Trusts and Estates
September 2002 Vol. 49, No. 1
Statements or expressions of opinion or comments appearing herein are those of the editors or contributors, and not necessarily those of the association or section.
(Notice to librarians: The following issues were published in Volume 48 of this newsletter during the fiscal year ending June 30, 2002: November, No. 1; December, No. 2; April, No. 3; June, No. 4.)
Contents
Our feature article is from Jane Hartley Pratt, in which she provides a practical review of alternatives to traditional estate administration. In addition, Paul Meints gives us some drafting tips as to post-mortem pet care.
A review of recent cases includes:
* Rejection of the survival of a claim similar to periodic maintenance;
* Following the ERISA standard of substantial compliance in an attempted change of life insurance beneficiary; and
* Upholding the constitutionality of a statutory custodial claim under 18-1.1 of the Probate Act.
We also include some practice pointers on FDIC insurance and certain IRS filing requirements.
We encourage our readers to submit material for publication. It would be helpful to send both a hard copy and a computer disk containing your article (Microsoft Word preferred, but not required) to either Mark Zumdahl (815) 625-8200 or Jim Say (815) 625-0726.
Alternatives in administering a decedent's assets
By Jane Hartley Pratt
Why alternatives?
Traditional estate administration includes either administration fully supervised by the court or the minimally supervised "independent administration." Under selective facts, an estate may not require all the steps of traditional court administration but may include property requiring a release of decedent's interest or transfer of ownership. Usually these are estates in which the decedent retained assets of only nominal value.
A decedent's estate consisting primarily of untitled personal property, such as household goods and furnishings, may include some titled assets requiring transfer of title. For legal or practical reasons, appropriate estate planning may intentionally leave certain property or types of property titled to the decedent. An asset may have been overlooked in planning.
If the decedent's estate plan consisted of titling assets in joint tenancy with right of survivorship or as payable on death accounts, an asset may have been either missed or intentionally omitted from that joint ownership or POD accounts. Proliferation of grantor trusts generates more estates with nominal assets that were either missed or intentionally omitted in funding that trust.
Occasionally a property interest acquired or discovered after death, such as an inheritance or a lottery winning, can create a need for transfer of ownership to decedent's heirs or beneficiaries.
In evaluating possible use of an alternative procedure, important practical considerations include: value and type of assets; number of heirs or beneficiaries; reliable knowledge by a capable survivor as to decedent's assets and debts; assets sufficient to pay outstanding debts and claims; no disputed claims; and available, cooperative and legally competent heirs or beneficiaries.
Summary administration
Summary Administration is an alternative allowing for an expedited court procedure. (755 ILCS 5/9-8) Assets can include both real and personal property, but the gross estate must not exceed $50,000.
Heirship is formally determined, and a Will can be admitted. A surviving spouse's or child's award can be granted. There must be no tax due and no unpaid claim. Heirs and legatees must consent to the procedure, and distributees must provide a bond before receiving a distribution. Publication must be made.
Upon being presented proof publication along with the required consents and bonds, the court may, among other things, excuse issuance of or revoke Letters and direct distribution. By abbreviating the administration process, this can minimize document preparation and shorten the period before distribution.
In considering this alternative, debts and potential claims as well as number of heirs or legatees are particularly important considerations. Cooperation by all heirs or beneficiaries is essential.
Admission of will
If the objective is simply establishing the right of a beneficiary to take property under a Will, the Will can be admitted and issuance of Letters excused. (755 ILCS 5/6-8). No further probate proceedings are required.
This procedure has no monetary limitation and would apply to both real and personal property, but it should be used very cautiously where assets passing under that Will are of substantial value. Without issuance of Letters and use of full claims notification procedures, the decedent's assets have no early protection against unknown debts or claims. The beneficiary is vulnerable to loss of those assets for at least a full two year period unless the required court administration claims notice requirements have been implemented to cut off claims exposure. (755 ILCS 5/18-12 (b)).
This alternative can create special issues as to merchantability of title to any real estate. Title insurance may be a solution as to that merchantability, depending on value of that real estate and cooperation of heirs or devisees.
Under appropriate facts, a Small Estate Affidavit could be used for transfer of personal property after establishing, by admission of the Will, the right of the beneficiary to take property.
Accurate knowledge of the decedent's financial facts, including potential liabilities, is critical. Consideration of whether there are, or could be, outstanding debts of decedent or claims against estate assets is pivotal. Multiple claims or an uncooperative heir or beneficiary would make this alternative impractical.
Small estate affidavit
A Small Estate Affidavit is an alternative for transfer of personal property. (755 ILCS 5/25-1 et seq). It is available for an estate with personal property not exceeding $50,000.
Bank accounts can be transferred using this Affidavit. Based on the Affidavit, funeral expenses can be paid directly from that account as can surviving spouse's and child's awards. Distribution of any remaining assets is made as set forth in that Affidavit.
