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© 2007 ME™ (Your Money Education Resource™) Estate Planning for Financial Planners Chapter 4: The Probate Process
2 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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.
3 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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.
4 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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.
5 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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.
6 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Nontraditional Relationships (3 of 3) Avoid probate!!! Family more likely to contest will Jeweler Anna Nicole Other means of transferring to the non- traditional partner: Lifetime gifts. Named beneficiary. Titling. Trusts.
7 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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.
8 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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
9 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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
10 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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
11 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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?
12 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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
13 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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
14 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 What Passes through Probate? Fee Simple Property Tenancy in Common Property Community Property Invalid beneficiary designations
15 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 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
Objective 9 Be aware of the basic documents used in Estate Planning 9
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