WHAT IS PROBATE?

Probate generally refers to the process of disposing of property upon the owner's death. The estate administration process will be discussed in greater detail below, but first some basic facts regarding probate:

Probate procedures are creatures of state law. Therefore, each state has a different procedure. It is not safe or accurate (but it is extremely common) to generalize about the probate process based on the experiences of one state's procedures. Some states (for example, California) have quite cumbersome probate procedures. As a consequence, trusts are popular in California to avoid delay and expense. Other states (for example, New York) have more cumbersome trust administration procedures. Uniform Probate Code states--such as Montana--have very informal and flexible probate procedures.

Common Misconceptions--six common fallacies about probate (at least in Montana):

• Safe deposit boxes are not "frozen" at death.

• Bank accounts are not "frozen" at death.

• Court approval is not needed to buy or sell stocks, real property or anything else.

• There is no restriction against paying bills or dealing in any fashion with the deceased person's property, and no court approval has to be received first.

• Estates can be officially closed in 6 months, but property can be distributed from them to beneficiaries at any time before then if so desired.

• Attorney's fees do not run between 10% to 15% of the estate. These figures are often given, but never seen in practice. They are limited by statute in Montana to a general maximum of 3%--but, in practice, for planned estates, are frequently less than 3%.


TRUST AND ESTATE ADMINISTRATION

Upon the death of any individual, certain administrative details must be completed. This is true whether the decedent made his plan by way of a Will, a Trust, by Montana's laws of intestate succession, or by way of any of the other tools available. In all cases, someone (whether that might be a Personal Representative, Trustee, Surviving Joint Tenant.....) must take steps to safeguard the decedent's property, ascertain and pay the decedent's bills, prepare an inventory of what the decedent owned as of date of death and its value, file death tax returns (where required), pay whatever taxes are due and ultimately distribute the property to the proper beneficiaries.

Church, Harris, Johnson & Williams, P.C. has an entire department devoted to trust and estate administration, with a staff of para-legals who work full time assisting in the administration of trusts and estates and with a complete schedule of deadlines, elections and other matters that must be attended to during the process.

To provide an overview of this process, the general estate administration steps are outlined below. With variations, much the same process is followed for the administration of trusts as well.

1. NOTICE TO AND PAYMENT OF CREDITORS.

The Personal Representative is required to publish Notice to Creditors, which gives creditors the opportunity to submit any outstanding debts of the decedent to the Personal Representative for payment. The Notice to Creditors must be published in a newspaper published in the county in which the decedent died. Creditors generally have four months from the time of the first publication of the notice within which to present their claim. A claim is deemed to be accepted unless the Personal Representative rejects the claim within 60 days after the expiration of the four month notice period.

It is the duty of the Personal Representative to make reasonable efforts to ascertain any debts (including contingent debts) owed at the time of death.

In addition to paying any debts owed by the decedent at the time of death, the Personal Representative is required to pay ongoing costs associated with the estate. This, for example, would include paying property taxes, utilities, insurance, and other costs of maintaining the estate property in good repair. The Personal Representative can also pay administrative costs such as appraisals and court costs.
(See also Item 7, Management of Estate Assets)

2. ESTATE ACCOUNTING.

The estate is a separate legal and accounting entity. Further, the Personal Representative is required by law to prepare an accounting which details all receipts and expenses occurring during the period of administration of the estate. Accordingly,
it is essential that all appropriate debts and administrative expenses be paid out of estate funds, and that all estate income be paid to the estate. As such, the estate in each case opens an estate bank account or accounts, in which all estate income should be deposited and from which all estate expenses paid.

3. INVENTORY OF ESTATE.

Another primary duty of the Personal Representative is to prepare an inventory of the assets owned by the decedent at the time of death. Assets categorized into two general types: Probate Assets and Non-probate Assets.

Probate Assets are any items owned by the decedent in decedent's name alone, or in decedent's name with another person who has predeceased the decedent. These assets will go to the beneficiaries named in a Will or by the laws of intestate succession if there is no Will.

Non-probate Assets include any assets held by the decedent and not governed by the decedent's Will or Trust, such as assets held as a joint tenant with another person where that other person is still living. The property automatically belongs to the surviving joint tenant, regardless of what the Will says. Another non-probate asset would be life insurance proceeds or retirement plans, where the proceeds are payable to a beneficiary other than the decedent's estate. Proceeds from these assets do not need to be placed into the estate checking account. They do not belong to the probate estate, although they must nonetheless be counted in the decedent's taxable estate for death tax purposes. They belong to the surviving joint tenant(s), or in the case of life insurance, to the beneficiary.

It does not matter whether the assets are probate assets or non-probate assets as to whether they are includable on the inventory of the decedent. They are includable in every case in which the decedent had some sort of interest in these assets, even though the assets are not part of the probate estate. They must be inventoried and reported for estate tax purposes in any event. This also has some potential beneficial income tax consequences to the estate or the decedent's beneficiaries in that all assets reported for tax purposes then generally take cost basis equal to that reported value. This means that it directly will greatly reduce income tax liability later in the event that these assets are ever sold.

Within nine months after appointment as Personal Representative, a fair market value inventory of all of the decedent's assets must be prepared. This inventory is used to prepare the Federal estate tax return, if one is necessary. It is the responsibility to provide a list of all assets in which the decedent had an interest at the time of death, including real property, vehicles, stocks and bonds, bank accounts and certificates of deposit, mutual funds, insurance policies, annuities and pension plans, co-op equities, and any personal belongings or collections of any value.

