The Estate Settlement Process

It is the purpose of this document to lay out the basic elements involved in this frequently complex process that will, inevitably, affect us all at some point. As with many things, what seems simple is often not, and thoughtful attention to the options available together with the careful drafting of coordinated documents in an overall plan will insure your wishes and expectations are realized after your passing, placing as little burden on your heirs and beneficiaries as possible. The decisions you make in this process will have lasting and irreversible effects on your family and heirs, far beyond the label of simplicity that many people believe describes their own estate situation.

By reviewing and considering the basic elements and concepts detailed here you will be in a better, more knowledgeable position when consulting the professional of your choice to discuss the issues unique to your situation, and every situation is, in fact, unique. When it comes to these matters there is no “one size fits all” solution.

It is my sincere hope this discussion will demonstrate why careful planning is so critical, and consideration of these issues will promote constructive discussion among you, your family and your advisors.

While there is a good bit to read here, I sincerely believe it well worth the time and effort to educate yourself a bit before selecting an advisor to work with in formulating a new estate plan or reviewing an existing but perhaps outdated one.

It is very important to understand that the documents and provisions of any estate plan can be rendered ineffective or invalidated by changes in your personal circumstances and should be reviewed periodically to insure the continued efficacy of your plan.

• Specifically, this discussion will focus on the following elements.
• Explanation of the terminology of wills, trusts and estate settlement
• Clarification of the processes and alternatives involved in the planning and settlement of an estate
• Highlight the importance of a definite plan, and of carefully drafted documents
• Provoke thoughtful reflection on your own situation

Important Points To Consider At The Outset

If you own property when you die there will be some form of administration process. The legal requirements dictating the form this administration takes will depend upon the plan evidenced by the testamentary documents and arrangements you made or did not make, as the case may be, during your lifetime. This process might range from simple re-registration of assets into the names of your successors to the imposition of formal probate proceedings administered by the court. Whatever form this process takes the goal is the same: to efficiently settle any disputes, claims or other obligations affecting your assets and to insure the effective transfer of all assets in accordance with your wishes. No single form of estate administration can be equally effective in every situation.

An important term in all this is the testamentary document. This is a formal writing serving the purpose of instructing how you wish your assets to be distributed and your loved ones cared for (or punished) upon your death. Strict construction of testamentary documents is the rule in all administration proceedings. If any questions arise, the precise language of the instruments is extremely important. As any ambiguity or error can have significant and unforeseen impact, the skill and care of the drafter should not be overlooked as a factor in your decisions regarding estate planning.

Intestacy is the state of dying without a will or other written testamentary documentation. If you die without such documentation the State of Oregon has written a will for you and disposition of your property will be dictated by the court, applying the laws of intestacy, regardless of your wishes or intent. The rules for this disposition can become very complex, particularly in the case of families combined through second marriage or split by separation or divorce.

We will now consider the key elements of the administrate process: wills, probate, and trusts.

Wills

A will is the most common form of testamentary document. A will is valid in Oregon if it was executed in conformance with the laws of the state where it was written and executed, at the time it was executed.

Formalities in the execution of a will are critical to establishing validity of the document. Testamentary capacity of the persons making the will, that is the ability to understand the content, intent and impact of the document, must be demonstrated and properly witnessed at the time the will is executed. A will is not complete until all the formalities are complete.

Holographic (hand written) wills made in Oregon do not meet the legal requirements for validity in Oregon.

Out of state wills are acceptable in Oregon if they were validly executed and meet the requirements of the originating state law. The local law of the state where the will was executed will determine the meaning and legal effect of disposition unless that law is contrary to Oregon public policy.

The legal effect in disposition of property by a will is determined by the intent as expressed by the language in the will. Only in the event of ambiguity will the court interpret what it thinks you really meant. Again, the importance of competent drafting cannot be over emphasized.

Any subsequent changes in the terms of a will through revocation or alteration must meet very specific requirements to avoid any possibility of ambiguity or malfeasance.

Probate

Probate is the most common form of estate administration and perhaps the most misunderstood. Probate is simply a court supervised legal procedure by which an estate is settled and the decedent’s property distribution is finalized. Probate is not always necessary, appropriate, or desirable but neither is it always to be avoided. Again, every case is unique.

Contrary to popular belief, the necessity for probate is not determined by the existence or non-existence of a will. Also, employment of a trust document is no guarantee that probate will not be necessary.

A key definition here is that of “probate property.” In Oregon, whether property is “probate” or “non-probate” is an important distinction. The difference lies in the nature of the ownership, not the type of property. In general, probate property is any asset a decedent owned in his or her sole name at death, for example an automobile titled only in your name or a bank account with only you as a signatory. Probate will be required to deal with any such property, whether covered by a will or not.