Many brokers or stock transfer agents accept this Affidavit for transfer of equities. Additional documentation, such as death certificate or indemnification forms, will be required as instructed by the brokerage firm or transfer agent. In dealing directly with a transfer agent, it may be necessary to ask for a supervisor in order to reach someone who understands how to go beyond the agent's usual check list for documents required when there is a deceased equity holder.
A special form of the Affidavit, applicable for Illinois vehicle transfers, is available from the Illinois Secretary of State.
The Illinois Department of Public Aid may be cooperative in releasing any claim against decedent's personal property if that Affidavit establishes that the estate includes no real estate and that claims above 6th Class claims (755 ILCS 5/18-10) exceed the value of the estate assets.
Knowledge of decedent's financial facts by a competent survivor plus assets sufficient to pay claims and debts are particularly relevant in considering use of a Small Estate Affidavit. A large number of debts or claims, a disputed claim or too numerous heirs or beneficiaries can make this alternative impractical.
Although this Affidavit applies only to personal property, under appropriate facts it can be used in conjunction with title insurance to effect the transfer of a merchantable real estate title.
Title insurance
A small tract of real estate or a modest residence or a platted lot may be the only titled asset of the decedent. If the real estate value is nominal, a title insurance company frequently will cooperate in working out a way to insure the title and thus allow transfer of merchantable title without the necessity of any court proceeding.
The title insurance company will specify what verifying, supporting documentation it will require. An indemnification bond from the heirs or beneficiaries is a common requirement. Some title companies can be more receptive to issuing such coverage than others in any particular fact situation.
Knowledge of the decedent's debts is important as is cooperation of heirs or beneficiaries in considering use of this method to facilitate transfer of merchantable title to real estate.
Informing heirs and beneficiaries
None of these alternatives protects the heir or beneficiary to the same extent as does traditional administration. In considering any alternative procedure, it is important that the potentially affected parties are informed of the specific legal and financial responsibilities and liabilities each could be assuming. This responsibility or liability can range from signing consents or indemnification bonds to losing that inheritance because of unknown debts or of unexpected claims against the decedent's estate. The most obvious risk arises from not utilizing the traditional court administration to deal with claims.
Because even the most honest and non-litigious heir or beneficiary hears, understands and remembers a verbal explanation from that listener's personal frame of reference, these legal and financial responsibilities should also be presented in writing. Each person affected then has the opportunity to review this information, either independently or with counsel, as deemed appropriate. Because of the potential conflict of interest in giving legal advice both to the estate and to the heirs or beneficiaries, it is prudent for the estate's attorney to recommend and encourage each heir or beneficiary to consult with his or her personal attorney prior to any decision being made to utilize one or more of the available alternatives.
Conclusion
Traditional court administration of a decedent's estate remains the customary procedure for identifying assets, debts and claims; determining values; paying debts and expenses; resolving claims; establishing heirship or beneficiaries; and providing orderly transition of assets. However, use of an alternative procedure can be reasonable and proper if tailored to the facts of the particular decedent's case. There are many specific fact situations in which simpler procedures can accomplish a comparable result more efficiently and economically for the decedent's heirs, beneficiaries or creditors and allow them to "avoid probate."
By Paul A. Meints, Esq., CLU, ChFC
To many of your clients, pets are an important part of life. The level of emotional involvement (generally directly proportional to the amount of money the client is willing to spend on the pet's care) tends to vary from client to client. People in rural areas of the state often have different beliefs than a person raised in an urban environment. Couples without children tend to have a greater concern about their pets than those with an extensive extended family.
Quite often the issue of post-death care of pets is not raised during the estate planning meeting. When discussed, typically the issue is raised by the clients. Frequently a fair amount of discussion results from just asking-- "do you have any special pets or animals that you have special wishes for?" The following drafting suggestions represent different directions the answer to this question can take.
Pet care alternatives:
(1) I request that each pet be put to sleep by a qualified veterinarian in a professional and dignified manner. I do not request cremation.
or
(2) I leave my faithful dog, Casey, to My Brother, John Doe, together with the sum of $5,000 to be used to defray the costs of my dog's care for the remainder of Casey's life. If My Dog should die within one year of my death then I request that the balance of the remaining funds be left to the McLean County Humane Shelter. If my dog should die after one year, then any remaining funds shall be retained by My Brother as appreciation for his care and services.
or
(3) I leave each animal I own at the date of my death to My Brother, John Doe, together with a sum of money for each equal to (i) $2,000 per each year of estimated life expectancy for each dog and (ii) $1,000 per each year of estimated life expectancy for each cat, the calculated sum then being increased by twenty percent to provide a contingency fund and reserve for unforeseeable circumstances.
or
(4) I direct the Trustee of My Family's Trust to pay the care provider for my dog, Casey, a sum of money periodically which provides adequately for the care of my dog. These payments shall include, but not be limited to, boarding, feeding of premium pet food, and veterinary care.
or
(5) To the Pet Care Trust that is created in Article 10, I leave the sum of money equal to the lesser of (i) Fifty percent of the Net Estate or (ii) $250,000 [alternatively an amount determined to be appropriate as an endowment according to paragraph 10.1].
