sisters were still not getting along. Finally, Lisa filed a request for payment of her mother’s estate’s expenses — including her attorneys fees for the probate proceedings themselves. Peggy responded by arguing that Lisa should have been disinherited because she filed the probate proceedings at all. Her logic: Betty’s will and trust provided for automatic disinheritance for anyone challenging her estate plan, and Lisa’s filing of a probate proceeding amounted to a challenge of their mother’s plan to avoid probate altogether.

The probate court approved payment of attorneys fees of $8,081.20, and a little more than $7,000 of other costs incurred in administration of the estate. Since the bulk of Betty’s estate was actually in her trust, the probate judge also ordered that the payments would come from the trust to the extent necessary. Peggy appealed both the approval of attorneys fees and the order that the trust should pay the fees.

The Arizona Court of Appeals ruled that the attorneys fees were appropriate and reasonable, and upheld the order. Furthermore, it agreed that the probate court had the authority to order payment from the trust — even though the trust had not been submitted to the court for oversight. According to the appellate court, both the trust’s language and Arizona law provide for payment of the decedent’s expenses — including probate and administrative expenses — from trust assets. Johnson v. Walton, May 14, 2015.

Peggy’s argument (that no probate proceedings were even needed) might have carried more weight if the Court had not been convinced that she actively interfered with the orderly administration of her mother’s estate. In fact, with even a modicum of cooperation Betty’s daughters might well have had a smooth, easy and inexpensive trust administration, and no need for any probate proceedings. That is a common result in similar circumstances — especially when one of the children is put in charge and they behave responsibly and honestly. (Of course, the person in charge need not be one of the children — but that is the choice we see most often.)

Was Betty’s mistake putting her two daughters in joint charge, and assuming they would work together? It’s always hard to figure out exactly what else might be going on when reading a Court of Appeals opinion, but if the joint authority didn’t cause the problem, it certainly did not help prevent the later dispute.

Our usual advice: rather than appointing two (or more) children with equal authority, we suggest you default to a choice of the one person who is most responsible, most widely respected among your beneficiaries, most available and most trustworthy. For clients who tell us that each of those terms applies best to a different child, we suggest that they use some method to make a single selection (coin flips work in extreme cases). Fortunately, though, our clients’ children all get along, all work beautifully together and never have disputes. Just like our own children.

Avoiding Probate — A Good Idea, But Not Always Effective

AUGUST 25, 2014 VOLUME 21 NUMBER 30

Some people really don’t like city traffic, and will go out of their way to get on the freeway whenever possible. Of course, that approach can backfire — freeway traffic is sometimes snarled, and sometimes in unpredictable ways (and at unpredictable times). Avoidance of surface traffic can be a good practice, but of course isn’t itself the end goal; the real point is to get where you’re going quickly and efficiently, with a minimum of frustration along the way.

We’ve been looking for a good metaphor to explain our view of “probate”, that vilified court process that often (though much less often than you probably think) has to be undertaken upon a family member’s death. Maybe the freeway/city street metaphor isn’t perfect, but we think it might be suggestive of the real goal. You probably want to make administration of your estate as simple as possible, while minimizing cost and aggravation for your family. You also want your wishes carried out, and you might add “no squabbling” to your list of goals. Those are your goals; “avoid probate” is no more the goal than “get on the freeway” is a goal in driving.

Why the extended traffic metaphor? Because of a case we read this month from the Missouri Court of Appeals. We thought it was a good case study in how probate avoidance sometimes is ineffective (and, in the reported case, probably even drove up the cost and complication).

Susan McCauley (not her real name) had a modest estate. In fact, her debts apparently exceeded the value of her assets. She had three children, a home, a commercial rental property, a brokerage account and three bank accounts. She and her late husband had borrowed money against the commercial property and also had a signature loan with the bank; the amount of those two loans exceeded the value of the property itself.

Whether avoidance of probate was Susan’s primary goal or not, she took several steps to accomplish that result. She made her bank accounts “payable on death” to her three children. She put a “transfer on death” titling on her brokerage account, again naming her three children. She executed beneficiary deeds naming the children as beneficiaries for all of her real estate (Missouri, like Arizona, is one of the minority of states that recognize a “beneficiary deed” or “revocable transfer on death deed” on real estate).

