“I’m sorry to say that that’s right,” answered Trish, the lawyer.

  “But, it says right here that I get the $500,000 life insurance policy number 1234555 with Universal American Mutual Mega-Huge Life Insurance Company.  If that doesn’t mean I get that life insurance policy, what does it mean?”  No wonder why stressed out people wring their hands – to keep everyone from seeing their sparkly diamonds shake. 

  “Well, if the policy had been payable to your father’s estate, or to you as the beneficiary, then you would receive the proceeds from that policy.  Unfortunately, the beneficiary of the policy is your step-mother,” said Trish slowly and carefully, allowing the information to sink in.

  “But she and Daddy were hardly even married when he died!  How can she get my life insurance policy?!  I need that money, she didn’t!  She got the house and the bank accounts and the Rolls and other stuff.  She doesn’t even love him!  After he had his first stroke, she put him in that awful place.  She’s been living in the house with the pool boy ever since.  How can we fix this?”

  “There’s no easy way to do that,” Trish said soothingly. “In fact, it is unlikely that a lawsuit against your step-mother, the insurance company or your father’s estate would be successful.  Your father had his estate named as a beneficiary when he prepared this Will back in 1999.  If he had left it that way, you would be receiving the life insurance through probate.  But he changed it to your step-mother in September of 2003.  When was his first stroke?” asked Trish.

  “In May of 2004.”

  “Before his first stroke, was he competent?”

  “Yes. He was as sharp as a tack,” Tiffany assured Trish.

  “When was that?”

  “January… No, February of 2004.  My cousin Tabatha’s wedding.  He out danced us all and told jokes all night,” answered Tiffany.  “The stroke a few months later was really a shock.”

  “When your father changed the beneficiary to your step-mother after he made his Will, we have to presume that he knew what he was doing.  It shows here that your father changed the beneficiary to your step-mother in August of 2002,” Trish stated, gently sliding the Change of Beneficiary form across the conference room table.

  Tiffany’s rings rapped against the glass-topped table as she put her hand on the form.  “But, Daddy’s Will is really clear.  It even gives the policy number and everything.  Why doesn’t it control the policy?” she asked.

  “Because the life insurance policy is a contract between your father and the life insurance company.  The purpose of the contract is to pay the death benefit to the person specified in the contract when the owner dies.  The insurance company has to follow the terms of the contract in paying out the death benefit.  The contract your father had requires the insurance company to pay the death benefit to your step-mother. Your father’s Will does not change that,” explained Trish.

  “But, what about the IRA?” countered Tiffany. “It’s only $217,000.  But Daddy’s Will gives it to me as well. What about that?”

  “Well, the same rules apply to the IRA’s as apply to life insurance policies,” began Trish. “Because your father never changed the name of the designated beneficiary, the person he originally named as the beneficiary is the beneficiary of that account as well.  Again, that is your step-mother. ”

  “Is there anything we can do?” asked Tiffany, crestfallen.

  “I can give you the name and phone number of a couple of probate litigators.  This is not something I can help you with.  Given the expense and the slim chance of success, however, I implore you to proceed very cautiously before you invite litigation into your life for the next several years,” offered Trish.

  This entire conversation and the subsequent possible litigation could have been avoided had Tiffany’s father’s estate plan be drafted more carefully or if her father had kept his life insurance and IRA beneficiaries consistent with his stated intent in his Will (or vice versa).

  Fortunately, Sarah’s mother left a will naming Sarah and Tommy’s Aunt Anne as their guardian.  A guardian is the person who is responsible for raising children if their parents died or are otherwise unable to raise them before the children attain the age of eighteen.  Aunt Anne is the perfect choice.  Tommy knows her well and loves her.  Aunt Anne knows Sarah’s history with alcohol and what she can do when she’s sober, which she has been for eleven months now.

  Unfortunately, Sarah’s mother’s will leaves everything to her children out-right.  That means that as each of her children attains the age of eighteen, they will receive the inheritance without adult supervision or guidance.  Sarah is only eighteen, but her share of her mother’s assets will be hers to use as she sees fit. Until Tommy reaches age eighteen, Aunt Anne will serve as his conservator.  That means Aunt Anne’s use of the money for Tommy will be supervised by the local Circuit Court.  Every year, Aunt Anne will need to provide an accounting of the money she spent on Tommy.  This can be an expensive process.  Due to Sarah’s history with alcohol Aunt Anne may be able to get a court to appoint her as conservator for Sarah’s money, if she relapses and begins drinking again.

