Probate - Everybody Fears it, But Few Know What it is

Probate - Everybody Fears it, But Few Know What it is.

By Alan G. Orlowsky

When people consider estate planning, they often list “avoiding probate” as one of the reasons they need to have a plan. But when you ask “what is probate?” they usually don’t know, but they know it’s “bad”. That message has been impressed on them for many years through books, seminars, and advisors. An estate plan, however, usually works best when the person establishing the plan understands what they are doing, and why.

Probate and Guardianship is not always “bad” because quite often it is used to appoint guardians for minor children on the death of a parent. Probate often is, however, an unnecessary burden that can be avoided with proper planning. The burden typically falls on the executor for the deceased (often an untrained family member) or on the beneficiaries themselves.

The purpose of probate is to enable a judge to ensure that the instructions of the deceased person’s will are carried out. If the deceased didn’t have a will or trust (i.e. they died intestate), the judge’s job is to ensure that assets are distributed according to that state’s laws of intestacy.

The probate process can vary widely from state to state and from judge to judge. Some of the variances depend on the size and complexity of the estate. But in most states, the probate process will require the executor (usually with an attorney’s help) to carry out these steps:

• Present an original copy of the will to the court, and ask the court to open a probate
• Be sworn in and formally appointed by the judge as the executor
• If required by the state or the judge, purchase a performance bond
• Obtain several copies of the death certificate to use in closing accounts, filing tax returns, and taking care of other administrative duties
• Set up a new checking account in the name of the estate which will be used to handle funds and make payments
• Locate and make an inventory of every asset owned by the deceased
• Notify all known creditors of the death, providing each with a copy of the death certificate, and publish a notice in the newspaper for creditors who may not be known
• Pay all creditors, and collect debts owed to the deceased
• Protect and manage assets and property, and sell property if required to pay bills
• File a final federal income tax return for the decedent, as well as an estate tax return, paying any taxes that are due
• Complete a report and give a full accounting of all financial transactions to the judge
• Distribute remaining assets and property to the beneficiaries
• Close the estate

 Obviously, probate is a lot of work, but why do most people think probate is “bad”? The biggest challenges of probate are time, cost, and publicity. It is not uncommon for a straightforward probate (with few complications) to take six months to a year to work through the system. In fact, the federal estate tax return isn’t even due until nine months after death. If beneficiaries are in financial need, they will have to wait to receive their inheritance.

As far as cost is concerned, many items on the list above will be new to the family member or friend serving as executor. Most executors will retain the services of an attorney to supervise the process, or to carry out some of the steps. So the biggest cost to the estate (after debts and taxes are paid) is typically attorney fees.

Finally, everything that happens in a court of law becomes part of the public record. Since most families would prefer that their affairs remain private, they will need to use other planning methods to avoid the probate process.

If you have questions regarding Probate and Guardianship please contact Orlowsky & Wilson at 847-325-5559 or visit our website www.orlowskywilson.com for more information.

 

Inheritance - Children Gone Crazy

Inheritance - Children Going Crazy

By Alan G. Orlowsky

Let’s Talk About …… Inheritance, Children Going Crazy.

How much money do you think you should give to an 18 year old college student? $10,000, $100,000, $1 Million, $10 million? When we look at Wills, Trusts and Inheritance some of our clients would say none of the above. In general this is because of most of our clients would say that giving that much money to an 18 year old is just asking for trouble.

Here is a true story related to us by one of our colleagues along with some very basic ideas that illustrate the problem (and some basic ideas that could have solved the problem in advance.) As always, names are changed to protect privacy. The Example highlights how important Estate Planning really is.

Don Jasper had it pretty good. At 18 he was a college student majoring in psychology at a great mid-western college. Tragically, during Don’s junior year, his father died. After the estate was settled, Don received a check for almost $650,000. There are at least two ways this true story could end up. The first is that Don decides to invest wisely and goes on to finish college. The second is that he decides that college is not as important as fast cars and lots of parties. (Read the full article to learn what happened to Don in real life.)

Most of us would like to think that our children and grandchildren could handle a size-able inheritance. The truth is that some would be able to deal with it while others would have great difficulty. As we all know, money can be both a great motivator and a great hindrance.

One way to turn money to your advantage is with an incentive trust.

How does an Incentive Trust work?

An Incentive Trust is a trust which most often becomes effective when you die, though you could establish one while living. Assets in the incentive trust are used by the trustee for the benefit of your beneficiaries. The key difference is that rather than outright distributions, the trust assets are used to encourage certain types of behavior.

For example, let’s assume that you believe your children should be rewarded for choosing a public service career. This might mean teaching, politics, mission work or other types of employment that contribute to the public good but traditionally have not been considered high paying careers. You could design an incentive trust that would make distributions to your heirs if they decide to pursue such careers.

One way to do that would be to pay them a dollar or two in trust distributions for each dollar they earn in public service. We have seen situations where clients have used incentive trusts to help a child live a drug free lifestyle. Like anything in life, incentive trusts have pros and cons.

Advantages

Incentive trusts can be used to motivate good and positive behavior. They can be used to encourage good grades in school or completion of certain stages of education on time. Additionally, these trusts can be used to reward a beneficiary for saving money or for living a healthy life style. Many clients have established these trusts to reward entrepreneurship or stewardship of a family business. And of course incentive trusts can be used to encourage philanthropy.

 

Disadvantages

One of the potential concerns with an incentive trust is the resentment that can be caused if your heirs feel you are controlling their behavior from beyond the grave. Another potential issue is that children may come to rely on matching trust distributions and settle for a mediocre job choice rather than striving to reach ever higher goals.

This type of structure can also be an easy set up for disappointment if the trust goals for success are set unrealistically high or for some reason cannot be met by the beneficiaries.
Despite the potential for disadvantage, clients continue to establish incentive trusts. They do this because we take them through a process that allows them to think creatively about how to achieve the results they are looking for. If this idea sounds attractive to you for your family, here are some things you can start thinking about.

Keep it flexible - You never know how your kids or grand kids will turn out. Sometimes it is the child who drops out of college who goes on to create Microsoft.

 Reward milestones - Think about how you could use the trust to reward constant improvement. One way this can be done is by having your trustees and your beneficiaries consult and let your beneficiaries help to establish their own goals. This can encourage personal and professional growth in a way that does not require the imposition of your views and values on future generations.

Establish good communication - One of the biggest problems we see in this area is the failure to let your children know why you set up the trust as you did. Failure to communicate your reasons may be one of the easiest ways to generate resentment after you are gone. Communication is the best way to insure that the trust works exactly the way you want it to. 

Allow Flexibility - Finally, consider allowing your trustees substantial discretion to work with the beneficiaries so that as times and people change, your trust can change as well.

Now Back to Don.....

Don just inherited $650,000 outright. He used the money in the first week for a new BMW. He went back to school and told everyone what had happened. As a result, he became the bank for some of the craziest parties the college had seen in a long time.

One night, Don was driving home from one of these parties and was in a serious car accident. His face was badly scarred and he suffered a number of broken bones. Luckily, no one else was hurt. For Don, it was a wake up call. He called his dad’s lawyer a few days later and made an appointment.

The lawyer talked with Don about how to put money into trust and set him up with a good investment counselor. He then told Don to forget the money and go back to finish school as his father would have wanted. The good news part of this story is that Don did go back. He finished with high marks. He changed majors to finance and now travels the world working in international mergers and acquisitions.

If you have any questions about Inheritance, Setting up a Trust, or Estate Planning and how we can help please contact the Law Office of Orlowsky & Wilson by calling 847-325-5559 or visit our website www.orlowskywilson.com for more information.