Last week, we talked about what happens when you do not have a will. This week, we will discuss what happens when you do have a will. When you have a will, it only takes effect after your death. This is because a will is a death instrument. During your lifetime, it does nothing and has no authority. You have to die before the instructions in your will can be followed. There are two other things that you may not know about your will.
Firstly, your will only governs assets or property that are just owned in your sole name. When you have assets or property that are jointly owned by others or have a beneficiary or payable/transfer on death designation, your will does not control it.
With joint property, your surviving joint owner become the owner of the property after your death. Similarly, with beneficiary or payable/transfer on death designations. Upon your death, the person whom you designate, becomes the owner of the property. So basically, joint ownership and beneficiary or payable/transfer on death designations trump your will.
Secondly, your will has no authority until it goes through the probate court process. We regularly get calls from the children of someone who recently passed away. The kids often explain: “Dad’s (or Mom’s) will says I am the beneficiary. I took the will to the bank, but the bank won’t give me my money. Why can’t I get my money, when Dad’s (or Mom’s) will says I should have it?”
What you may not realize is that your will in and of itself does not give anyone the authority to transfer assets upon your death. A will is nothing more than a set of instructions. The two key instructions in your will are who gets what and who is going to make it happen. The person whom you name to make it happen is called your personal representative. The old term for personal representative is executor or administrator.
However, before the person you name as personal representative can act, he or she must be appointed personal representative by the probate court through the probate process. Not until after the probate court appointment, does your personal representative have any authority to handle or make distributions of your property. Your personal representative’s duty is to preserve and protect the assets of your estate, pay all creditors and estate expenses and then distribute the remainder in accordance with your instructions you leave in your will.
If you are named as personal representative in a will, I generally recommend you begin to preserve and protect estate assets even before you are appointed by the probate court. For example, change the locks on the house immediately after a death, even before the funeral. You do not know how many keys were given out by the deceased during his or her lifetime or what people were told they were getting after the death. It is not uncommon for personal property and valuables to either be removed from the house by persons who believe they were entitled to that property or just “disappear”. Often times, property is removed during the funeral, when the family is away from the home.
To start the probate process your personal representative files your will with the probate court along with your death certificate and a number of other completed court forms. The court then, with or without a hearing, appoints your personal representative and issues letters of authority. These letters of authority give notice to all the world that your personal representative now has the legal authority to handle your property.
One thing that you may not realize about probate court is that the court files are generally considered public records. You or anyone else usually can go down to the probate court and review any probate court file.
Once appointed by the probate court, your personal representative has to notify all known creditors about how to file a claim against the estate and publish a notice to creditors in the newspaper for all unknown creditors. Your creditors generally have four months from the date of publication or notice to make a claim against your estate.
I call this after-death probate process, the lawsuit that your family files against itself to protect your creditors. Because who gets paid first? Your creditors. And your number one creditor is the probate court. There is a filing fee for starting the probate court process. Then there is an inventory fee paid to the court which is calculated based upon a percentage of the value of the estate.
After the court is paid, the funeral bill gets paid. Then come administration expenses, including legal fees. Once the attorneys get paid, then your personal representative can pay the rest of your creditors. After all your creditors and estate expenses are paid, then your personal representative can distribute what’s left of your assets in accordance with the instructions that you leave in your will.
After everything has been distributed, your personal representative can then file to close your estate. Your personal representative cannot file to close the estate any earlier than five months after the appointment of your personal representative or four months after the date of publication of the creditors notice, whichever is later. Once your personal representative files to close the estate, it usually takes another thirty to sixty days before the estate is officially closed.
The probate court process has been streamlined over the years and is nowhere near as burdensome as it once was. However, probate takes time and result in considerable legal fees. That’s good news for lawyers.
Even simple estates can take the better part of a year to complete. We have clients come in saying they have a simple estate. However, our definition of a simple estate is often very different than our what our clients believe is simple. A simple estate to us is an estate with a couple of bank accounts, maybe a retirement plan, a home and two or three beneficiaries who love one another and are not fighting. Anything more than that is not simple.
And probate can be expensive. Average probate costs are reported to be in the range of 3%-5% of the gross value of the estate. So a $500,000 estate can cost $15,000 to $25,000 to administer after a death. I have seen probate costs in some instances reaching much higher in the range of 10%-20% of the value of the gross estate.
There are a variety of tools that you can use to avoid the probate court process. One of the most effective tools to avoid probate is a fully funded trust based estate plan. Funding of your trust includes the proper titling of your assets in the name of your trust or individual names and/or the proper naming of your trust and/or individuals as beneficiaries and additional insureds.
Although a trust based estate plan is initially more costly to set up than a will based estate plan, the administration of a trust based estate plan is usually substantially less than the administration of a will through the probate court process. In most instances, we have found that the overall costs of a fully funded trust based estate plan, including initial set-up, regular updating, and administration at disability and death, is less than the 4%-6% of just the after death administration of a will. It’s like the old Fram oil filter commercial, “You can pay me now, or you can pay me a lot more later.”
With proper planning, you can stay in control while you are alive and well, plan for you and your loved ones in the event of your mental disability, and when you are gone, give what you have to whom you want when you want the way you want, all at the lowest overall cost to you and those you love.
By: Matthew M. Wallace, CPA, JD
Published edited December 8, 2013 in The Times Herald newspaper, Port Huron, Michigan as:Wills guarantee probate