  Most eighteen-year-olds are not equipped to manage large sums of cash or other assets.  This is particularly true when both of the teen’s parents have died.  Nonetheless, if you do not prepare an estate plan that delays your child’s receipt of your assets after you die and you die before your child is eighteen, your child will receive your assets at age eighteen, barring unusual circumstances.

  One of the other primary reasons people place their assets in a trust or leave their assets to a trust through a will is to care for their minor children or other beneficiaries who are, or may be, unable to care for themselves.  Unless the estate plan dictates otherwise, the minor children of deceased parents will each receive an equal share of the decedent’s estate on their eighteenth birthday.  Many people wish to delay their children’s receipt of significant sums of cash or other assets until the children are older.

  This reasoning is just as true for grandparents who wish to benefit a grandchild.  Stereotypically, husbands and wives with grown children wish to benefit each other first and their children second.  If one of their children dies before them, but leaves living grandchildren, the grandparents typically want that deceased child’s share of their estate to pass to that child’s children.  Again, a trust permits the grandparents to control how old the grandchildren must be before they are entitled to have complete control over the assets.  A trust also permits the grandparents to control the uses to which the funds can be put.

  A second significant reason why many people create estate plans which include Revocable Living Trusts is to avoid probate.  The most common myth I encounter in my estate planning practice is that a will avoids probate.  That is not the case.  A will requires probate to have the decedent’s wishes in the will implemented.

  A third major reason many people create trusts is to allow whichever spouse dies first to control the distribution of about half of the assets upon the death of the second spouse to die.  This is particularly important in a second-marriage situation.  If one or the other, or both, spouses have children from a prior relationship, most typically that spouse wishes to support his or her current spouse and have his or her assets pass to his or her own children, rather than the children of his or her spouse.  A trust is just the document to control those events to the best satisfaction of all. 

  A fourth significant reason people create trusts is to control their finances and their personal care if they become incapacitated or incompetent.  Typically, trust documents allow the person creating the trust to dictate who will control the funds when he or she is no longer able to, how the funds will be used, as well as providing some direction about the person creating the trust’s personal care, should that person be unable to make decisions about his or her own care.

  As you can see from the scenario with Sarah and Tommy, their mother had prepared a will designating a guardian for her minor children but unfortunately, did not create a trust where the distribution of the funds could be controlled until her children were older and more prepared to use the funds for their education or buying their first home.  In all likelihood, the share they will receive at eighteen will be spent by the time they reach the age of twenty-five.  It is never too early to start planning for the inevitable, and the more prepared you are now, the easier it will be for those left behind.

“I’m sorry, but that’s not right.” Answers Trish as soothingly as she can. “It’s the most common misunderstanding I run into in my estate planning practice. It seems like everyone believes that having a Will avoids probates.” After a pause to let Holly digest that information, Trish goes on: “Having a Will requires probate to implement the deceased person’s intentions as stated in the Will. But probate is not the end of the world. There are even circumstances in which your mother’s estate should be probated.”

“But mom only had her house and a bank account. The bank account is small. She just received her Social Security payments into it and paid her living expenses out of it. I think she has an IRA somewhere too. Isn’t her estate small enough to skip probate?” Holly argues with a sense of doom.

“No, I’m sorry that’s not the case. In Oregon, where your mother lived, there is technically no amount of value, cash or tangible personal property, that can pass without a probate. As a practical matter, people generally deal with tangible personal property without probate when those are the only assets the decedent owned. But the people who receive those assets take them subject to the claims of the decedent’s creditors, if those creditors are unpaid. I have yet to hear of a case in which a creditor went after the heirs of a decedent for unpaid debts when the only assets were tangible personal property. In this case, because your mother owned her home and a bank account, probate is necessary,” explained Trish.

“Okay. How do we get started?” Asked Holly with a tone of resignation.

