probate

Probate Avoidance

What is probate? 

Probate is the manner of administering the property (also known as “the estate”)  of a decedent by a personal representative under the jurisdiction of one of Michigan’s county probate courts.

When is probate required?         

Probate is required anytime a person dies leaving personal or real property in his or her own individual name at the time of his or her death.

What is involved in probate?

Each case will be different depending on the individual circumstances and facts of each matter.  However, simplified, in the easiest of cases (uncontested, few heirs, no creditors) the following occurs:

1.         The probate court appoints the estate’s personal representative.  The appointment is usually based upon the personal representative being named in the will of the decedent or being nominated by an interested party of the will.  However, anyone can ask the court to be appointed personal representative, even a creditor.  Nevertheless, there is a hierarchy under Michigan law specifying who the probate court should appoint as personal representative, and in what order.  The hierarchy is as follows:

  1. Person nominated in the will
  2. Surviving spouse, if he or she is a devisee under the will
  3. Other devisees of the decedent
  4. Surviving spouse, if not a devisee
  5. Creditors
  6. A State or County Public Administrator

A personal representative named in a valid will has top priority to be appointed, ranking even above family members.  If no heir or devisee petitions the probate court to be appointed personal representative within 42 days after the decedent’s death, a nominee of a creditor can be appointed as personal representative if the court finds the creditor nominee suitable.

2.         The personal representative will marshal all of the decedent’s assets.  Once appointed, the personal representative will collect the assets of the estate, including monies and debts owed to the decedent.  The personal representative will also secure all of the assets of the decedent, including all real property, and will obtain valuations and appraisals of the assets.   Finally, the personal representative will inventory all of the assets.

3.         The personal representative will pay the expenses of the estate.  The expenses include medical bills from the last illness, funeral expenses, amounts owed to creditors, unpaid charitable contributions, taxes, and the expenses of probate administration.

4.         Finally, the personal representative will distribute what is left of the estate assets to the estate beneficiaries, either according to the terms of the decedent’s will or, if there is no will, in accordance with Michigan’s law of intestate succession.

What is intestate succession? 

Intestate succession is the fall-back “estate plan” created for you by the State, if you have not created your own valid estate plan prior to your death.  Under intestate succession, who will be a beneficiary and will thus be entitled to receive a decedent’s estate assets, depends upon the relationship of the beneficiary to the decedent.

One clear example of the confusion over intestate succession occurs with married couples.  Under Michigan intestate succession laws, a spouse is only entitled to the entire intestate estate of his or her decedent spouse “if no descendant or parent of the decedent survives the decedent.”  MCL Section 700.2102.  Otherwise, there are various formulas specified by Michigan Codified Law to determine who is entitled to receive distributions, based upon the existence of surviving descendants and parents of the decedent.  This is only one example of the unfortunate misunderstanding of Michigan probate law.

Is there a way to avoid probate?

Yes, by creating a valid trust agreement.

How can a trust allow your estate and your heirs to avoid probate?  

Assets held by your trust, are not owned by you.  They are owned by the trust.  Therefore, when you die, your trust remains in existence although you do not.  Think of it like a family company.  It is a separate entity from you.  The actors in a trust are similar to those in a company:

Trust                                                  Corporation

Grantor                                             President

Trustee                                             Chief Operating Officer

Successor Trustees                         Chief Operating Officers-Elect

Beneficiaries                                    Shareholders

Assets of the trust                           Assets of the corporation

At your death, the trust survives you.  Your trust holds the assets.  Thus, probate is not required, because you do not hold the trust assets in your individual name at your death.

Why is avoiding probate beneficial?

Privacy.  Your trust and the assets of your trust do not become public record.  Your trust does not get filed with the probate court and notice of your estate is not published in the newspaper for all to see, unlike an estate governed by a mere will on intestate succession (where no will is in existence).

Cost effective.  Probating an estate, also known to as simply “probate,” is generally more costly than establishing and funding a trust.  The cost of establishing a trust depends upon the circumstances and goals of each client.  However typically, the fees and costs to create and establish a trust are far less than those involved in a contested probate matter.  In a probate matter there are filing fees, inventory fees, publication fees, etc.  With a proper trust, there will be no probate costs or fees.  You can also eliminate the need for an attorney, and hence attorney fees, in the administering of a trust, unless your trustee hires one to assist in administering the trust.  That differs greatly from a typical probate matter, which often involves the need for lawyers.

