Death and Taxes Blog

If you grew up in the 1980's like I did, you know that the question "Who's The Boss?" has a few possible answers: Angela, Tony, or maybe Mona.

But on a more serious note, the question of "Who's the boss?" in a probate or trust context is more difficult to answer. On the one hand, you have the fiduciary (trustee, executor, or administrator); on the other hand, the beneficiaries. If there's a conflict between the two, who wins? Does one always control?

Here's the difficulty: the relationship between fiduciary and beneficiary is not a straightforward one. A fiduciary does have title to property, and handles the administration of the estate or trust. Some fiduciaries think this means that they are "in charge," and they attempt to make beneficiaries feel like second-class citizens. This isn't right. While a fiduciary is in one sense "the boss," they are also required to follow the terms of the Will or trust, and also owe a number of duties to the beneficiaries.

To take an example: a trustee may have title to real estate, but the trustee might be required (under the terms of the trust instrument) to sell the real estate and distribute all or a portion of the net proceeds to the beneficiary. The trustee HAS to do this, or risks running afoul of the law.

That being said, the beneficiaries get the benefit from trust or estate property, but may not be authorized to interfere with the day-to-day administration. A typical Will or trust may allow a trustee to sell real estate without requiring beneficiary consent. (Of course, if the sale is done incorrectly for some reason, the beneficiary may have some legal recourse, via objecting in a court proceeding.)

In Illinois, you can avoid a probate proceeding so long as the assets you owned in your own name at your death (that is, assets OTHER THAN joint assets, assets with a beneficiary, or assets in trust) have a value of less than $100,000.

But what if you are over that amount, yet your only asset is Illinois real estate? Is there a way to transfer your house to your heirs or legatees without a probate? The answer is (surprisingly) "yes." You can do this by a process called "bond in lieu of probate," by which the heirs or legatees can transfer title to a buyer (maybe one of them, maybe a third party) via a valid deed. Basically, the process requires you to have:

1. Agreement by the heirs (and legatees, if any) to use this process; and

2. A title company that will agree to handle the transaction itself.

What are the concerns with transferring title to a decedent's real estate without a probate? The big one is creditors. Probate exists to transfer the decedent's property to his or her heirs (or, if there was a Will, to the legatees under the Will). But it also exists to allow creditors to be paid money they are owed by the decedent or his or her estate. If there's no probate, how are the claims paid? This is where the title company comes in to the picture. Here's Chicago-area attorney Cary A. Lind's take on the situation:

The title company is concerned about creditors claiming against the purchaser or other insured party because claims were not paid. In order to protect itself, the title company takes two different routes. First, it requires a personal undertaking from all distributees, whereby the distributees agree jointly and severally to indemnify the title company against all claims, fees, expenses, etc., from any claims which may be asserted against it. That is well and good, but what if a legatee skips town, blows the money, and is uncollectible? The title company's second requirement is a bond to insure its risk, thus the phrase "bond in lieu of Probate." The bond for Chicago Title Insurance Company is two percent of the value of the decedent's interest in the real estate during the first twelve months after death and one percent during the second twelve months. After two years, all claims are barred, so no bond is necessary.

I don't know if those rates are still applicable (Mr. Lind's article is from 2002), but let's assume they are, and we're talking about the transfer of a $500,000 house. In that case, the bond will be $10,000 (if the transaction is done in the first year after death). That's pretty expensive, I think, especially since the heirs are still required to sign a personal undertaking. I typically handle probate estates for far less than $10,000, and you get the probate "seal of approval" (disallowing claims once the claims period in probate has passed) thrown in for free.

Does this mean a "bond in lieu of probate" is always a bad idea? Not at all. I recently closed a transaction where dad died in 2005, leaving no Will and two heirs (son and daughter, who get along well). Son and daughter worked together in handling the property over the five years after dad's death, but then the two of them agreed that son would purchase daughter's interest. No bond was needed because the time for filing claims had passed, and the transaction was completed for much less than than the cost of a probate. (It happened pretty quickly to boot.)

A line in my baby book reads: "Joel is afraid of animals, clowns, and men with beards." That's still pretty much true; in other words, I'm not an animal lover (although I'm not as bad as this guy). But, obviously, I'm in the minority -- lots of Americans have pets that are a big part of their lives.

What happens to a deceased person's pets? Usually a family member or friend takes them in. But how are the pets provided for? For a long time, you couldn't create a trust for your pets because a trust must have a human beneficiary. How to get around that?