When Susan died in 2008, her son filed a simplified probate proceeding allowed under Missouri law, in which he recited that her probate assets consisted only of her personal property with a value of about $16,000. Since that amount was well under the Missouri limit of $40,000, he sought an order allowing transfer of all of her remaining personal property to the three children.

Not so fast, argued the bank which held Susan’s two notes. The bank claimed that Susan owed over $370,000, and asked the probate court to order her son to bring all of those non-probate transfers (the beneficiary deeds, the POD and TOD accounts) back into the probate proceeding to satisfy their claim. Meanwhile, the bank went ahead and foreclosed on the one property it had most direct control over — the commercial real estate, which secured one of its loans.

After sale of the rental building, the bank’s remaining claim was a little over $164,000. It continued to insist that it should be able to get her house, bank and brokerage accounts to defray the remaining debt.

Susan’s son explained to the probate court that there really hadn’t been all that much left in her estate. After payment of about $22,000 in other debts (presumably, but not clearly, including her final medical and funeral/burial expenses), the three children had split the house and about $60,000 — including about $30,000 in equity in Susan’s house. The bank asked for judgment against the three children for the $60,000.

The probate court disagreed about the equity in the house, noting that the children had borrowed $50,000 against the house in order to pay those last expenses and that values were lower than the bank thought (remember that all this was taking place in 2008/2009). It ordered that the house be listed and sold, and that any net proceeds after repayment of the loan taken out after Susan’s death should be given to the bank. The probate court also removed Susan’s son as personal representative and appointed a new, neutral personal representative.

The bank appealed, arguing that (a) the probate court should have entered a judgment against Susan’s children and ordered them to repay the estate, rather than ordering sale of the house for whatever it might raise, and (b) the proper valuation of damages should be based on the value of the house on the date it was transferred (that is, on the date of Susan’s death), not months later as property values slid. The Missouri Court of Appeals agreed on both points.

The result: the probate court was directed to calculate and enter a judgment against Susan’s three children for the amount they received (up to the bank’s debt, which clearly exceeded any valuation of the amount they received). Rather than ordering sale of the house and distribution of any net proceeds, the children would be liable for the value of everything they got — and that valuation would be as of the date of their mother’s death, not based on what they held at the time of resolution. Merriott v. Merriott, August 19, 2014.

Would the same result have occurred if Susan had lived and died in Arizona? Probably. Missouri’s statutes on bringing assets back into an estate to satisfy creditors are very similar.

In hindsight, Susan would have made a better plan by simply writing a will leaving her estate to her three children and keeping all of her assets in her name alone. Her son could have been appointed personal representative, listed her home and sold it for what it would have actually fetched on the market, identified the priority of claims against her estate (paying funeral and last-illness expenses first, plus his own — and his lawyer’s — fees for administration) and simply paid any remaining balance to the bank (and other creditors, if there were any). He (and his siblings) would not have borne the risk of a falling real estate market, would not have incurred additional administrative expenses, would not have suffered the indignity of being removed as personal representative of his mother’s estate, and would not have had a money judgment leveled against him (and his siblings). But sometimes you don’t know what traffic is going to look like until you’re already on the on-ramp.

How To “Fund” Your Revocable Living Trust

APRIL 15, 2013 VOLUME 20 NUMBER 15
We keep bumping into versions of the same story:

“Mom and dad created a revocable living trust. They wanted to avoid probate, and my sister lives in a group home because she is developmentally disabled. The trust named me as trustee, and my sister’s share goes into a special needs trust. Problem is, they named the kids as beneficiaries on their IRAs, and the house wasn’t transferred into the trust. Is that going to cause any difficulties?”

In a word: yes. Two kinds of difficulties, in fact:

  1. Not transferring assets to the trust (like the house) means that the probate avoidance value of the trust is lost altogether. Probably we will have to file a probate proceeding to transfer the house to the trust — and then it can be distributed properly. The good news is that those assets they DID transfer into the trust won’t be subject to the probate proceeding. The bad news: there will still have to be a probate proceeding. Your parents failed in their goal to avoid probate.
  2. The IRA beneficiary designations create a different difficulty. The other kids will get their shares of the IRA just fine, even though your parents didn’t use the trust. But your sister’s share will go outright to her, and will cause her to lose her eligibility for at least some public benefits — and we will probably have to have a court proceeding (in Arizona, a conservatorship) to get you or someone else authority to handle her inherited IRA. Plus we may have to have a related court proceeding to set up a special needs trust (we can’t use the one that your parents created) to receive those funds — and if we do, that trust will get paid back to the state when your sister dies. In other words, your parents also failed in their goal to provide protection for your sister’s inheritance.