“We’ll need your mother’s original Will and her death certificate, once it’s available. We will also need a list of the people your mother named in her Will and their addresses and relationships to your mother,” said Trish.

What Probate Is, And Isn’t

Probate is the court process by which the written intentions in a Will are implemented. If a decedent did not have a Will, probate is the court process by which the decedent’s assets are passed to his or her heirs under Oregon’s intestate succession laws. Many of my clients come to me with the express intent of avoiding probate, but without a clear understanding of what it is or whether it should be avoided in their case.

The probate process in Oregon is statutory, meaning that the steps for probating a will are dictated by the Oregon legislature. In the probate process, the court appoints a personal representative to administer the estate. This person is most commonly the person nominated in the Will to serve in that capacity. Some people, such as disbarred attorneys, minor children, an incompetent person, a former attorney who resigned while under investigation for ethics violations, and licensed funeral service practitioners, are disqualified from serving as a personal representative.

The probate process is also the forum in which the court appoints a guardian for any minor children left by the decedent. Typically, the other surviving parent is named guardian. If there is no surviving parent, the court will look first to the intent of the decedent as stated in the Will.

Drawbacks of Probate

There are three primary drawbacks of probate: (1) it is time-consuming; (2) it is relatively expensive; and (3) it is public.

The typical probate proceeding takes between 7 and 12 months to complete. That means that from the time the decedent dies through the completion and distribution of the estate, there could very realistically be a 12-month delay. That timeline can be significantly lengthened in a very complex estate. In some circumstances, the personal representative may choose to keep the estate open for well over a year in order to lengthen the time period for payment of federal and state death taxes. In other circumstances, simply marshaling the decedent’s assets consumes significant periods of time.

Also, the very nature of the Oregon probate process leads to some time delays and expense. In Oregon, during the first 90 days after his or her appointment, a personal representative investigates the decedent’s financial affairs. The personal representative must also file an inventory of all of the decedent’s assets within 60 days of his or her appointment by the court. The personal representative must arrange for a notice to be published in a local newspaper of general circulation. The probate cannot be completed for at least four months from the date this notice is first published. The personal representative must give notice to heirs (even if they are disinherited) and devisees as well as known creditors. Note that these deadlines can be extended with approval of the court.

Simply because a probate takes several months to complete does not mean that all the decedent’s assets are tied up and unavailable for the support of his or her family. Quite the contrary. There are statutory provisions that permit a court to set aside all or part of an estate for the support of the surviving spouse and children. However, all such expenditures from an estate must be approved in advance by the court. This process typically leads to some delay and expense.

The probate process is also relatively expensive. This is due, in part, to the relatively large amount of attorney fees associated with the administration of an estate. There is also a court filing fee (up to $596), which the estate must pay. Another significant expense is the personal representative fee which is a percent of the estate determined as follows:

In addition, the court may order extra compensation for “any extraordinary and unusual services not ordinarily required of a personal representative.” Frequently, but not always, if the personal representative is a family member or devisee of the decedent, he or she will waive the personal representative fee. This fee is taxable income to the personal representative.

It is not unusual for the costs of a fairly simple (one home, no other real property and no small business) moderate-sized estate (less than $800,000) to be $4,000 – $6,000, which includes attorney fees and accountant fees, as well as other costs, but excludes personal representative fees. I have personally assisted with the administration of estates in which the fees and costs have been as little as $2,200 or well in excess of $60,000.

The third significant drawback of probate is that it is public. Anyone can go to the county courthouse and, for 25 cents per page, copy any portion of the probate file. As required by Oregon law, the probate file will include a list of all of the probate assets of the decedent, all of the creditors of the decedent, and names and addresses of all of the heirs and devisees of the decedent. For some people, this disclosure of personal information alone is sufficiently intrusive to justify avoiding probate.

If Probate Is So Horrible, Should Everyone Avoid It?

For some people, avoiding probate may be inappropriate. One of the most significant benefits of the probate process is that it has the effect of cutting off claims of unknown creditors. This means that an individual injured by the decedent has a short time in which to file his or her claim against the estate (even if the creditor is not yet aware of the claim or the injury) or lose the right to pursue the decedent. Any insurance the decedent had which would apply to the creditor would still be available, but to the extent the insurance is inadequate to fully compensate the injured person, the decedent’s estate would be off limits.