Enter the pet trust, and pet trust laws -- the Illinois law is here. What do you need to know/consider in setting up a pet trust? Two main things, really:

1. There are two people who are carrying out your wishes with respect to pets: a caretaker and a trustee. The division of labor is similar to guardianships for minors (where there's a guardian of the person and a guardian of the estate). The caretaker has physical possession of the pets, and the trustee invests the trust money and uses it for the benefit of the pets. You will of course want to name caretakers and trustees who can work together, since the caretaker may be requesting money from the trustee.

2. You have to name a clear contingent beneficiary, to inherit the trust property if (a) you die without owning pets, (b) your pets survive you but subsequently die, or (c) a court reduces the amount of the trust due to a determination that it "substantially exceeds the amount required for the intended use." (Note re. (c) -- this would probably happen if, for instance, you left $10 million for Dickens Thor Meow-Meow Face*, your cat.)

*This is the actual name my wife would give our cat if we owned one. Luckily, she's allergic to cats.

Robert S. Held has a nice article in this month's Illinois Bar Journal (registration required -- but it's here) regarding the doctrine of election. What is the doctrine of election? According to the author, it's a "common law doctrine... which prevents a beneficiary from accepting benefits under a will and then challenging that same document." So, if you're left $5,000 under your dad's Will (with the rest going to your ugly stepsisters), you can't accept the $5,000 and then contest the Will. It's an either/or proposition. Mr. Held also indicates that the doctrine probably applies to bequests under a trust as well as bequests under a Will.

Putting on my probate litigation hat, the above makes me think about new ways to deal with potential Will contests. Let's say you represent Son (who is left 99% of Mom's estate and who is her executor) -- Daughter is left only 1%, and may challenge the Will. Upon Mom's death, get in touch with Daughter ASAP and try to give her the 1% to which she's entitled. If she accepts, then you don't have to worry about a Will contest.

Dear Lenders,

Hey! Hope everything is going well.

I just wanted to write you about an issue that's arisen of late with some of my estate planning clients. These clients are finishing up their estate plans, and are also in the process of refinancing. (Very "on the ball" of them, don't you think?) In both of their cases, their mortgage brokers have told them NOT to transfer their residences into their new living trusts prior to refinancing. In fact, the lenders have said that, if they do re-title their residences in the name of their living trusts, they may lose their loan and not be able to refinance.

In the words of one of my favorite recent SNL skits, I have to ask, "what up with that?" I realize that you guys have been burned in the past, because you essentially made loans with no regard to the risks involved. You remember that, don't you? I know I do -- ah, the heady days of the early aughts. I recall the couple that bought their first house and walked away from the closing with $10,000, because they'd financed 105% of the value of their house. And the guy who got the $100,000 loan despite not having any job or income.

Yes, those were the days. I think we can all agree that you behaved like morons. And I understand the desire to impose some standards. I just don't understand the desire to impose THIS standard. As I'm sure you know (?), owning property in a revocable trust is just like owning property in your own name. There's no asset protection here. In addition, clients can bypass your ridiculous rules by refinancing and then transferring title into their living trusts. And as I talked about here, there's really nothing you can do about it.

You might counter by saying, "then why do you care about this rule -- all it does it postpone the transfer until the refi is complete." And you do have a point. But what if my clients die in the interim? Not likely, but it could happen -- if it does, then we have to have a probate, which is exactly what we were trying to avoid by setting up living trusts. And even if they don't die: why should my clients have to wait to start the re-titling process just because you don't understand anything about the law, or about risk?

Anywho, if you want to discuss, just let me know. I promise I won't even yell at you (very much) if you call.

Your pal,

Joel A. Schoenmeyer

To Kill A Mockingbird was originally published on July 11, 1960, so there has been a fair amount of hoopla surrounding its 50th anniversary. This has included (among other things) the publication of Scout, Atticus & Boo (an examination of the book's cultural and personal impact via interviews with a number of interesting, thoughtful people - and Tom Brokaw).

It's been a few years since I read the book, so I decided it was time for a revisit. (Another reason to revisit: I was thinking about whether it would be appropriate to read to my 8-year-old. It isn't.)

What is there to say about the book that hasn't already been said? Not much, but it is interesting to note that Atticus Finch -- in addition to practicing criminal law by defending Tom Robinson -- is an estate planner. The book alludes to this twice:

The family's friend Miss Maudie Atkinson remarks that Atticus "can make somebody's will so airtight can't anybody meddle with it." (Chapter 10)

The family's miserable neighbor Mrs. Henry Lafayette Dubose called Atticus to make her will just prior to her death. (Chapter 11) At the time she made the Will, Mrs. Dubose was a morphine addict (an addiction she broke prior to her death), which raises a couple of interesting inter-related questions:

1. Does a morphine addict have the necessary capacity to make a Will?

2. If you were to "climb into [Atticus's] skin and walk around in it," would you agree to draft a Will for her, given her addiction?

