Written by P. Mark Accettura and Samuel A. Hurwitz

INTRODUCTION

Chapter Two: “Getting Organized” discusses how to get started, documents to locate, items to save, and whom to contact. Key among those duties is to identify all of the assets in which your late spouse had an ownership interest. The Asset Inventory with Values Worksheet discussed in Chapter Two is intended to help you catalog your late spouse’s assets, identify how each is owned, and approximate their value. How your late spouse’s assets were owned will determine how they pass at death. The methods of passage, and your responsibilities as surviving spouse and fiduciary, are the subject of this chapter.

HOW DO YOU KNOW WHEN PROBATE IS REQUIRED?

A banker, stock broker, or real estate agent will advise you that since a particular account, stock, or parcel of real estate is in your late spouse’s name alone, they are going to need evidence of your authority to act in your late spouse’s place and stead. They will not accept a copy of your late spouse’s Will since, as they may tell you, only the probate court has the authority to interpret the terms of a Will. Instead, they will need “letters of authority” or other decree of the probate court appointing you as your spouse’s “personal representative.” The probate court will not contact you. Obtaining court authority requires that you submit to the court’s jurisdiction by filing a petition with the court.

For our purposes, the term “personal representative” is defined as follow:

Personal Representative: A person, or committee of individuals, or sometimes a corporate fiduciary like a bank, appointed by the probate court, to administer the probate estate of the decedent. Sometimes called an “executor” or “executrix.” The person named in the decedent’s Will has first priority to be appointed as personal representative. If the individual named in the Will is unable or unwilling to act as personal representative, or the decedent died without a Will, the surviving spouse has first priority.

Deserved or not, probate has gained the reputation of being time consuming and costly. In reality, each probate estate is different. Your experience will depend on the size of the estate, the quality of your legal representation, the cooperation of your family, and if different, your late spouse’s family.

Assets owned in trust pass according to the terms of the trust document. No transfer of title takes place, since the trust continues to own property both before and after the death of the trust creator (“grantor”). The grantor’s death makes the trust irrevocable since the grantor was the only person with the power to amend or revoke the trust. Most revocable trusts provide that the grantor shall act as initial trustee until his or her death. A successor trustee, appointed by the grantor in the trust instrument, takes over the management of trust assets after the grantor’s death.

FIDUCIARY RESPONSIBILITY

It is possible, in fact likely, that you will act as your late spouse’s personal representative and successor trustee. When acting as personal representative or trustee, you are considered a “fiduciary” under state law. Being a fiduciary means that you have a legal obligation to exercise a high standard of care in the management and distribution of your late spouse’s property.

It is important that you fully understand and fulfill your fiduciary responsibilities. If you breach any such duty, you could be personally liable to the estate or trust, as well as heirs and beneficiaries for damages.

The probate court could also remove you as fiduciary in favor of another family member, or officer of the court. While the risk of personal liability and removal are extremely low for traditional families, it could be quite high if your family has a history of hostility and conflict.

You should be especially diligent in your duties if your late spouse had children not of the marriage, as these relationships can become strained after your spouse’s death.

Although they vary from state to state, some version of the following fiduciary responsibilities apply in all fifty states. You must:

1. Exercise reasonable care in carrying out your duties,
2. Exercise loyalty (i.e., you must act in the best interest of the estate or trust and not for your own benefit),
3. Not commingle estate and trust property with your own property,
4. Act as a prudent investor concerning estate and trust assets,
5. Keep beneficiaries reasonably informed,
6. Provide beneficiaries with accurate and timely accounts of estate and trust assets and income.
7. Report and pay income and estate tax, and
8. Distribute estate and trust assets in strict compliance with state law or the terms of the trust document.

JOINT OWNERSHIP AND SURVIVOR RIGHTS

Assets owned jointly in a form known as “joint tenancy with rights of survivorship,” pass by operation of law to the surviving joint owner(s).

Example: is a brokerage account titled in the name of “Mary Barnes and John Barnes as JTWROS.” If John dies, the account automatically belongs to Mary. Even though ownership transfers automatically, Mary would be well advised to remove John’s name and social security number from the account at his death. This can be accomplished by presenting the brokerage house with a copy of John’s death certificate.

Real estate owned jointly with your spouse is a form of joint ownership called “tenancy by the entirety” in many states. At your spouse’s death, ownership of the real estate, like your principal residence or vacation home, passes automatically to you without need of any court procedure.

