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.