The Estate, Issue Nine

By Matthew A. Quick Probate

Probate is the legal process of settling the estate of a deceased person. Settling a decedent’s estate involves making claims on behalf of the estate (collecting money owed to the decedent, bringing medical malpractice claims, etc.), resolving all claims against the estate (paying creditors, responding to lawsuits, etc.), distributing the property in the estate after all claims are made and resolved (distributions are made pursuant to a Will or the statutory rules of intestate succession), and addressing the guardianship of any minor children or other dependents (guardians are appointed in a Will or determined by statutory rules of guardianship).

Probate can be costly and time consuming, but it is not the same process with all decedent’s estates. Some estates do not require probate if there is no property to be distributed. An estate can be left with no property to be distributed, thus avoid probate, if the decedent’s property is not owned solely by the decedent upon his or her passing. Instead of the deceased owning property solely, he or she could hold property in a trust, jointly with another person, or provide a pay-on-death (referred to as “P.O.D.”) or transfer-on-death (referred to as “T.O.D.”) designation.

To own property in a trust, the person setting up the trust (referred to as the “Settlor”) transfers ownership of property to a Trustee based upon certain terms and conditions that are listed in a Trust Declaration. The terms and conditions of a Trust Declaration are instructions that the Trustee is bound to follow in maintaining or investing the Trust Property. One of the terms of the Trust Declaration is how the property that is being held in the Trust is distributed after the Settlor’s passing. Since the Trustee, not the Settlor, owns the property when the Settlor passes, the Settlor will have no property to be distributed through probate, thus negating the need for probate.

Joint ownership is another effective way to avoid probate. Joint ownership occurs when more than one person owns property at the same time, but each has a right of survivorship. Therefore, when one of the owners passes the other owners continue to own the property without the need for probate. Typically, we see joint ownership with real estate and deposit accounts (checking accounts, savings account, etc.).

Probate can also be avoided by setting up P.O.D. or T.O.D. designations on bank accounts, shares of stock, brokerage accounts, 401ks, IRAs, automobiles and life insurance. Any property that has a P.O.D. or T.O.D. designation will pass automatically to designated beneficiaries upon the passing of the owner of the property. P.O.D and T.O.D. designations differ from joint ownership because once someone is made a joint owner they are an owner and have equal right to control the property. Conversely, if P.O.D. and T.O.D. designations are used, the owner of the property retains control of the property until the date of his or her demise, at which time the property is transferred.

If property is owned solely by the decedent upon his or her passing, then the property must be distributed through probate. Estates that must endure probate will follow one of three general processes: (1) that of a testate estate; (2) that of an intestate estate; or (3) that of a small estate. A testate estate is one that follows directions of a valid Will when being administered. An intestate estate is one that does not follow the directions of a Will, but follows statutory rules of administration. A small estate is one that the legislature considers small enough to administer through a summary proceeding, which typically involves very limited, if any, contact with a court. In Michigan, the threshold for a small estate is $15,000 remaining in the estate after debts and expenses have been paid. In Illinois, the threshold for a small estate is $100,000.

The first step to probate a testate estate is to start a case with the Probate Court, which has special jurisdiction over cases involving estates and guardianship. The Probate Court will determine the validity of the Will and appoint a Personal Representative for the estate. The Personal Representative is typically nominated in the Will (when dealing with a testate estate the personal representative is also called an executor (male) or executrix (female)). Through, and with the power of, the Probate Court, the Personal Representative collects and inventories all of the property in the estate, pays any debts, taxes and expenses, follows the instructions of the Will regarding guardianship of any dependents and distribution of property, and adjudicates the interests of interested parties who may have claims for or against the estate.

The first step to probate an intestate estate is to also start a case with the Probate Court, but instead of determining the validity of a Will (since there isn’t one) the Probate Court will nominate and appoint a Personal Representative for the estate (when dealing with an intestate estate the personal representative is also called an administrator (male) or administratrix (female)). Like testate estates, the Personal Representative will act through and with the power of the Probate Court, however, rather than following the instructions of a Will, the Personal Representative must administer the estate in accordance with the laws of the state where the decedent resided at his or her death. This means that the estate must be distributed to the heirs named by the laws regardless of their relationship or kinship to the decedent. In sum, the intestate process takes all control out of the hands of the decedent’s family to distribute property or decide which person should be named guardian of minor children.

After all of the claims against the estate are paid, the claims for the estate are made, and the property that made up the estate is distributed, the case involving the estate is closed. From opening the case to closing the case, probate generally lasts several months, in some instances over a year, and incurs substantial court and attorney costs. To avoid the time, cost and publicity involved with probate it is imperative to organize an estate in a manner that will not require a lengthy court case, but will allow for a seamless transfer of ownership.