“Tenancy in common” is a form of joint ownership that does not automatically pass the decedent’s share at death. Instead, the share of the deceased owner must be “probated” (unless it is owned in trust) in order to transfer title to his or her heirs. For instance, if Mr. A, Mr. B and Mr. C own a piece of real estate together as “tenants in common,” and Mr. A dies, his one-third ownership interest does not pass to Mr. B and Mr. C. Instead, the beneficiaries named in Mr. A’s Will become the new owners. If Mr. A did not have a Will, his share will pass according to the laws of intestacy.

Even though jointly owned assets pass at death with relative ease, it would be incorrect to assume that such ownership constitutes sound estate planning. In reality, the automatic transfer at death and the lifetime rights accorded to joint owners make joint ownership a poor estate planning tool. See “Joint Ownership As a Trust Substitute” in Chapter Nine.

ASSETS PASSING BY BENEFICIARY DESIGNATION Some assets allow the owner to name a beneficiary. Such assets pass at death to the individuals (or trust) named in the “beneficiary designation.” This type of designation is usually found on insurance policies, retirement plans, IRAs, 401(k)s and annuities. Assets naming a beneficiary pass automatically without resort to a probate court proceeding.

Pay-on-death (“POD”) and transfer on death (“TOD”) accounts are another form of beneficiary designation. A number of states permit POD and TOD designations on individual securities, bank, and brokerage accounts. POD and TOD designations direct the financial institution to transfer the security or account to the named designee upon the death of the account owner.

ASSETS PASSING THROUGH PROBATE

Assets owned by your late spouse that were not held with a joint tenant, did not name a beneficiary, and were not owned in trust, will comprise your late spouse’s probate estate. There are two major types of probate: formal and informal. With formal probate, the court supervises each step of the probate process. The judge must approve each step of the process including the sale and distribution of all estate assets. With informal probate, the court does not supervise the fiduciary. Instead, the court intervenes only if an interested party (i.e. beneficiary) complains about the fiduciary’s actions.

Whether you choose formal or informal probate will depend on a number of factors including the number of creditors making claim to the estate and your relationship with the other heirs. Formal probate is more appropriate where you anticipate conflict. With the court approving each step of the process, there is little room for disgruntled creditors or heirs to claim you acted inappropriately.

Formal probate can be significantly more expensive than informal probate, since numerous hearings must be held before the judge. Your attorney must attend each hearing. All heirs must receive notice of the time and date of each hearing, giving them an opportunity to object to your actions. Since most attorneys charge an hourly rate for their services, the more time your attorney spends in court, the more expensive the process.

Routine estates without expected challenges can be handled informally. Informal probate tends to be cheaper and faster, and all things being equal is preferred. If you choose informal probate and a conflict arises, you can elect to resolve a particular issue with a formal hearing. In fact, the preferred approach is to administer the estate informally, with final distributions approved by a formal hearing. Final court approval validates all of the fiduciary’s actions, and prevents later challenges by disgruntled heirs.

ASSETS OWNED IN TRUST

Assets owned in trust do not require a probate proceeding. Instead, upon the grantor’s death, the successor trustee takes over the management of trust assets. As a fiduciary, the successor trustee has a legal obligation to prudently manage trust property and to strictly implement the terms of the trust. Depending on its terms, the trust may operate for only the time it takes to value, liquidate and distribute assets, or it may last for many years, with the successor trustee managing assets for minor or disabled beneficiaries.

APPLICABLE LAW

The laws of the state of which your late spouse died a resident govern the administration of his probate and trust estate. The probate court of the county of his residence has jurisdiction to handle estate and trust matters. For purposes of this chapter, we have assumed that your state has adopted the Uniform Probate Code (“UPC”). To date, approximately 18 states have adopted some variation of the UPC. Even if your state has not adopted the UPC, the concepts that follow nonetheless apply to you with minor modification.

ONGOING ADMINISTRATION

The balance of this chapter discusses the role of the fiduciary in administering each step of the probate estate or trust administration process. Generally, administration consists of five (5) separate steps. Each of the following steps compares your responsibility in formal probate, informal probate, and finally, trust administration:

1. Appointment of Fiduciary;
2. Admission of the Will;
3. Asset Inventory and Administration;
4. Dealing with Creditors;
5. Making Final Distributions.