How did this happen? Didn’t the creation of the trust address both kinds of problems?

No. Creation of the trust was one thing. Funding of the trust is another.

“Funding” is the term lawyers usually use to describe all the different kinds of things that have to be done to get assets titled in the name of a revocable living trust. It is an essential part of the process, and usually is part of the job taken on by the lawyer who drafted the trust. Not every lawyer agrees, but we at Fleming & Curti, PLC, feel that we have not completed our job unless we have at least initiated the process of getting assets transferred to the trust. The practical effect: even after you sign your estate planning documents, you may still be working with our office for weeks or months to get the “funding” done.

Some assets are fairly easy. The house title (at least for Arizona properties) is easy for us to prepare. If there is out-of-state real property, we may need to involve a lawyer from the state where the property is — but even that is usually a fairly modest cost.A lawyer in, say, Indiana might transfer Indiana property to the Arizona trust at a low cost, hoping that we will return the favor the next time she has an Arizona property to transfer into an Indiana trust (we probably will).

Other assets can be more complicated. Your bank, credit union or brokerage house may resist changing accounts into the trust’s name. Some may flat out refuse. Some will appear to have done it right, but then later decide that the title hasn’t actually been changed at all (and they may not tell us).

Then there are the assets that get changed after the trust is signed. If you have refinanced your home mortgage, or purchased a certificate of deposit from a new financial institution, or talked to your “personal banker” about accounts, you might well have signed new title documents. You often will not even realize that that is what you were doing — no one ever says: “you know, if you sign this document it might just mess up your trust funding — you should talk with your estate planning attorney first.” We wish they would say just that.

Some assets get overlooked. Did you remember that you inherited a 5/24 interest in some oil and gas rights in Texas? Did you tell us about the small bank account you kept in your hometown bank when you moved to Arizona 23 years ago? Did you even remember that you had a life insurance policy from your time in the military at the end of World War II?

Then there are the beneficiary designations. Life insurance, IRAs and other retirement accounts and annuities almost always have them. Bank and brokerage accounts and, in Arizona and a handful of other states, even real estate can have them. Our clients are forever tinkering with them — you go to a seminar, or listen to the bank manager explain the value of annuities, or talk to a tax preparer who assures you that lawyers are overpriced, and then the beneficiary designation gets disconnected from the rest of your estate plan.

Don’t panic. (“Towel Day,” incidentally, is May 25 — go ahead and look it up. We’ll wait.) The problem might not be insoluble.

It would be best, of course, if we could get things right while you’re still alive. Haven’t met with your lawyer in five years? Make an appointment, gather up all the statements, titles and beneficiary designations you can, and sit down to review the funding of your trust. Not every beneficiary designation should name the trust in every situation. Not every account will actually be held the way you believe it is, or the way your lawyer believes it should be.

Even if you don’t get it straightened out while you’re still alive, there may be things your heirs can do. In Arizona, up to a total of $50,000 (that may be changing to $75,000 in a few months, incidentally) can be collected into your trust without having to do a full-blown probate. Up to $75,000 of real property (soon to be $100,000) can be collected in a simplified probate proceeding, too. There are rules and limitations, but many problems of failure to fund trusts can be taken care of through those provisions of law. Not in Arizona? We don’t know for sure (we don’t practice in your state), but there are similar rules in most, perhaps all, states.

Thank goodness your lawyer is such a nice person, and the staff is so pleasant. That makes it easier to follow up, even after you’ve already signed your revocable living trust.

LLC Interest Not Transferred to Trust During Life, is Subject to Probate

OCTOBER 8, 2012 VOLUME 19 NUMBER 37
Bear with us. This story will be a little dense and involve more difficult legal issues than we usually like to tackle. The good news: at the end you get an honorary law degree. Well, not really — but you’ll probably deserve one.

Matt Silver (not his real name) had a living trust, and had transferred nearly all of his assets to the trust. He was also a “member’ of a limited liability company — an LLC — but he had not gotten that LLC interest transferred to the trust before he died in 2007.