. . .
Article 10 Pet Care Trust
10.1 Creation of Pet Trust. My Trustee shall set aside an amount of the Trust Estate sufficient to generate an income for the lifetime care and maintenance of all animals I owned or cared for at the time of my death, plus the life of any offspring of such animals in gestation at the time of my death (hereafter, "my animals"). My Trustee shall set the amount of this fund no later than one (1) year after my death and is further authorized to add a reserve for unforeseeable circumstances. This endowment fund shall be designated and hereafter referred to as "My Pet Trust."
10.2 Distribution of Remaining Trust Estate. After setting aside an amount of property according to paragraph 10.1, my Trustee shall distribute the balance of My Trust Estate according to the provisions of Article 11. Such funds shall not be distributed with my Trustee receiving a written release and waiver of any claims or challenges that they may wish to pursue concerning the validity of My Pet Trust. Under no circumstances shall my Trustee distribute property to any person or entity which refuses to sign such release and waiver.
10.3 Caretaker Appointment. I designate and appoint John Doe of Farmer's City, Illinois as the caretaker of my residence and animals. He is further designated as the person entitled to enforce the intended use of the principal or income of My Pet Trust. If John Doe fails or ceases to act as caretaker for any reason, I appoint Jack Smith of Bloomington, Illinois as successor caretaker.
10.4 Rights of Caretaker. My caretaker shall own my animals, shall use kind care and judgment for each, and is further permitted to live in my home rent-free for as long as he serves as caretaker of my animals. My caretaker shall pay for his own personal living expenses, including but not limited to all utilities and other services not exclusively required by my animals. My caretaker is responsible for routine repairs and maintenance on my home. In the event a disagreement arises between my Caretaker and my Trustee then the determination and decision made by my Trustee is conclusive and final. I direct that my Caretaker and my Trustee exercise open communication by and between one another, further requesting periodic visits by my Trustee to the location where my animals are being cared for.
10.5 Distributions of Principal and Income. My Trustee may distribute funds to my Caretaker or to or for the benefit of my animals' care and welfare as my Trustee determines to be appropriate, necessary, or advisable for the care of my animals. The extent and nature of care provided shall be measured by my animals' standard of living at my death. My Trustee shall apply trust income and principal as my trustee determines to be necessary or advisable for maintaining my residence in a condition that is saleable and substantially similar in condition of my residence at the time of my death. My Trustee shall pay for taxes, insurance, upkeep, and any other expense for the reasonable care of the residence necessary to provide housing for my animals and their caretaker and to carry out the other purposes of this trust. The cost of enforcing this Pet Trust shall first come from other trusts which may then exist and which were created by reason of my death. My Trustee is further authorized to use income and principal for the payment of any legal expenses associated with this Trust and the activities that are associated with its implementation. Any income which is not distributed shall be added to principal.
10.6 Termination of My Pet Trust. My Pet Trust shall end when (i) my last appointed successor caretaker resigns or fails to serve as caretaker for any reason, (ii) my animals have died, or (iii) my last appointed successor caretaker gives written notice of his intention to vacate my home.
10.7 Option to Purchase Residence. If continued care and attention has been given to each of the animals, then at the surviving animal's death, my Caretaker can purchase the residence for (i) its fair market value reduced by (ii) two percent for each year he has provided care for my animals. This Option to Purchase shall occur within ninety days of the written notice of termination being given by my Trustee to my Caretaker.
10.8 Continued Trust and Substitute Care Provider. If my Caretaker moves from my Residence then my Trustee is authorized to continue the terms of the Trust by finding a suitable person(s) to provide continuing love and care for my animals.
10.9 Trust Termination and Distribution of Remaining Trust Estate. When the Trust no longer exists, my Trustee shall distribute the remaining funds and trust estate in the following manner: (i) one share to my then living nieces and nephews, per stirpes and (ii) one share to a charitable organization or organizations reasonably approximating my beliefs at the time of my death.
By James K. Say
Estates-marital settlement agreements-survival of claims
In re Estate of John R. Lundahl, Docket No. 2-01-0508, 2002 Ill. App. ___, July, 2002. A claimant to the estate, Elizabeth Gabel, had pursued payment arising from a 1990 agreed order. The order annulled a purported marriage of Gabel to John Lundahl, and an agreement among the parties as a result of the litigation required Lundahl to pay $1,700 a month to Gabel "for the balance of her natural life." At the time of the order, John Lundahl was disabled, and the agreement was entered into by his guardian. Subsequent to the order, Lundahl's guardian made the monthly payments to Gabel. Lundahl died on June 12, 2000. His estate argued that the contract to pay Gabel ended with Lundahl's death. Gabel sued for the payments to continue for the rest of her life, and she obtained a judgment in the Circuit Court that her right to monthly payments survived the death of Lundahl. The independent executor of the estate of John Lundahl appealed.