To promote smooth administration, you should go above and beyond the strict legal requirements outlined below. The death of a loved one is extremely stressful on the entire family, often breathing new life into old conflicts and jealousies. This is especially true if there are beneficiaries who are not your biological children.

They will undoubtedly wonder “What’s she doing with dad’s money?” One way to lessen these feelings is to be as open and honest as possible.

Upon request, beneficiaries are entitled to a copy of your late spouse’s Will and trust. Rather than make them ask, consider providing them with a copy of relevant documents as soon as possible.

Another peacekeeping strategy is to speak through your attorney. Beneficiaries may feel more comfortable asking questions like “What do I get, and when?” to a third party. It may also be easier for them to hear bad new such as “You don’t get anything until your step-mother’s death” from someone other than you.

The term “estate” is often used loosely.

It may refer to a probate estate, a trust estate, or a taxable estate. In general usage, the term “estate” means all that a person owns, whether tangible, intangible, personal, or real property.

A “probate estate” consists of those assets that need to go through probate to transfer legal title from the decedent to the new owner.

A “trust estate” refers to assets owned in trust.

The phrase “taxable estate” means the assets that the IRS includes when computing the estate tax.

When the term “estate” is used in this chapter without further explanation, you should infer its meaning from the context in which it is used.

APPOINTMENT OF PERSONAL REPRESENTATIVE IN FORMAL PROBATE

The first step in a formal probate proceeding is to file a petition, along with your spouse’s Will (if any), requesting the appointment of one or more persons to serve as personal representative. The petitioning party, which can be any beneficiary or heir, asks the court to appoint the personal representative named in the petition.

A copy of the petition and a notice of hearing must be sent to all “interested parties,” which includes all heirs and beneficiaries named in the Will. In making its determination, the court gives priority to the person named in the Will. If the person named in the Will (if other than the surviving spouse) declines or is unable to serve, the next priority goes to the surviving spouse. Next in line will be children. This priority scheme will also apply if there is no Will.

A hearing will be held to determine whether the person nominated to be personal representative has priority and whether there are any objections to the appointment. Someone with higher priority can appear at the hearing and object to the appointment. Any interested party may object to the appointment, even if the nominated individual has priority, on a showing that the nominated person is not suitable to act as personal representative due to lack of expertise, conflict of interest, or some other valid reason.

Once the court has made its determination, it will issue “letters of authority” which you as personal representative must present as evidence of your authority. It is advisable to order five to ten original copies of the letters of authority since each financial institution will likely request an original copy.

The personal representative represents the estate in all matters including the preparation and filing of all income, gift, and estate tax returns. The personal representative is also charged with gathering and securing the estate’s property, preparing all necessary court filings, paying proper estate expenses and distributing the estate’s property to the named beneficiaries or heirs.

As a personal representative and fiduciary you must use your best efforts; act in the best interest of the estate, and not for your own benefit; protect and preserve the estate’s assets; productively invest the assets of the estate; account for all income and expenses; keep the interested parties informed of the progress of the estate’s business; and ultimately distribute the estate to the beneficiaries named in the Will or to the heirs.

The court may require the estate to purchase a bond to protect the estate and its beneficiaries against any wrongdoing of the personal representative. If a bond is required, the annual premium is paid by the estate. A bond is usually not required where the surviving spouse is appointed as personal representative, especially where the estate will pass entirely to the surviving spouse.

APPOINTMENT OF PERSONAL REPRESENTATIVE IN INFORMAL PROBATE

The procedure for appointing the personal representative in informal probate is the same as it is in formal probate except that there is no court hearing. Instead, the court clerk will simply issue letters of authority appointing the person named on the petition as long as he or she has priority under state law, or the written consent of everyone who has an equal or higher priority. The duties and standard of care of the personal representative are the same in both formal and informal probate.

APPOINTMENT OF TRUSTEE

In a typical revocable trust, the grantor acts as initial trustee. The trust document appoints a successor trustee to act upon the death of the grantor/initial trustee. For the successor trustee’s appointment to become effective, he or she must sign an “Acceptance of Trust.” In the Acceptance of Trust, the successor trustee accepts the appointment and agrees to faithfully execute the duties of trustee. No court filing is needed.

A trustee is a fiduciary, and must act in the best interests of all beneficiaries. State law typically requires the successor trustee to notify trust beneficiaries (usually within 28 days after signing the Acceptance of Trust) of the grantor’s death and their right to review the trust provisions affecting their interest in the trust. No bond is required unless provided for in the trust document.