A short side-excursion into LLCs is in order. These popular business entities have been around since 1977, when Wyoming first introduced the concept. They merge some of the advantages of a corporation (including the ability to shield the individual participants from potential personal liability for claims and lawsuits) with some of the advantages of partnerships (including tax treatment as if the LLC members were partners — thereby avoiding corporate income taxation). The business participants are usually called “members” and the entity is governed by its operating agreement.

But a type of entity that was invented in 1977 is still pretty new by legal standards. Heck, two of the partners at Fleming & Curti, PLC, were already practicing law when Wyoming came up with this new idea (to be fair, Robert Fleming and Tom Curti were just one year into their law practices when the Wyoming legislature acted). Note, as an aside, that “PLC” at the end of the law firm’s name: even we are a limited liability company (the “P” denotes that we are a professional limited liability company — a type of LLC restricted to professionals like lawyers). Bottom line: that all means that the rules governing LLCs are less clear than those governing corporations, partnerships, trusts and other types of business and personal associations.

Back to Matt. He had not gotten his LLC interest transferred to the trust. That meant that it might be subject to the probate process — thereby increasing the complexity and cost of getting it to his heirs. But it also created a larger problem: Matt’s death meant that there was only one remaining member of the LLC, and he could reform the LLC in such a way that Matt’s interest could be bought out at “book value.”

Another side-excursion, to discuss “book value.” That means the carrying value on the books of a business organization — essentially, the contributions of the partners, shareholders or members (depending on the type of business entity). Book value is often (not always) far less than the market value of the partnership interest, shares or (in the case of LLCs) membership interest. In other words, if Matt’s LLC membership interest was part of his probate estate it would be worth far less (the court opinion does not tell us how much less, so we use the scientifically accurate “far less” metric) to his heirs than if his trust was the member.

Back to Matt again. The surviving LLC member filed a probate, alleging that a Personal Representative (what we used to call “Executor” — we’re not going into another side-excursion for that one) was necessary to complete the forced liquidation of Matt’s LLC membership. His trustee objected, claiming that Matt’s LLC was part of the trust — and that the surviving member should be estopped from claiming otherwise.

“Estoppel” is an interesting legal concept. Basically, the argument is that even though something may not be true, the court may sometimes tell at least some people that they may not raise objections. Usually, the person whose objection is not permitted has done something, said something, or benefited in some way from treating the thing as true. They are said to be “estopped” — barred — from saying otherwise.

Back to Matt. His trustee argued that Matt, the other LLC member and other people in Matt’s life had met shortly a year before Matt’s death. At that meeting the other LLC member had said that he supported Matt’s efforts to transfer the LLC into his trust, and that he would do “whatever was needed” to help complete the transfer. Even though Matt apparently never followed up, his trustee maintained, the remaining LLC member should be estopped from claiming that the LLC had not been transferred to the trust.

Confused yet? We warned you that this was a little dense. Maybe if we get right to the resolution we can make a couple points that will help you with your own estate planning.

The probate judge agreed with the surviving LLC member. Matt had failed to transfer his LLC interest to the trust, and his business partner was now the sole member (and able to force liquidation of Matt’s interest at book value). It was Matt’s inaction, not the surviving member’s change of heart, that had prevented the transfer. The Arizona Court of Appeals upheld the probate court’s ruling, and noted that even if Matt had signed transfer documents he probably would only have transferred his interest, not his membership, in the LLC. In other words, even if he had completed the transfer his business partner would be the sole LLC member — unless the operating agreement was also amended to name the trust as the member, not just the owner of Matt’s share. Matter of Estate of Shiya, October 2, 2012.

So why did we pick this dense fact pattern, and what is the takeaway message? It is simply this: it is not enough to complete your living trust planning, even if you get it just right and the lawyer writing the trust perfectly captures your wishes. “Funding” the trust is the key. Assets have to be retitled to the trust’s name, and that can sometimes mean more than just changing names on the title, or just signing a batch of documents. Funding can require some follow-up, and some continuing maintenance.