Twice in one day last week I encountered documents titled "Declaration of Trust Agreement." Let me explain why that title makes no sense, and then discuss a few more confusing sets of terms in estate planning and probate.

When you sign a document establishing a trust, you are doing it in one of two ways:

1. With a third party (a bank or trust company, or a friend or relative of yours) as the trustee. Basically, the document you are signing is an "agreement" between you (as grantor or creator of the trust) and the trustee. You agree to contribute property to the trust; the trustee agrees to handle the property as set forth in the agreement.

2. With yourself as the trustee as well as the grantor. In this case, we don't use the word "agreement" -- instead, we say you are making a "declaration of trust." You are declaring that you as trustee will hold certain property as set forth in the declaration.

Some other sets of terms that are confusing:

Living Trust vs. Declaration of Trust vs. Revocable Trust. These are really just different names for the same thing. You set up a trust with yourself as trustee. It applies during your lifetime (it's "living"). It's a declaration, as I described above (although you can do a living trust agreement, where a third party is the trustee during your lifetime -- but it's rare). And it's revocable (you can revoke it - or amend it - during your lifetime). Note that there are some types of trusts that you can't revoke (irrevocable trusts) -- these are set up for tax reasons, and are always trust agreements (the grantor is not the trustee).

Living Will vs. Will. A "Will" is where you give away property upon your death. A "living will" is a health care-related document -- it sets forth circumstances in which you want to be taken off life support.

Power of Attorney vs. Power of Appointment. A "power of attorney" is similar to a living will -- it's a document meant to apply if you become disabled and can't make decisions for yourself. In Illinois, there are two types of powers of attorney: for health care decisions, and for property decisions. In each case, you name an agent to make decisions on your behalf. A "power of appointment" is a power given to a beneficiary of a trust, enabling the beneficiary to give away (or appoint) his or her interest in the trust to someone else (sometimes a charity or another person).

Probate vs. Non-Probate. "Probate" is a court proceeding, to transfer certain property from a deceased person to his or her beneficiaries. What type of property is subject to probate? Property owned by a deceased person in his or her own name at death. That means "non-probate" property is everything else: property owned jointly with another person, property with a beneficiary designation, and property held in trust. Non-probate property passes outside of the probate process.

Heirs vs. Legatees. "Heirs" are a deceased person's closest relatives -- they are set forth in a long portion of the Illinois Probate Act. For instance, if I am married and have two kids, then my wife and kids are my heirs. If I'm unmarried and have no kids, my heirs would be my parents and siblings. "Legatees" are the beneficiaries I name under my Will. Note that heirs and legatees may not be the same thing, but they may have similar rights (like the right to contest your Will, and the right to get notice of probate proceedings) under Illinois law. If I am married and have two kids, and leave all of my property to my wife and kids, then they are my heirs and legatees. If I am married and have two kids, and leave all of my property to my mistress, then (a) I'm a very bad man, (b) my mistress is my legatee (but not my heir), and (c) my wife and kids are my heirs (but not my legatees).

Today's Wall Street Journal has an interesting article (here) entitled "Jackson Estate Steers to Next Crisis." There are a few points here, some of which relate to most probate estates and some of which are specific to Mr. Jackson's estate.

The rich and famous are just like everyone else in the sense that their bills have to be paid. Mr. Jackson had a LOT of outstanding obligations at the time of his death -- many of them large, but some of them relatively small (like an AT&T bill in the amount of $1,300). His co-executors are doing exactly what co-executors should do: use estate assets to pay off his debts (and to pay ongoing expenses of administration).

Here's an uncomfortable but true statement from the article: "Mr. Jackson's absence from the equation has eliminated the chaos and out-of-control spending that reigned during his life." Estate and trust administration appeals to me because it's very orderly. You have assets and you have bills -- you then use the assets to pay the bills. If the assets are insufficient to do so, there's even a mechanism (similar to bankruptcy) by which creditors are placed in order to get paid. The co-executors here are obviously operating on a much grander scale (at present, trying to figure out how to pay back or refinance a $300 million loan due at the end of this year), but the issue is pretty much the same one you'd see in more typical estates.