ADMISSION OF THE WILL IN FORMAL PROBATE

The second step, which often occurs contemporaneously with the first, is a declaration by the probate court that the Will offered by the petitioner is the decedent’s genuine last Will. Once a court rules that the Will is the decedent’s last Will, it is “admitted to probate.”

Prior to admitting the Will to probate, the court will entertain objections by any interested party who wishes to contest the Will.

The Will may be disallowed if it can be shown that the testator (the person making the Will) lacked mental capacity, or that undue influence was exercised over the testator in making his Will.

The law generally provides that anyone of sound mind can leave his or her property to whomever he or she desires (except if the effect is to disinherit a spouse as discussed below).

However, if the court finds that the Will was fraudulently prepared or altered, that the testator was not competent, or was unduly influenced, it will invalidate the Will. If the Will is invalidated, the court will look to any previous Will prepared by the testator and consider it for admission.

If there is no prior valid Will, the decedent’s property will pass under the law of intestacy.

Shortly after your appointment as Personal Representative, you must send notice of your appointment, as well as notice of the admission of the Will, to all interested parties. The law also requires that you publish a notice to creditors (discussed in Step 4) at this time.

ADMISSION OF THE WILL IN INFORMAL PROBATE

The court clerk will examine the application, the associated papers and the Will. If the application lists everyone named in the Will as an interested party, the Will appears to be properly signed and witnessed, and all the associated papers are in order, the clerk will admit the Will to probate without a court hearing.

ADMISSION OF THE WILL IN TRUST ADMINISTRATION

Trusts need not be filed with the probate court since, absent an independent lawsuit to overturn the validity of a trust, there is no requirement that the court rule on the genuineness of a trust. If your spouse had a trust that was not fully “funded” (see “Trust Funding” in Chapter Nine), assets in his sole name must be probated. In that case, his Will would be admitted to probate and Steps One through Five pertaining to formal or informal probate would have to be followed. Your spouse’s Will would likely be a “Pour Over” Will, naming his trust as the beneficiary of his probate assets. As such, probate assets will transfer, or “pour over” into his trust to be administered according to Steps One through Five as such steps pertain to trusts.

ASSET INVENTORY AND ADMINISTRATION IN FORMAL PROBATE

Within a few months of appointment, the personal representative must prepare a list of the estate’s property called an “inventory.” The inventory lists each item of property in the probate estate and its corresponding value. Personal items and household effects are often listed as a single entry with a single aggregate value.

An “inventory fee,” based on the aggregate value of the property listed on the inventory, is charged by the probate court. All beneficiaries and heirs are entitled to see the inventory, which must be filed with the probate court.

Each year the estate remains open, the personal representative must prepare, sign, and file federal and state income tax returns (see “Tax Reporting” in Chapter Eight). Annual accountings of estate income and expense must also be filed with the court, and made available to beneficiaries and heirs.

Most formal estates run their course in nine to eighteen months, requiring only one or two income tax filings. If an estate can be completed in less than twelve months, it should elect a twelve-month non-calendar fiscal year. In doing so, the estate will only be required to make a single income tax filing (see Chapter Eight).

ASSET INVENTORY AND ADMINISTRATION IN INFORMAL PROBATE

Informal estates are subject to the same inventory and income tax return requirements that apply to formal estates, except that the inventory need not be filed with the court.

ASSET INVENTORY AND TRUST ADMINISTRATION

There is no specific inventory requirement for trusts. However, depending on the terms of your spouse’s trust and the law of your state, you may be required to furnish beneficiaries with trust asset information, as well as annual accountings. To avoid having to account to your children, your spouse’s trust may exempt you from such disclosures. On the other hand, if it was a second marriage, your late spouse’s trust may require asset and accounting disclosure to keep current beneficiaries (you) and contingent beneficiaries (his children) apprised of trust activity.

While probate estates continue only so long as necessary to appoint a fiduciary, pay creditors, and distribute assets to beneficiaries and heirs, trusts may last for years. Trusts avoid probate, minimize estate tax, and allow the grantor to provide structure and security for his surviving spouse and children. You could say that probate administration is accidental while trusts administration is by design. That is why the cost and delay of probate should be avoided.