A smaller takeaway point from Matt’s case: avoiding probate is not always the only issue to be considered in trust creation and funding. There may be other consequences — good or bad — flowing from the decision to create and fund a living trust. In Matt’s case, it looks like an effective transfer into the trust might have given Matt’s chosen successor trustee to step into Matt’s shoes and act as member of the LLC — and (not incidentally) significantly increase the value of his interest in that LLC.

Is It Important to Avoid Probate? Why, or Why Not?

SEPTEMBER 10, 2012 VOLUME 19 NUMBER 35
Earlier this year we wrote about how to avoid probate. We told you at the time that we might later address whether to avoid probate. This week we’re going to tackle that topic.

You might be thinking something like: “‘whether to avoid probate’? Isn’t that foolish? Of course I want to avoid probate.” There is simply no question that the whole process of probate (by which we mean the court proceeding required to transfer a decedent’s assets to his or her family or the beneficiaries named in a will) has gotten a bad name. Our purpose here is not to try to rehabilitate the public image of probate, but to give you some of the details about how the process works. Armed with that, you can decide how bad probate really is, and how badly you want to try to avoid it for your estate.

First, a handful of generalizations. Please note that they are generalizations, not absolute truths:

  1. Probate is not as bad as it was a half-century ago. When Norman Dacey published “How to Avoid Probate!” in the mid-1960s, the negative image of the probate process was already widespread. His book galvanized opposition, and popularized the notion of revocable living trusts as an efficient probate avoidance tool. It also woke up the legal establishment; within a decade, a number of states (including Arizona) had adopted the Uniform Probate Code, which had been crafted to simplify the process. Even states which did not adopt the Uniform Probate Code drew a lot of the ideas and processes from it. The result: in most (but not all) states probate has gotten much, much simpler.
  2. Relatively few deaths result in a probate proceeding being filed. For example, the Tucson area probably sees about 10,000 deaths a year (extrapolating from U.S. Census data for Arizona, which reported 46,000 deaths in 2008). Yet only about 1,300 probates were filed in Tucson last year — and that number includes cases where a trust was filed for review, interpretation or supervision. We predict that similar numbers — about 10% of deaths leading to a probate proceeding — will apply in other jurisdictions, too.
  3. Avoiding the probate process does not, by itself, have any effect on taxes and does not prevent family fights. As to the former, there are no income taxes due upon receipt of an inheritance regardless of whether it comes through probate or not. Estate (or inheritance) taxes are a different animal; there is no estate tax in Arizona, and no federal estate tax (in 2012) on an estate of less than $5.12 million. But the value calculation is not based on probate estates — it is applied to trusts, joint tenancy, beneficiary designations and anything else the decedent owned or had control of just before death.
  4. There is tremendous state-to-state variation. There are a number of states in which one item or another from the list below would completely change your analysis. DO NOT use this guide to judge whether you want to avoid probate in California, in Texas, in Ohio — in fact, in any state other than Arizona. Ask your local lawyer about your state. Feel free to share this article and go over the list, but do not be the least bit surprised if his or her answer is completely different, based on your state’s laws. (Incidentally, if you, gentle reader, are an attorney practicing in a different state — please feel free to comment about how, precisely, you would adjust our advice for your state. We’d be happy to include such comments on our website, along with your contact information. We won’t vouch for your accuracy, but you do know your state law way better than we do.)

Let’s get started. We propose to set up a series of the most common objections to probate, and then explain how seriously you should consider those objections.

Probate is expensive. It does cost something to go through the probate process. There are filing fees, publications of notice in local newspapers, and lawyer’s fees. They can be substantial. But one thing about the Uniform Probate Code: it moved states from a fixed percentage of the value of the estate to a “reasonable” fee. In general terms, that has meant average fees about 1/3 of what they were under the old fixed-fee schedules. Still more than some people want to pay, but much less than they have heard about. Did you read that some celebrity’s estate paid 40% of its value in fees and taxes? Well, we bet that (a) most of that was taxes and (b) there was a will contest. If your competence is going to be challenged, avoiding probate may not reduce that cost. If your estate pays taxes, avoiding probate will not change that.

It is also important to remember that avoiding probate does not mean avoiding lawyers — and costs — altogether. Resolving the division and distribution of a living trust (a popular probate-avoidance device) will cost some money. It will probably be considerably less than the probate cost, but it won’t be $0. And accountants are still likely to be involved (there are, after all, the same number of tax returns to file either way).

