What Happens When You Live & Die…Without a Plan
This article by Attorney Gary DeWitt, practicing in estate planning, probate, guardianship, and elder law.
Living Without a Plan
Living without a plan is living on borrowed time.
1 in 3 people will become disabled or worse before retirement age. Those odds are simply too high to ignore.
If you become incapacitated – unable to make your own legal, financial, and healthcare decisions – due to accident, health incident, drugs, or alcohol you family may have to seek a guardianship in court!
A guardianship is also sometimes called “living probate.”
You can think of a guardianship as a limited power to oversee and assist you with your affairs, under court approval.
Guardianship are public record!
If you and your spouse (or children) own things together,they will need a guardianship to be able to access accounts (like a 401(k) or IRA) or sell real estate if needed. It doesn’t matter if you have setup a beneficiary on the account because that only takes effect on death.
Mary never expected her husband John to have a major stroke when he was only 53. John pulled through but was left with enough mental deficits that he needed help managing money and making healthcare decisions. He was also left with a few physical deficits that made climbing stairs difficult.
Mary needed to sell the house to downsize and get a single level home that was easier to get around in.
Mary had to, at an expense of time and money:
- Hire an attorney to get a guardianship ($$$$$)
- Go to court to get a ruling on the guardianshippetition
- Get 3 appraisals on the property ($$$)
- Petition the court (ask for permission) to sell the house ($$$)
- Sell the house
- Report to the court with the sales information in it ($$)
- Report annually to the court how the money was used ($$)
- Repeat as needed
- If John needs Medicaid, hope the Judge will approve the Medicaid plan
Probate or Bust
If you don’t have anything, then nothing needs to be done…
But, if you have assets or property just in your name, then that property will have to go through court approval before it can be transferred to your family.
That process is commonly called “probate” and I will use that word throughout. (However,technically probate involves a Last Will and Testament. It is called administration when there is no Last Will and Testament).
Probate typically takes 8 months or more in Arkansas to get done. The average is close to 12 months. 6 months of that is taken up because of required notices to be published in the newspaper. If all of the heirs and beneficiaries don’t waive inventory, account, and more, the process will take closer to 18 months.
If there are no bills payable, under $100,000 of assets not including the primary residence, and 45 days have elapsed, the entire process consists of filing an affidavit and deeding real estate to the heirs.
However, this is not typical.
In general terms, the process begins with filing a Petition with the court to appoint an Administrator. If the choice of Administrator is not valid or unacceptable, the Court will appoint somebody, perhaps even a complete stranger, as Administrator.
Unless you have a very simple estate, your Administrator usually hires an attorney to help.
Your Administrator must publish, in a paper of local circulation, the fact your estate is being administered and creditors can make their claims. Notice of the administration of your estate must be sent to all known creditors, preferably by certified mail.
That’s just the beginning. Then somebody must value and inventory everything you’ve left behind.
Your family may be denied access to assets, or only allowed a small stipend, until the final distribution.
Before the process is done, your creditors will be paid off,estate taxes paid, attorneys paid, and your administrator paid. Only after these expenses are paid will your heirs divide what remains, if anything.
Your and your family’s private affairs will be open to public scrutiny. It goes beyond just publishing the fact of your probate in the newspaper. It can also expose your family to crimes of opportunity. Con artists, creditors,overly aggressive sales people, and people eager to exploit financial weakness routinely look at the Probate records. There might not be a bad reason, but on the other hand they may be looking to exploit your family.
Regardless of motive, these people present a threat to your family that they don’t need. You can’t protect your family from them if your estate goes through probate.
The good news is that Probate normally works without a hitch. Your wishes are carried out. The bad news is that it takes time and money.
The average time for Probate varies from state to state, but you can expect at least a year. A year if your affairs are straightforward and nobody objects to anything.
Paying for Probate
Long, red tape filled processes take a long time and money to finish. Everyone else gets paid first: administrator, attorneys, funeral home, appraisers, the court, taxes, and creditors. Only then will your heirs get what’s left.
How much is left varies considerably depending on your state and how much you owed. A simple estate and straightforward administration doesn’t mean it’s cheap.
Whether paid by flat-fee or percentage, you can expect Probate and its associated expenses to eat up 6% or more of your gross estate. That is the value of your possessions without taking away expenses and what you owe on the assets. That doesn’t include accounts fees,appraisers’ fees, and more.
Making out a Will doesn’t mean your plan will be followed. Disgruntled family members can challenge the Will and process.
Probate is a vulnerable time for your family.
Just about any disgruntled relative can challenge a Will,sometimes with devastating consequences. Even if your heirs win the contest and prevail, they may find they won the battle and lost the war because all of the money was used up in defending the estate and will.
The Solution: A Revocable Living Trust
The Revocable Living Trust is one of the most widely used and powerful Probate avoidance tools available!
First, the Revocable Living Trust avoids Probate and the problems that come with it like:
- Opportunistic Criminals and con artists
With a Revocable Living Trust you protect your and your family’s privacy. You expedite the process. Assets are available on an as needed basis.
That’s just a few of the benefits. Here are some more:
- You can use a Revocable Living Trust to take care of your assets and healthcare needs should you become disabled or incapacitated mentally.
- Maximize estate tax planning to minimize taxes
- Maximum control over your assets for years to come. This is especially important if you leave behind minor children, incapacitated heirs, or other people that need time to learn to manage sums of money.
- No-contest clauses
- A Revocable Living Trust in some states does not have to pay your final expenses or creditors.
- As long as your heirs leave their inheritance in the Trust, the assets are protected from their creditors and financial predators.
How a Revocable Living Trust Works
When you have a Revocable Living Trust, you literally own nothing. Your Trust owns it all. But don’t worry. Because you are the trustee (trust manager)and the beneficiary of the Trust, you stay in full control of all the assets. You can have the income, spend the money, sell, buy, and do anything you need to with the property in the trust. In every practical sense, have a Revocable Living Trust is almost identical to owning all your property directly.
The difference happens when you are gone or incapacitated.
Since technically you didn’t own the property, there is nothing to go to Probate. Instead your property and assets are quickly distributed to your heirs without all the red tape and bureaucracy. Your successor Trustee doesn’t have to get the approval of the courts.