Trust administration, on the other hand, is a necessary byproduct of the grantor’s wish to keep a guiding hand on his loved ones after death. Trusts that provide for immediate distribution require little or no ongoing administration. Trusts that operate for surviving spouse’s lifetime, or until the grantor’s children reach a particular age, must be administered according to their terms for their duration.

As the surviving spouse, trust assets will likely be held for the balance of your life to allow you to maintain the lifestyle you enjoyed while your spouse was alive. Even if your late spouse’s trust makes liberal provision for you, you nonetheless have a duty to contingent beneficiaries even if they are your natural children.

You must prudently invest trust assets, file Federal and state income tax returns, and preserve trust assets for contingent beneficiaries. Your duties as trustee end at your death, or when the trust’s last dollar is distributed, if earlier.

FAMILY/MARITAL TRUST DIVISION

If your spouse’s trust holds assets in excess of the Applicable Exclusion Amount ($675,000 in 2001) it will divide into two separate trusts: a “family trust” (sometimes called a “bypass” or “credit shelter” trust) and a “marital trust.” Trust assets equal to the Applicable Exclusion Amount are first allocated to the family trust. Assets in excess of $675,000 (if any) are allocated to the marital trust. The division of trust assets between the family and marital trust allows for the full utilization of your spouse’s unified credit, and avoids estate tax at his death (unless you are not a U.S. citizen).

The family trust is not subject to estate tax since it is within the Applicable Exclusion Amount. No estate tax is imposed on the marital trust since transfers to the marital trust qualify for the unlimited marital deduction.

Some marital trusts permit you to designate the beneficiary of the balance of the trust at the time of your death (a “general power of appointment” or “POA”), and some do not (a “qualified terminal interest property” or “QTIP” Trust). In either case, the balance of the assets remaining in the marital trust at your death will be included in your taxable estate. With a QTIP marital trust, amounts remaining in the marital trust at the time of your death are paid to the family trust to be held or distributed for the benefit of the contingent beneficiaries named by your late spouse.

QTIP trusts are especially useful in second marriages. Trust assets are used for the support of the second spouse for the balance of her life with the balance distributed to the grantor’s natural children at the second spouse’s death. If the marital trust is the POA variety, amounts remaining in the marital trust at the time of your death are paid to the family trust only if you fail to designate different contingent beneficiaries at the time of your death.

By definition, you may not designate contingent beneficiaries of your spouse’s family trust, since such a power would cause the family trust to be included in your taxable estate, defeating the purpose of creating the family trust; that is, to bypass your estate and fully utilize the Applicable Exclusion Amount of your late spouse.

Income and principal from both the family and marital trusts are available to you to allow you to enjoy the lifestyle you became accustomed while your spouse was alive. How and when you take income and principal is important to minimize income and estate tax. Obtaining the best income and estate tax result is no simple task. Often, the best estate tax result comes at a high income tax cost, and vise versa. However, minimizing both taxes can be done with a little planning.

Best Income Tax Result

The family and marital trusts are separate taxable entities, subject to the highest marginal income tax rate. Fortunately, trusts are entitled to a deduction (to the extent of trust income) for distributions made to beneficiaries. The effect of the “distribution deduction” is to shift income tax liability from the trust to its beneficiaries. Since trust beneficiaries are likely to be in a much lower tax bracket than the trust, shifting the tax burden to beneficiaries is good for all of the parties involved. Unfortunately, making distributions from the family trust may not make good estate tax sense.

Best Estate Tax Result

Assets of the family trust have already passed under your spouse’s Applicable Exclusion Amount, and are not includible in your taxable estate at your death. Thus, assets of the family trust will never be (estate) taxed again, no matter how much they appreciate after your spouse’s death. So, “let it grow, let it grow, let it grow.” To achieve the greatest growth, the family trust should be invested for long-term growth, and you should take distributions from the family trust only to the extent needed to maintain your lifestyle. If you need income, you should take it from the marital trust. You should spend down the marital trust since it is included in your taxable estate. In short: spend marital, don’t spend family. This advice is tempered by the fact that income left in the family trust will be taxed at the highest marginal income tax rate.

The Problem

The problem, simply stated, is that for income tax purposes, family trust income should be distributed annually. For estate tax purposes, little or no distributions should ever be made from the family trust.

Solution

To avoid unfavorable income tax results, the family trust should be invested in growth, low-income, or non-income producing investments. By investing for growth and not for income there is no income tax reason for making distributions from the family trust. With the income tax problem solved, family trust assets can be allowed to grow estate tax free.