4. DECEDENT'S FINAL INCOME TAX RETURNS.

The Personal Representative is also responsible for seeing that the decedent's final state and federal income tax returns are filed. This is commonly done by the decedent's normal accountant if the decedent had one.

5. ESTATE INCOME TAX RETURNS.

At the time of the decedent's death, a new taxable entity, the estate, comes into being. The Personal Representative must file state and federal income tax returns for the estate.

For the first taxable year of the estate, the estate has the right to elect any taxable year end, so long as that year end does not extend more than twelve months after the date of death. This permits great flexibility in shifting income and expenses to different tax years for the overall benefit of beneficiaries. All subsequent estate tax years shall be for a full period of twelve months, with the returns being due three and one-half months after the end of each taxable year. Due dates of the various income taxable years are calendared as well.

6. ESTATE TAX RETURN.

A federal estate tax return is due within nine months from the date of death if the decedent's gross estate is valued at $1,000,000.00 or more. We will prepare this return for the estate, if one is necessary.

Once all of the appraisals in, an estimate of what the federal taxes will be, if a return is required, can be prepared.

7. MANAGEMENT OF ESTATE ASSETS.

While the estate is open, the Personal Representative has the duty to preserve and manage the estate assets. This means that any liquid assets must be invested in a wise manner pending final distribution of the estate. The Personal Representative must also safeguard tangible personal property, keep the real property in good repair, and generally make decisions regarding the investment and safekeeping of all estate property. The Personal Representative is also responsible for collecting any interest, dividends, rents or other income of the estate, and depositing the income in the estate account.

Note that the Personal Representative's responsibilities extend only to probate assets (see the discussion above on probate versus non-probate assets). The Personal Representative is not responsible for property that was held by the decedent as a joint tenant with a person who survived the decedent, nor for life insurance or pension plans that are payable to a beneficiary other than the estate. It is only the income from probate assets which the Personal Representative is required to collect and deposit into the estate account. The surviving joint tenant of any joint tenancy property is entitled to receive any income from such joint tenancy property. Similarly, the named beneficiaries of life insurance, pension plans or IRAs are entitled to receive the proceeds from the policy, plan or IRA. One of the Personal Representative's important responsibilities is to ensure that income from estate (i.e., probate) assets is not commingled with income from non-probate assets.

The Personal Representative has the authority to sell estate assets (other than those specifically given to someone under the Will) if that would be in the best interests of the estate. The Personal Representative can sell assets without the approval of the court, unless the sale is made to that Personal Representative, that Personal Representative's spouse or an entity controlled by the Personal Representative. In that event, the Personal Representative would either need to have the consent of all interested parties, or to have the court approve the transaction. Of course, all sales have to be made in a reasonable manner.

It is permissible to distribute the decedent's property as directed in the Will. It is not necessary to wait for the close of the probate to distribute these items, though normally final distribution of all assets will remain until final determination of death taxes or other liabilities has been because the Personal Representative can be held personally liable for such obligations if estate assets have been distributed instead of being applied to estate obligations.

8. CLOSING THE ESTATE.

Under the Uniform Probate Code, it is not possible to close the estate informally (meaning simply filing closing documents with the Clerk of Court without need for judicial approval) before six months from the date the Personal Representative was appointed. This does not mean that the Personal Representative cannot pay bills and, in fact, make some distributions before that date. It is just that that is the first date on which the estate can be closed informally with the Clerk of Court.

As a practical matter, an estate is normally not closed or final distributions made until the Federal estate tax return has been file, if one is required, and the estate has received an estate tax closing letter from the Internal Revenue Service.

If a federal return is filed, it may take from six months to a year after that return is filed to receive the estate tax closing letter. Every estate tax return is reviewed by the Internal Revenue Service. If there is any question, the return can be audited for accuracy of values, discounts or other matters. If the audit of the federal estate tax return presents any question, it may take longer take longer to close the estate.

9. DISTRIBUTION OF THE ESTATE.

Once the accounting is complete and the tax returns are filed and approved, the estate will be ready to be distributed. At that time, a final determination of the amount available after expenses and taxes for distribution. The Personal Representative will execute deeds for the real property, and instruments of distribution for the personal property.

There is a statutory preference for distributing all of the assets of the estate in kind, though this is sometimes awkward with assets that are not easily divisible. To that extent, it may be possible to liquidate these assets, and distribute the cash in lieu of the property.

10. LEGAL PROCEDURE FOR CLOSING THE ESTATE.

An estate can be closed either formally or informally. A formal closing would involve a hearing in front of the judge, at which the judge would rule on the validity of the Will as presented, determine that the list of heirs and beneficiaries is correct, approve the accounting of the income and expenses of the estate, as well as the final distribution of the estate.

An informal closing would not involve a hearing. Normally, accountings for the estate must be presented unless waived. Waivers of an accounting must be signed by all heirs and devisees after an informal accounting is presented to them. When that is done, the Personal Representative simply files a sworn statement stating that all claims and all taxes have been paid, and that the Personal Representative has distributed the estate in accordance with the Will.

TRUST AND ESTATE LITIGATION

Surprisingly, perhaps, very few Wills or Trusts are ever contested in Court. When they are, the stakes are high, and the litigation differs from normal commercial contests in that overlaying all actions are the high standards required of all fiduciaries such as Personal Representatives of Estates or Trustees of Trusts. The stakes can be very high for the contestants of Wills (but not Trusts) as well, since if someone contests a Will and fails, that contestant becomes obligated to pay not only his or her own attorney's, but the estate's attorneys as well. This has been a hard lesson for many.

If fiduciary litigation over Wills, Trusts or their administration arises, then it is important to engage counsel familiar with the rules and tax and practical considerations that are peculiar to this sort of litigation.