There certainly are new expenses caused by death (funeral expenses, expenses for lawyers and accountants, etc.), but those should be easy to get a handle on. The main problem with Mr. Jackson's finances was Mr. Jackson (or, more specifically, his inability to live on a budget). That problem died with Mr. Jackson. Also, my impression is that Mr. Jackson gave a LOT of money to various family members -- the co-executors certainly aren't going to continue that practice unless ordered to by a court (sorry, Tito).

One thing that isn't typical here: Mr. Jackson's co-executors "are aggressively managing Mr. Jackson's affairs as a going concern." That's as it should be, but it's fairly unprecedented. There was interest in Mr. Jackson's work before his death, and that interest has ballooned since his passing. The co-executors have a lot of experience in the music industry, and are in a great position to maximize the value of Mr. Jackson's assets. But I'll be curious to see how the estate is eventually wound up. Will the assets simply be turned over to a company run by or for the beneficiaries?

I just stumbled upon this short Vanity Fair article by Jamie Johnson. In it, Johnson (a filmmaker, and one of the Johnson & Johnson heirs) uses the movie The Art of the Steal (which I discussed here) as a jumping-off point to discuss (among other things) estate planning and probate attorneys.

His title - "The Art of Stealing from the Rich and Dead" - is pretty provocative. Here's a passage:

Examples of glaringly manipulative, and sometimes unlawful, interpretations of high-profile wills are surprisingly common among wealthy Americans. Contrary to what most people might believe, the rich routinely fail to draft effective trust agreements that faithfully carry out their dying wishes. In fact, power struggles over inherited wealth are so endemic in the culture of affluence that nearly all of the nation’s most profitable law firms maintain trust-and-estates divisions whose sole purpose is to handle such disputes—and reap the financial rewards.

Historically, the leaders of vastly rich families have gone so far as to reserve six percent of their fortunes for payments to long-suffering estate lawyers. Problems of this nature occur so regularly that attending to them becomes practically a permanent job.

Disagreements often result from trust and will documents that can never be specific enough. Products of a particular moment, such documents cannot anticipate future developments, so, while people and financial institutions grow and change, charters do not. Conflicts inevitably arise, and opportunities for manipulative, even illegal, behavior emerge.

Executors of wills and others entrusted with managing supposedly irrevocable trust agreements can seize the chance to alter events in their own favor.

I think Mr. Johnson makes some good points, both here and when he talks about the difficulties in controlling your bequests from "beyond the grave." But I would disagree with him about the most profitable law firms "maintain[ing] trust-and-estates divisions whose sole purpose is to handle [probate] disputes." I was an associate in the trusts and estates department at the firm now known as Sidley Austin LLP, and our department was both small, and not-at-all focused on trusts and estates litigation. There were something like 15 T&E attorneys in the Chicago office -- out of perhaps 300 attorneys total there -- and only two of us had much to do with litigation. To the extent that T&E departments are profitable (and I doubt they are, at least when compared to regular litigation and corporate departments - that's why T&E attorneys are greated like second-class citizens), it's mostly because of sophisticated (estate) tax planning work. That was really our department's bread and butter.

I've never heard of the 6% "rule," and it doesn't make much sense -- probate attorneys are generally paid out of the estate's assets, not from some segregated fund.

Mr. Johnson is touching on something when he mentions that documents can never be "specific enough." I remember hearing that one prominent Chicago probate litigator proudly stated he could find an ambiguity in ANY estate planning document. That's unfortunate. A lot of big-money disputes arise and continue because the players have the money to go forward. I now handle estates of all sizes, and in cases where there's not a lot of money, the parties often have to settle. They just can't afford their "day in court."

I like to think that estate planning and probate attorneys try our best to serve our clients. Maybe I'm being overly defensive here, but Mr. Johnson seems to be implying that the probate attorneys (rather than their clients) are driving the litigation. That hasn't been my experience. I think most probate litigators try to work out family disputes in an efficient manner, if at all possible. But we represent clients who often get very emotional about these issues. Probate is personal in a way that a lawsuit between, say, AT&T and Verizon wouldn't be. And there often are real problems that must be dealt with (like executors and trustees who act in illegal and/or unethical ways).

Article 8 of the Illinois Probate Act discusses how to contest the validity of a Will. Section 8-1 states that a Will can be contested by filing a petition "[w]ithin 6 months after the [Will's] admission to probate...." That's a bright line rule, and one that can cause problems for people who miss the deadline. A couple of recent cases discuss the ramifications of the rule, and whether there are exceptions:

1. Estate of Ellis. I blogged about the 1st District Court of Appeals's decision in this case back in 2008, here. The case subsequently went to the Illinois Supreme Court, which reversed the 1st District. In doing so, the Illinois Supreme Court (here) said that Shriners Hospital could go forward with their tort claim of "intentional interference with an expectancy of inheritance." A lot of the allegations in that type of tort claim are similar to the allegations you make when you seek to contest a Will (such as "undue influence"). The 1st District focused on that point, and said that the 6-month limitations period should apply.