The following diagram illustrates the division of a single trust into a family and marital trust as described above:

DEALING WITH CREDITORS IN FORMAL PROBATE

Although there may be room for compromise, your late spouse’s debts are not automatically extinguished at his death. How and when creditors are paid depends on a number of factors including whether they are “secured” or “unsecured,” known or unknown, and whether your spouse was the sole obligor of a debt. The probate code contains notice procedures that must be strictly followed to guarantee that creditor’s claims are completely extinguished.

As with most things in life, when paying creditors timing is everything. You shouldn’t pay creditors or beneficiaries too quickly. You need to be sure that each creditor has an enforceable claim and that the estate has sufficient assets to pay all creditors in full. Beneficiaries should be paid only when all creditor claims are finally determined. The risks are high.

You, as the personal representative, can be personally liable to either creditors or beneficiaries if you fail to properly assess their relative entitlements. By following the instructions in this Step Four and Step Five, you can protect yourself from liability.

First, you remain personally responsible to repay home loans and other debts for which you co-signed. Additionally, “secured” creditors, such as mortgage companies and other lenders, have a mortgage, “lien,” or other security interest securing their loan. If a secured creditor is not paid, they can pursue the secured assets directly. For example, a mortgage company will bring a foreclosure action on real estate for which they hold a mortgage. A car loan or leasing company will simply come and take the car. Your spouse’s “unsecured” creditors can make a claim against your spouse’s probate estate or his trust during the publication period described below.

You may wonder: “How do creditors know when someone dies?” The short answer is: “You tell them.” As personal representative, you must make a reasonable attempt to locate creditors. Most creditors can be located from a simple review of your spouse’s incoming mail or his checkbook. You might also consider contacting a credit agency to run a credit report. Known creditors must be sent a Notice to Known Creditors.

In most states, known creditors have four months from their receipt of the Notice to Known Creditors (or four months from the date of the published Notice to Creditors (described below), whichever is longer), to file their claim against the estate, or be forever barred.

You must also publish a Notice to Creditors in a legal newspaper in the county of your spouse’s residence to inform unknown creditors of his death. In most states, unknown creditors have four months from the date of the published notice (the “publication period”) to file a claim against the estate, or be forever barred. Merely publishing the claims notice in the newspaper will not bar the claim of a known creditor or a creditor you should have known about. Such creditors may have up to six years to pursue their claims.

Therefore, if in doubt, send a notice. Sending notice reduces the claim period for both known and unknown creditors from the normal six year “statute of limitations” (the period a creditor has to bring a lawsuit to collect its debt) to four months. Although the notice requirements may seem like an added burden, in reality they provide closure and certainty. You can rest assured knowing that no creditor will come out of the woodwork after the publication period has passed and you have disbursed the estate.

As personal representative, you may allow or disallow claims. Allowed claims are simply paid. Disallowed claimants must receive written notice of the disallowance. Failure to disallow a claim is a deemed acceptance (state laws vary as to how much time must pass before a deemed allowance occurs). A disallowed creditor must file a lawsuit to further pursue its claim.

COMPROMISING CLAIMS

If the estate contains only illiquid, or not readily available, assets such as real estate, you should contact creditors and ask them to wait until funds become available. Many creditors will be willing to either wait for full payment, or negotiate a quick settlement of the debt. Credit card companies, for example, are often willing to accept a lesser sum, say 80%-85% of the debt in exchange for immediate payment.

If the estate’s assets are insufficient to pay all creditors, state law determines which creditors get paid first. Except as provided below, neither you (acting in your fiduciary) nor any beneficiary is personally obligated for your late spouse’s personal debts.

If the estate does not contain sufficient assets to pay all creditors in full, the probate code dictates the following priority of claims:

1. Funeral and burial expenses, and administrative expenses such as the personal representative’s fees, attorney fees, and accountant fees. Since funeral and burial expenses are given such high priority, it is usually safe to pay them as soon as possible.
2. Statutory allowances such as the homestead exemption and the family allowance (see Step Five, below) that provide immediate living expenses to the surviving spouse and children of the decedent.
3. State and federal taxes. You will be personally liable if you distribute the estate’s assets before tax obligations have been paid in full.
4. Medical/hospital bills related to you spouse’s last illness.
5. All other claims on a pro rata basis.