Quick transition.  There will be no interference from the probate court in the administering of the trust, and there is no requirement to keep the trust estate open for any length of time before distribution can occur.  On the other hand, probating an estate can take as little as 5 months, to as long as more than 5 years.

Protection from creditors.  In a probate estate, the personal representative must publish a notice to all creditors of the decedent and provide creditors with a period of 4 months to present their claims.  A copy of this notice must also be sent directly to all known or reasonably ascertainable creditors.  If a creditor does not file its claim within that 4 month period, its claim is barred.  But that means that the estate is open and vulnerable to claims for at least 4 months.  In addition, claims made against the estate, especially if made by family members or friends, often lead to litigation, and thus to more fees, costs, time and stress.  In contrast, a trust does not become open for creditors to make claims and its existence is not published.

Other benefits of using a trust:

Control.   As creator of the trust, you specify how you want the trust assets to be distributed, including to whom, in what amounts and when.

In addition, as grantor and creator of the trust, you can control when the beneficiaries of your trust will receive their distributions.  This can be important if any of your beneficiaries are minors.  You can specify in your trust that the assets to be passed to the minor beneficiaries shall remain in trust (and not be disbursed to the minor) until the minor reaches 25 years of age, or 30, or 60 (or whatever age you choose).  Disbursements can also be hinged on the minor attaining education if you so desire.

Further, depending on the type of trust you create, while you are alive and able, you control your trust, including the assets that go in and the assets that go out (assets that are spent).  If you name yourself as a trustee, although the assets are no longer yours individually, you as trustee have control of the trust assets while you are alive and able to act as trustee.

Limit joint ownership problems.  By using a trust, you are able to avoid potential problems and liability of joint ownership.  For example, with a joint bank account, each joint owner has access to the whole account, even though the funds in the account may have come from just one of the joint owners.  In addition, with a joint account, the funds in the account are open to attachment or garnishment by a creditor of one joint owner, as there is a legal presumption that one-half of the funds in the account are contributed by each owner and thus subject to garnishment.  Finally, to move, amend or change the account, all joint owners need to agree and sign-off on the change.  Thus, just as a practical matter, joint ownership can be time consuming and frustrating.

Tax benefits.  Trusts can be established in a multitude of ways to limit tax liability.  The type of trust created will depend upon the circumstances, amount of assets and long-term goals of the grantors who create the trust.  Examples of the different trust options available are A/B Trusts (or marital trusts and family trusts), ILIT (irrevocable life insurance trusts), and QTIP (qualified terminable interest property trusts).

Beginning January 1, 2011, the Federal estate tax exemption amount is now $5 million per person ($10 million per married couple).  Any amount above the exemption amount gets taxed at maximum 35%.  These amounts will remain in effect until January 1, 2013, at which time, unless Congress acts to modify them, they will revert to their pre-2002 amounts, being a mere exemption amount of $1 million per person, with any amount above the exemption amount to be taxed at a maximum of 55%.

Possible creditor protection while you are alive.  If a trust is created for the benefit of a third-party, thereby making the third-party a beneficiary of the trust, and the grantor retains no interest in the trust, creditors of the grantor of the trust cannot reach the trust assets unless the conveyance to the trust was done so fraudulently.  DAPT (domestic asset protection trusts) are an example of such a trust designed with a specific intention by the grantor to prevent future attachment and collection of trust assets by creditors of the grantor.

Creditor protection for your beneficiaries.  Creditors of your named beneficiaries cannot touch assets that are held in trust for your beneficiaries, unless that beneficiary controls the right to force distributions and compel payment.

What if you forget to put something into your trust?

If you have a proper will in place, often referred to as a “pour-over will” any remaining assets which you own individually upon your death, your personal representative is directed to pour-over any of these lingering assets into your trust automatically.

Will having a mere will alone allow my heirs and my estate to avoid probate?

No.  If you only have a will, the assets you leave behind are still yours and held in your individual name upon your death, and thus, are all subject to probate.  A will only becomes effective upon your death.  In contrast, a trust is effective while you are alive and continues through your death until final distribution of your assets.  Therefore, in order to avoid probate, a valid trust, properly funded, needs to be in effect at the time of your death.

Who can have a trust?

A trust is not only for the extremely wealthy.  Anyone can have a trust.  You do not need to have a specific amount of net-worth and assets before you can establish a trust.  There are many advantages to having a trust, as discussed above, which may coincide with your goals and expectations for your estate plan.

If you have any questions regarding probate avoidance or how you and your loved ones would benefit from a trust, please contact Attorney Galbavi to schedule a consultation.