Probate means public disclosure of private matters. Not any more. Or at least, not in Arizona. No inventory has to be filed in the probate court (a copy gets sent directly to beneficiaries, but it need not be filed in court). No formal accounting is required (assuming, of course, that no one objects to the administration of the estate). Anything with confidential information can be filed in a sealed envelope with the court. In short, the only thing publicly available is likely to be the text of your will itself (plus, of course, the fact of your death). That may be enough of a violation of privacy that you want to avoid the process, but for most people that’s not terribly invasive.

It takes a long time to go through the probate process. It can, but it doesn’t have to. Most probates can be closed once a four-month waiting period is completed. Given ordinary delays in getting things filed, that usually means the probate process is wrapping up at about six months after filing. Of course there are exceptions. We have decades-old probates hanging around in our office. We once took over a probate that had languished for over forty years. It happens. But it is not inherent in the probate process. PS: we closed that 40+-year-old probate with two phone calls and one court filing. It took about two more weeks. We apologized to the now-elderly heirs for an unconscionable delay. They said they had wondered why they’d never gotten their small inheritances. But they had never called to ask the prior lawyer what was taking so long — it wasn’t until the lawyer’s death that that particular sad little file got closed up.

Probate proceedings are easy (easier?) to contest. This one is correct, although not (for most people) a very big deal. If you have disinherited a spouse or child, you might want to consider a living trust. Your will isn’t literally easier to contest than your trust — the same principles apply in both cases. But probate does mean that there’s already a court file, and a letter has to be sent out to the disinherited heir (which might invite a contest that they otherwise wouldn’t get around to filing).

Why isn’t this a big deal for most people? Because most people don’t deviate very much — or even at all — from what would have happened if they did not sign a will or trust. If you don’t leave anything to your long-lost cousin in Colorado, she doesn’t have any basis for contesting your will OR your trust — because she wouldn’t inherit even if you were batty as a bedbug (is that the right metaphor?). If you had no will or trust your estate would go to your spouse and kids in some proportion. Your goofy cousin will never get any part of your estate (unless you die without spouse, children, siblings, nieces, nephews, parents, grandparents, uncles or aunts), so a will contest is pretty much a theoretical idea for most of our clients.

If you own real estate in more than one state, the cost and trouble of probate will be magnified. Yup. And we can’t tell you how hard or expensive it will be to handle the probate in the other state. You’re a good candidate for a living trust. Note, however, that we’re going to have to go to the expense of getting that other state’s real estate transferred into your trust, and that’s going to increase the cost of creating the trust in the first place.

So what does it all mean? Should you be trying to avoid probate? Probably, but maybe not if it’s very expensive to do so, or you aren’t too worried about your heirs incurring some additional costs, or you haven’t decided exactly what you want to do. If you decide probate avoidance isn’t too important we won’t call you foolish or misguided.

But are there any positives about probate? Any reason to want to have your estate go through the probate court? Well, we’re well beyond our usual self-imposed word limit for this week, so we’re going to leave you with that question as a cliffhanger. But we can promise that next week, when we answer it, our weekly newsletter will be shorter.

Some Persistent Myths About Probate Exploded

JULY 2, 2012 VOLUME 19 NUMBER 25
It’s a slow week (with the Fourth of July holiday breaking it up on a Wednesday) and it’s too hot to think about actual controversies this week. So let’s take a minute to clear out some longstanding items we’ve been meaning to get around to. One thing we’ve meant to do for quite a while is to try to explode some common myths about legal issues — and particularly about the probate process. Here are some of the mistakes we most commonly hear from clients, questioners and (occasionally) professionals who have given not-so-good legal advice to our clients:

If you want to avoid probate, you should sign a will. Sorry, but that doesn’t help. Upon your death a probate proceeding will have to be initiated to transfer property owned in your (individual) name alone, with not beneficiary designation. Property that doesn’t meet that description will ordinarily not need to be subjected to probate. Signing a will does not change that answer in any particular. For that matter, merely signing a trust does not change the answer, either. The way a trust can help you avoid probate is by creating an entity which can become the owner of your property; that entity (the trust) does not “die” with you, and so assets transferred to its name should not be subject to the probate process. But it is the funding of the trust (that’s what lawyers call the process of retitling your assets to the trust’s name) that avoids probate.