Property passing by operation of law is not subject to the claims of your late spouse’s individual creditors. For example, life insurance proceeds are not part of your spouse’s probate estate and therefore are not subject to creditors’ claims (unless the proceeds pass to his estate or his revocable trust).

Similarly, joint property with full rights of survivorship passes directly to the joint owner, outside of the decedent’s estate and is generally not subject to creditors’ claims (except secured creditors with a lien or other security interest in the joint property). However, property in your spouse’s revocable trust is subject to such claims.

PERSONAL LIABILITY OF THE PERSONAL REPRESENTATIVE

Generally, as personal representative you are not liable for your late spouse’s individual debts, or for debts incurred in the administration of the estate (such as funeral, attorney, accounting, and appraisal fees). However, you may become personally liable if you breach one of the fiduciary responsibilities described earlier in the chapter, or if you distribute estate assets to yourself or other heirs at the expense of valid creditor claims.

Beneficiaries can be quite anxious to receive their inheritance, exerting subtle and not so subtle pressure on you to “hurry things up.” If bold, they may even outright ask, “When do I get my money?” You must resist the temptation to appease such heirs, so as to avoid personal liability. Rather than have to ask heirs to return improperly paid distributions, it is cheaper and easier to postpone distributions until all estate liabilities are identified and quantified.

You may decide to make interim distributions to heirs at any time, but you should postpone final distributions until the publication period ends, and all tax returns are filed and accepted by the taxing authorities.

CREDITORS AND INFORMAL PROBATE

With the exception of the closing procedure for informal estates (see Step 5, below), creditors are treated the same in formal and informal probate.

DEALING WITH CREDITORS IN TRUST ADMINISTRATION

In most states, revocable trusts may elect, but are not required, to utilize the creditor notification procedure. If a trustee chooses not to utilize the notification process, creditors have up to six years to present their claims, rather than only four months. The procedural requirements for notifying potential creditors are virtually the same for trusts as for probate estates. The same rationale for time limiting claims also applies.

DISTRIBUTION OF PROPERTY IN FORMAL PROBATE

The fifth and final step is to distribute what’s left of the estate after payment of the your spouse’s debts, taxes, and estate administration expenses. If the probate estate is small, the probate code gives priority to the surviving spouse and children of the decedent. The allowances, which are modest, take priority over the claims of all the other beneficiaries and most creditors.

DISINHERITED SPOUSE

In addition to a family allowance, the surviving spouse, if disinherited, may elect “against the Will,” and take a portion of what he or she would have received under the laws of intestacy. Each state defines the surviving spouse’s entitlement differently. Some states base the surviving spouse’s elective share on the “augmented” estate. That is, the probate estate plus assets owned in trust as well as life insurance proceeds. Other states do not augment the estate, measuring the spouses elective share as only a percentage of the probate estate. Interestingly, in states that do not augment the estate, a spouse could put all his property into a trust for his children, or others and purchase life insurance to benefit his children, or others, and legally disinherit his spouse.

DIVISION OF ASSETS

When allocating assets among beneficiaries, the value and character of each asset must be considered. To assure equitable division, assets that will subject the beneficiary to income tax such as IRAs, 401ks, and bonds (and other “income in respect of a decedent,” or “IRD”), must be allocated so as to proportionately distribute the income tax burden. Illiquid assets like real estate should be sold prior to distribution. Personal property, such as furniture, jewelry, and tools can be divided among beneficiaries in a lottery system, with numbers drawn from a hat to determine the order of choice.

There are two general categories of gifts in a Will: specific bequests and residuary bequests. A specific bequest is the gift of an identifiable item to a particular person, such as: “I give my 1982 Buick to my nephew, David Smith”; or, “I give my tangible personal property such as furniture, clothes, books and jewelry to my children, equally.” Residuary bequests consist of everything not given in a specific bequest: “I give the rest, remainder and residue of my estate to my children, equally.”

The significance of whether a gift is a specific or residuary bequest arises where there are insufficient assets to satisfy all gifts. In such a situation, the specific bequests are dispersed before the residuary ones. If a Will gives a diamond necklace to Mabel, $10,000 to David and the whatever is left (the “residuary”) to Fred, and the estate has only the necklace and $10,000, Fred will get nothing. If the estate has only the $10,000 and no necklace, Mabel and Fred get nothing and David gets the $10,000.