Non-probate property, on the other hand, is not subject to the jurisdiction of the court. Examples of non-probate property include bank accounts or other property held jointly with another person by right of survivorship. Also property such as IRA accounts with defined beneficiaries, life insurance proceeds, and other payable on death accounts. These will pass automatically to the other owner or named beneficiary upon your death. Property held in trust is also considered non-probate property, but more on that later.

Probate will always be necessary in the following circumstances.

• To determine and supervise distribution of probate property under the terms of a will or according to the laws of intestate succession
• To enable a personal representative to sue to collect any debts owed to the decedent
• To render marketable title to property such as land, stocks and bonds, or large bank account held in the decedent’s name alone
• To settle conflicting claims among persons asserting entitlement to the decedent’s assets
• To resolve challenges to the validity of a will, such as will or trust contests

Probate is essentially an accounting exercise during which property is inventoried, appraised, and valued; taxes owed are determined and paid and claims by and against the estate are brought, considered and settled. This process is accomplished through a series of filings with the court over a period ranging from six months to two years.

Costs incurred in the probate process include professional fees such as attorney and accounting fees, court filing fees, publication of public notices, recording fees for property titles, and miscellaneous expenses such as postage, copying and travel expenses.

One benefit of the probate process is that court supervision protects both the creditors and beneficiaries of an estate and, at the end, all issues will have been resolved when the estate is settled.

A key person in the handling of all probate matters is the personal representative. A requirement of the probate process, this is typically a relative or close personal friend, usually named in the will. If there is no will, the court usually appoints such a person but if there is no one ready, able, and willing to serve, the court may appoint “any person” to serve; banks and trust companies sometimes serve in this capacity as part of their institutional trustee business.

The duties of your personal representative are specific and can be quite demanding so selection of this person must be carefully considered and should involve the clearly understood commitment of the individual.

Trusts

A trust is a separate legal entity created to serve as a repository for property. To create a trust, a person (the grantor) transfer title to property and other assets to the trust in the name of a trustee, to be administered under the terms of the trust. Because the property is then legally “owned” by the trust rather than the grantor, upon the grantor’s death it is by definition non-probate property. Thus, barring contests or conflicts, trust property is not subject to the supervision of the probate court.

There are a great many types of trusts utilized for specific purposes and describing all of them is beyond the scope of this document. Presented here are the two types most common in the handling of estate planning: the Testamentary Trust and the Revocable Living Trust (RLT).

A Testamentary Trust is created by a will, whereby all or part of an estate is left to the trustee of a trust with specific provision detailed in a trust document. The trust is funded by the devise under the will to the trustee, and disposition of the property is accomplished under the terms of the trust.

A testamentary trust has some of the advantages of a revocable living trust but suffers a major disadvantage in the loss of flexibility, since by its terms it is irrevocable.

A Revocable Living Trust is perhaps the most popular estate planning device, often serving as your “alter-ego” for estate matters. Because it is revocable during your lifetime it may be amended in accordance with its terms and that power to amend or revoke is not affected by your incapacity should such power be vested in an agent or attorney in fact. The RLT becomes irrevocable upon your death.

Uses and advantages of the Revocable Living Trust:

Asset Management

• The RLT provides a great tool for asset management
• If so inclined, you can serve as the initial trustee
• Successor trustees can be named to assume those fiduciary duties upon your incapacity or death

Will Substitute

• The RLT can provide for distribution of the trust assets upon your death
• The trust instrument that provides for the ultimate distribution of the assets does not become a public record of the probate court, thus protecting privacy

Probate Avoidance

• Avoidance of court-supervised probate is a common reason for adopting a revocable living trust

Reasons for choosing a trust mechanism for administration of estate distribution are as follows.

In some cases the expense of administering a probated estate will be greater than the costs of trust administration but some fees will remain even in a trust administration. Also, since the probate court is usually not involved in the trust administration the role of an attorney may be reduced.

There should be a significant reduction in the time required to distribute assets after death. The probate process requires a four month creditor claim period to pass before distribution of the estate assets and prior court approval of any distribution is required. No such requirements exist for trusts, although a trustee may use a comparable notice period and process. Also, since the court will not be a party to the process, time will likely be saved.

Because the plan of distribution is not made a part of a public court record privacy is maintained, although mandatory disclosure from the trustee to the beneficiaries is required once the trust becomes irrevocable.

Disadvantages of a Revocable Living Trust:

The RLT is generally more complicated and expensive than a will to create and manage. Assets must be re-titled in the name of the trustee at the time the trust is created, and as additional assets are subsequently acquired. Such transfers usually result in costly recording and other fees. If all assets are not properly transferred into the trust, some of the omitted property may yet be subject to probate.