There is one significant exception to the rule that everything in your name has to go through probate on your death. In most states there is some sort of simple affidavit process to bypass probate for small estates. The definition of “small” varies, though. In Arizona it is (for most purposes) $50,000; if you die with assets of over that $50,000 threshold in your name alone, with no beneficiary designation, your estate will be subjected to probate.

What do we mean by that “in your name alone, with no beneficiary designation” phrase? Only property that is not held as joint tenants with right of survivorship, community property with right of survivorship, or as POD (payable on death) or TOD (transfer on death). Be careful about those ownership options, however — avoiding probate may not be worth the problems you can create by changing ownership of property.

Probate avoidance is critically important for everyone. There are two ways in which this common belief is mistaken. First, there are a small number of circumstances in which probate may actually be beneficial. Second, for the greater majority of people who ought to be thinking of probate avoidance, the cost of implementing, managing and periodically reviewing probate avoidance plans is sometimes simply not worth incurring.

Let’s deal with the first one first. When is probate actually a good thing? There are very limited circumstances where it is a good idea — but those circumstances do sometimes appear. One is where the decedent had potential claims that might be asserted against her or his estate. A good illustration: a deceased professional (doctor, lawyer, architect, accountant, nurse) who might have an unknown malpractice claim. Filing a probate, and publishing notice of that probate in local newspapers, can help cut off those uncertain and potential claims. Note, though, that in Arizona and some other states you can actually publish notice to creditors without needing to open a probate, so that argument in favor of probate is further limited.

Here’s a better one: when you are managing the affairs of someone who has died, and you know there will be disputes about what you have done, you might prefer to have the entire process supervised by the court. That doesn’t come up very often, but sometimes it can be very beneficial to your peace of mind to know that everything you do has already been blessed by the judge who has the authority to review your administration, your bills and your proposed course of action.

Let’s deal with the other side of the coin: probate avoidance is often not worth the trouble or expense. With updated probate administration rules (like those in place in Arizona for nearly forty years now), the cost, hassle, and public disclosure associated with probate proceedings have all been dramatically reduced. The cost of preparing, funding and monitoring a probate-avoidance trust may simply be more than the cost of probate itself.

Lawyers try to talk clients out of doing probate avoidance in order to protect their future probate fees. Let’s imagine for just a moment that we lawyers are as venal as that assertion suggests. So here we are, with (say) twenty years of professional life ahead of us, and you come visit us at age 60. Which is better for us: (1) we collect, say, $2,000 from you right now in order to create a probate-avoidance trust plan, or (2) we collect $500 from you today and cross our fingers that you will die before you turn 80 so we can get another $2,500 in probate fees — for which, incidentally, we will have to do quite a lot of work. Do you begin to see just how insulted we are by this popular myth?

There are a number of other reasons we lawyers might actually be better off if you sign the probate-avoidance trust, incidentally. In five years, when you come to see us to make changes, amending your trust will probably generate slightly more in legal fees than creating a new will would be. And we do count on seeing you in five years — no matter how well your estate plan is crafted, you should assume that it needs to be reviewed at about that time. Your interests and ours are mostly in alignment: we both want to get the right estate plan for you, at the most appropriate cost, and not opt either for more expense than you need or less coverage than you are entitled to expect.

I don’t need to do estate planning because my family knows what I want. Really? How do they know? Have you had a big family meeting where you detailed your wishes to everyone at the same time, and gotten them to agree that they understand and will follow your wishes? Did their wives, husbands, children and grandchildren all agree? (Because, you realize, one or more of your immediate family members might actually die before you do.) Did it all get reduced to writing to make sure everyone remembers the agreement twenty years down the road? If you did all that, congratulations — and you’ll be one of the few people we consult with who appreciate how much simpler it actually is for you to sign a real estate plan. We are also, incidentally, trained to probe the things you didn’t think about — like what happens if your estate is significantly larger or smaller, or if the kinds of assets you own are quite different, at your death? What happens if you loan (or have loaned) money to one or more of your children? How about naming a back-up personal representative? Did you even realize they are called “personal representative” instead of the more common — and inaccurate — “executor”? All of that, and more, is what you get when you hire a professional — like, for example, us.

So what’s your favorite probate myth? Let us know, and maybe we’ll continue the explosions after the Fourth of July holiday.

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