Reasons For Probate

When is Probate Required?

There can be many reasons why a probate proceeding is opened up after death, even if all of your assets were placed into your revocable trust. For example, people you owe money to may need to file a statement of claim or a creditor’s claim, to assert their rights and get paid. Did you sign a prenup with your last spouse and promise to give him or her something? That surviving spouse or widow, then, is a creditor of your estate and is most likely going to file a statement of claim, if your trustee doesn’t pay him or her right away.

Beyond paying your debts or satisfying your creditors, an estate proceeding or a probate proceeding may need to be “opened up” for other reasons. Assets which may have been forgotten about, were not transferred to the trust, or which have a cloud on the titles may require a court order or some other judgment, so that the titles are clear. This is common with interests in private investments and real estate.

There may also be ongoing legal disputes and litigation which you’re involved with during your life, which now must involve your estate. You – and now your estate – may or may not want to, or need to, assert certain rights or property interests.

To deal with these issues, your estate generally needs to be “opened up” by the filing of a petition with the probate court. This will permit the probate court judge to issue an order or other ruling appointing someone – an executor or personal representative – to administer the estate. The court will also grant authority to this fiduciary, to act for your estate.

So, while a revocable trust can provide for inheritances for your loved ones, and can manage your property during life or at your passing, trusts don’t necessarily mean you won’t need a probate proceeding when you pass.

There are two other mistakes I see people make about trusts. One is assuming they’re easy enough to manage that your spouse, kid, or other loved one can do it. Being a trustee is serious business. Having a trust or administering a trust requires an understanding of how a trust is actually administered – which is so much more than simply investing some money.

It’s definitely not the same as investing money with your broker. “Running” a trust requires a knowledge and appreciation of fiduciary principles of administration, beneficiary rights, and investing. A trustee needs to know what the trust terms are, and what they mean. The trustee needs to determine what to do when asked for trust money by a beneficiary – hint: you can’t “just say no.” A trustee also needs to know how to invest under the prudent investor rule, which requires that the trustee have an investment strategy, not just some haphazard assembly of stocks and bonds. Trustees also need to understand their fiduciary duties and provide accountings, relevant information, and also file tax returns on an annual basis.

The dirty secret is that most family members have neither the time nor the experience to run a trust. Even though most want the power and authority of being trustee, this is actually a job that’s often best left to the professionals. Most of you won’t understand this until you’re serving as a trustee, and a beneficiary family member sues you seeking damages and a new trustee.

A recurring mistake that we see in our trust litigation law practice is that the estate planning lawyer –who sets up these trusts and convinces you to have a trust in the first place – will fail to completely and adequately explain what a trustee is getting into.

You may, for example, want your spouse to be your trustee when you’re dead, but – who’s really advising her or him about their duties and obligations as a trustee? This includes advice about such things as providing relevant information and accountings.

Sure – you can hire accountants to file annual income tax returns for the trust – it’s just a Form 1041. But, the trustee needs to insure that there’s enough cash in the account to pay the advisors and those taxes.

Sure, you can hire a bank or trust company or money manager to invest the trust funds: this is probably a great idea. Still, trustees must understand how to invest prudently, and how to manage those money managers – which is a lot more than hiring your son-in-law who is a broker or investing 50/50 in stocks and bonds.

Pankauski’s Bottom Line: trusts are like pets: they can be great, but they require attention, competent people overseeing them and they are not perfect. Knowing what you’re getting yourself into is a must, or you just might just get a bite in the ass.