Why did the Supreme Court disagree? I think it was due to the very sympathetic facts of the case. The Shriners Hospital is a charitable group, and they didn't file a Will contest within the 6-month period because they didn't know they had standing to do so (they didn't know they'd been named as beneficiaries under a prior Will of the decedent until 3 years after the decedent's death).

2. So, does the Supreme Court's above decision mean that potential litigants who miss the period for contesting a Will can always go forward with a tort claim of "intentional interference with an expectancy of inheritance"? Maybe not, if we consider the 2nd District's decision in the Fitch case (here). That case specifically rejects the plaintiff's attempt to invoke the Supreme Court's decision in Ellis, distinguishing between Ellis and the Fitch case as follows:

a. In Ellis, Shriners Hospital didn't know of its interest under the prior Will until after the 6-month period passed. In Fitch, the plaintiffs were immediately informed that the Will had been admitted to probate.

b. In Ellis, Shriners Hospital's claim had something to do with an issue other than the Will (in part, it related to transfers made by the decedent prior to death). In Fitch, the plaintiffs' claims are all based around the idea of undue influence leading to gifts in the decedent's Will and trust.

So what is the lesson to take away from these two cases? I think the main point is: act quickly. All too often I receive calls from clients who want to contest the Will of someone who died 2 or 5 or even 10 years ago. As more time passes, your chancees of winning your case (or even getting your day in court) diminish.

Here is the trailer for an upcoming romantic comedy called Life As We Know It, starring Katherine Heigl and Josh Duhamel.

So why am I posting this here? Because the film revolves around two single people who are drawn together when they are named as co-guardians of the daughter of their mutual friends. Since this is a romantic comedy: life lessons are learned, flirting takes place, poop is smeared on someone's face. Call me unromantic, but I want to make a few points about the trailer and how it relates to guardianships:

1. If you die unexpectedly, people should not be surprised to learn that they are named as guardians of your minor children. TALK TO POTENTIAL GUARDIANS. ASK THEIR PERMISSION. (People actually do say "no.")

2. You are not required to choose your children's godparents as their guardians.

3. It may not always be a good idea to name co-guardians. (One note: there are actually two types of guardians, the guardian of the person and the guardian of the estate. These are two different roles -- one has to do with acting as the parent, and the other has to do with managing the ward's finances. You can choose two different people for these two jobs, and that's fine, but the trailer suggests that the two main characters share both jobs.)

4. It is an especially bad idea to name two people with no connection to each other as co-guardians. These people have to work together, and if they don't know each other -- or have a combative relationship (due to a hi-larious first date gone awry) -- that can make things difficult.

5. Don't require your guardians to live in your house. They're already doing you a solid by taking care of your kid(s). Make it easy on them -- let them have access to estate/trust funds to minimize the impact. (Let them put an addition on their house if needed, or even help them buy a new, bigger house.)

So, to review:

-ask potential guardians in advance if they will take the job

-choose appropriate individuals

-think about how acting as guardians will affect the lives of the people you choose

Illinois's so-called "slayer" statute (section 2-6 of the Illinois Probate Act) states that "[a] person who intentionally and unjustifiably causes the death of another shall not receive any property, benefit, or other interest by reason of the death." This section is applicable to any interest the killer might have taken, so it applies to probate and non-probate property alike. (For instance, the killer couldn't take under the decedent's Will or as a beneficiary of the decedent's life insurance policy.)

The Fourth District Court of Appeals recently considered the slayer statute's application in a case (Dougherty v. Cole, Jr. -- here as a PDF) involving insanity. The facts are fairly simple: Jack had a manic episode and beat and stabbed his mother, Jane, to death. Jack was found not guilty of Jane's murder by reason of insanity.

May Jack inherit from Jane? He may not, according to the above decision. The slayer statute was amended in 1983 to focus on the two main points: "intentionally" and "unjustifiably." The Court does a nice job of reviewing the rationale behind the 1983 amendment, which was really an expansion of the statute. Its finding: criminal intent does not matter. Jack intended to kill Jane, knew she was his mother, and knew that he was killing her. It doesn't really matter that Jack did so because he was being told (by the voices in his head) that she was the enemy.