Legal and accounting assistance will be required in the future. Professional fees and administrative expenses will still be incurred for the usual tasks of estate administration, such as collection and valuation of assets, payment of decedent’s liabilities, preparation and filing of various tax returns, and actual distribution of the trust assets according to the terms of the trust.

Frustrations and aggravations associated with probate may still arise. Expenditures of significant time, energy and money may be needed to deal with hard-to-value assets, squabbling relatives, and tax reporting requirements.

Affiliated Estate Planning Documents

A “pour over will” can provide a safety net. As a safeguard against omission from or failure to properly transfer assets to the trust you should execute a will, simultaneous with the creation of the RLT, directing that any probate property be distributed to the trustee who can then distribute that property in accordance with that instrument. Ideally this will is not then admitted to probate because there are no assets remaining outside the trust subject to the probate court’s jurisdiction.

A Durable Power of Attorney that remains effective in the event of the incapacity of the principal, or that becomes effective upon the incapacity of the principal, depending upon the language of the delegation.

An Advance Health Care Directive is often prepared at the same time as estate planning documents to specify the types of life-saving measures you wish to have taken in the event you are incapacitated and cannot make your wishes knows directly.

A Certification of Trust is required for assets to be transferred into a trust in order to provide proof of the existence of the trust for the bank, brokerage house, financial institution or corporation. This avoids having to provide a copy of the entire trust instrument, with the attendant violation of your privacy.

Various Transfer Documents must be prepared and submitted such as quitclaim deeds in the case of real property, or endorsed stock certificates in the case of securities.

Consideration In Choosing Among Estate Plan Alternatives

• Do you have the inclination and ability to manage and administer a trust instrument? If you are doing some thinking for an elderly friend or relative, you must also ask if that person has the capacity to create, manage, and administer a trust instrument.
• Do you have assets that would be subject to the probate process, e.g., probate property? Can those assets be designated to pass at death by a simple “transfer on death” designation or revision of present ownership? It is important to recognize that non-probate property, such as real property held as joint tenants during a marriage, will become probate property upon the death of the first spouse, and to plan for that eventuality.
• Do you need or want asset management, such that features and flexibility of a trust make sense for you? This is also an element to consider if you are involved in planning the estate of an elderly parent or friend. The asset management features of a trust can be conducted by either an individual trustee or an institutional trustee.
• Will you want to divide your assets between yourself and your spouse to achieve tax savings? A living trust can create a testamentary trust (often called a “credit shelter” trust) to reduce estate and inheritance taxes for married couples. The credit shelter trust is usually funded with the separate property of the first deceased spouse. This device can be incorporated either into planning with wills or a trust; the RLT has the additional advantage of avoiding probate at each spouse’s death.
• What is the current cost-benefit analysis? This is determined by estimating the projected cost of probating the estate, versus the cost of a living trust, including the asset transfer costs and maintenance duties. Will a revocable trust reduce administration expenses at the time of death?
• Are you motivated to take on some of the complexities of asset distribution yourself now to simplify distribution at your death, by setting up, funding, and managing a living trust—Or, by delegating the necessary tasks under a carefully drafted durable power of attorney?
• Are there reasons why your estate may need court-involvement? Such reasons include: anticipated disputes among heirs (the probate process is the most effective means to resolve these disputes because of the finality and imprimatur of the court); need to perfect chain of title to real property, securities, or other valuable personal assets (the legitimacy of the successor is paramount to future marketability, and can sometimes only be confirmed by the probate court); high-value estates increase the likelihood that court supervision may be a good idea.
• How important is maximizing privacy in the distribution of your assets to you and your family?
• Do you appreciate and understand the tasks that will be required to fund a trust properly during your lifetime in order to avoid probate?

Where to Start

As you can now see there really are many variables involved in the estate planning and settlement process. There are many options on how to create and implement as estate plan that makes sense for you and your descendants, be they family, friends, charities, institutions or a combination.

Here is a simple but sometimes daunting task that can get you started or help you implement a review of your current plan.

• Make a complete listing of the assets you own and their approximate value, together with account numbers and the location of the documents representing those assets. Take a moment to reflect upon what the aggregate includes.
• List each of the important persons or entities, such as colleges or charitable groups, in your life whom you would want to benefit from your estate, as well as any specific gifts you would want to make.
• Give all this information real thought and add to it and review it over a period of days or a couple of weeks.

With this exercise in mind, you and your advisors can begin to look at the options for your consideration and planning.

And most important, GET IT DONE. Procrastination on these matters is a common source of difficulty when you are facing other serious problems during emotionally trying times.