MINORS AS BENEFICIARIES

Assets of the estate cannot be distributed to a minor. A fiduciary, known as a “conservator,” must be appointed to receive, hold, and manage distributions on behalf of minor beneficiaries. Once appointed, the conservator must account to the court annually until the minor reaches the age of majority (age 18 in most states).

At such time, the remaining funds are given to the child outright. A major advantage of revocable trusts is that they may hold the share of a minor beneficiary in trust, with no requirement that the trustee annually account to the court.

Often, trusts manage the share of young beneficiaries such as children and grandchildren until they are out of college. Even then, distributions may be made in increments (say equal shares at age, 25, 30, and 35), to allow young beneficiaries time to mature.

There is no such flexibility allowed in probate. At age 18, newly emancipated minors are free to spend their inheritances as they please. A scary thought.

PROCEDURE FOR DISTRIBUTION

Prior to final distribution, a final accounting and an itemized list of proposed distributions must be prepared and sent to all interested parties and unpaid creditors. A hearing is held to approve the final accounting and proposed distributions. A party wishing to object to the fiduciary’s performance, or to the final distributions can do so at the hearing. Failure to object forever bars future complaints. Once approved by the court, final distributions can be made. It is advisable to obtain a receipt from each recipient showing that the distribution has been made and that the recipient waives further claim.

DISTRIBUTION OF PROPERTY IN INFORMAL PROBATE

Informal distributions are handled much the same as in formal probate, except that no hearing is required. A final account is sent to interested parties and creditors, and receipts received at the time of distribution. Without a final hearing to cut off claims, creditors and disgruntled beneficiaries can bring an action at any time in the future. For that reason, it is advisable to formally close an informal probate estate.

DISTRIBUTION OF PROPERTY IN TRUST ADMINISTRATION

No formal procedure is necessary to make final distribution of trust assets. Nonetheless, it is advisable that as trustee you prepare a final accounting and obtain receipts from all beneficiaries.

SMALL PROBATE ESTATE PROCEDURES

Most states provide for an abbreviated probate procedure for small estates. Depending on your state, the simplified procedure is available for estates of up to $25,000 (not counting funeral expenses and some spousal and family allowances). The dollar limit is based only on probatable assets, and therefore does not include assets held in trust or assets that pass by operation of law. The abbreviated procedure typically involves the filing of a single document, and does not require public notice to creditors. Small estate procedures usually require a single visit to the county probate court.

COMPENSATION OF FIDUCIARIES

You are entitled to compensation for services rendered as a personal representative or trustee. Compensation is based on a number of factors, the most important of which tends to be the actual time spent in furtherance of your duties. Accordingly, it is important that you keep track of the time you spend on estate business, as well as your out-of-pocket expenditures.

CONCLUSION

The law of estate and trust administration is extremely complex and the liability is too great to learn on the job. You cannot rely on the probate court staff to walk you through the probate process. Probate courts do not render legal advice and are not staffed to educate the general public on probate procedure.

Fulfilling your fiduciary responsibilities requires that you hire professionals. The Uniform Probate Code states: “The fundamental duties of a trustee include the use of the skill and prudence which an ordinary capable and careful person will use in the conduct of his own affairs.” You are not held to the standard of what you happen to know, but what you should know to completely and competently discharge your duties.

Ignorance is no excuse when it comes to fiduciary responsibility. If you don’t have accounting, investment, or legal experience you will need professional help. To fully discharge your duties and avoid liability, you need to engage the services of an accountant (Chapter Eight), an investment advisor (Chapter Five) and an attorney. How to locate and choose professionals in these areas is discussed in the respective Chapters as well as the Directory or Resources.

FINDING A LAWYER

It is important to retain a lawyer who specializes in estate administration and estate planning to assist you in administering your late spouse’s estate or trust. Since trust and estate administration involves complicated tax issues, you should choose a lawyer with experience and advanced training in taxation.

A lawyer with a post-law degree in taxation (“LL.M”) is preferred. The trust department of your bank or brokerage house often has names of attorneys they have worked with and can give you a referral. You can also use the Directory of Resources section of this book to obtain names of attorneys in your area, along with their qualifications.

You may also have friends, acquaintances or co-workers who have used a lawyer, in circumstances similar to your own, who can either recommend or steer you away from an attorney.

What you learned by administering your late spouse’s estate should be helpful as you plan your own estate. Chapter Nine will help you avoid the pitfalls discussed in this Chapter.

Comparison Chart of Formal Probate, Informal Probate, and Trust Administration