This shortened timeline is measured from the time the first notice is published in the local newspaper. The notice must be published for three consecutive weeks. From the time it is first published, any creditors, whether they know they are creditors of the estate or not, have only four months in which to file a claim against the estate. After that four-month time period, claims against the estate are too late.

A similar four-month time period is available in the context of revocable living trusts as well. A trustee of a revocable living trust may petition the probate court to determine the claims of creditors of the settlor. To do so, the trustee must file a petition with the court very similar to a probate petition. Once that petition has been filed, the trustee must publish a notice in the newspaper very similar to the notice that is required in the probate context. As with the probate context, claims may be filed against the trust estate and may be allowed or disallowed. Claims of unknown creditors are disallowed four months after the date of the first publication of the notice in the newspaper. Once all of the claims have been settled in the context of the court proceeding for the trust administration, the trustee may petition the court to close the case. This procedure is so similar to a probate proceeding that it runs the risk of being too complicated. It also requires disclosure of all the trust assets.

This shortened statute of limitations is of particular importance to professionals such as attorneys, accountants, doctors, podiatrists, dentists, architects, general contractors, veterinarians, and the like. Only you know whether there could be such a potential claim against your estate. If there is, you need to discuss this matter with your attorney. If you believe your personal or business circumstances warrant utilizing this four month time period, I would recommend that you consider a limited probate rather than using the trust probate procedure. More on limited probates later.

For some estates, the very cumbersome nature of the probate proceeding is of great assistance. Under Oregon law, creditors, even known creditors, of the estate have a limited time period in which to file a claim against the estate to seek payment of the debt. If the creditor fails to timely file the claim, the debt can be disallowed by the personal representative.

If a creditor timely files a claim against an estate but the personal representative disallows the claim, the creditor must file suit or seek a summary determination of the debt within 30 days of the disallowance. If the creditor fails to jump through these procedural hoops, the personal representative has no obligation to pay the debt. This is particularly helpful in estates with large amounts of debt and support obligations, such as the financially struggling couple with young children. To maximize the remaining estate available for the surviving spouse and the children, the personal representative may choose to force all creditors to jump each probate hoop before being paid.

It is also possible in the context of a revocable living trust to maximize the estate assets while minimizing the chances of creditors to successfully pursue the estate for payment. Most typically, creditors of an estate in which there is a revocable living trust do not pursue the remedies they have available under Oregon law for claiming against a trust because the amount of the obligation is insufficient to justify the expense of pursuing it. In addition, from a creditor’s perspective, once they have been advised that no probate will be filed, it is very difficult for them to determine whether the lack of a probate is driven by lack of assets or by some more sophisticated means of avoiding probate. Because creditors cannot be certain that there are assets available to pay the debt, they tend to be reluctant to pursue the trust estate for payment.

Because of the above reasons why one would want to avoid probate, and the countervailing reasons why some decedents should not avoid probate, I recommend that, if an estate should intentionally be subject to probate, we consider a controlled probate. By creating an estate plan in which nearly all assets pass outside of probate, we can control the number and type of assets which pass through probate. This is useful to restrict the amount of information the personal representative is required to disclose and the amount of complexity involved in the estate. This also permits us to take advantage of the limitation on liability generated by the probate process while minimizing the negative attributes of that process.

Small Estate Proceeding

A small estate affidavit proceeding is an alternative for some individuals in Oregon. For decedents dying after January 1, 2005, the small estate affidavit proceeding is available only to estates in which the decedent owned real property worth not more than $150,000 and personal property worth not more than $50,000. These amounts are gross amounts – you do not get to subtract the amount of a lien, mortgage, land sale contract or trust deed on the real estate. A small estate proceeding does not have the added benefit of cutting off claims of unknown creditors because there is no requirement of a publication in the local newspaper, which would give the creditor notice of the timeline. Typically, a small estate affidavit proceeding costs between $1,800 and $3,500 in attorney fees, accounting fees, and filing fees. This is an estimate of what is typical and not a flat fee quote. The amounts that apply to decedents dying before January 1, 2005 are lower. Contact my office for additional information.