Estate Planning

Probate is the process by which the estate of a decedent (a person who has died) is administered, distributed and protected by the courts. Probate of a decedent’s estate involves confirming whether there is a will and its validity, appointing an executor or administrator to act on behalf of the estate subject to the court’s supervision (which supervision may be limited in the case of an independent administration), collecting the probate assets, paying debts, and distributing the remaining probate assets.

The assets subject to probate are those owned in the person’s own name or his or her interest in a tenancy in common (these assets are referred to as “probate assets”). Only probate assets pass pursuant to a will or, if there is no will, pursuant to the rules of intestacy. A will does not dispose of property owned as joint tenant with right of survivorship or tenant by the entireties, unless the person is the surviving joint tenant. A will does not dispose of property subject to a beneficiary designation (such as a typical IRA, retirement plan or insurance policy), a Payable on Death (POD) designation, a Transfer on Death (TOD) designation or a Transfer on Death instrument for residential real estate, unless the beneficiary designation names the owner’s estate or defaults to the owner’s estate when the other designated beneficiaries fail to survive the owner. Property owned by a trust is disposed of according to the terms of the trust, not by a will, except to the extent that the trust grants the person a power to direct in the person’s will the disposition of all or a part of the trust property and such person exercises this power.

A will is a legal document that becomes effective upon a person’s death. It contains instructions, to be applied after a person’s death, for the payment of the person’s debts, the distribution of the person’s remaining assets, the designation of a guardian for the person’s minor children if there is no surviving parent (subject to the court’s approval), and the designation of an executor of the will. The will should provide answers to at least three basic questions: “Who gets what?”, “How and when do they get it?”, and “Who’s in charge?”

An “executor” is an individual, bank or trust company nominated in a decedent’s will and appointed by the court after the decedent’s death to administer the probate estate of the decedent. More than one individual or entity can act as co-executors. In some states the executor is called the “personal representative.” If a person does not name a personal representative in his or her will, or dies without a will, state law establishes the order in which a probate court appoints relatives to act as personal representatives. When the will does not nominate an executor or personal representative, the person appointed by the court may be called an “administrator.” In common parlance, the term “executor” can be used to refer to an executor, personal representative or administrator, all of whom have similar duties.

An executor administers the decedent’s probate assets by (1) collecting the decedent’s probate assets; (2) managing the decedent’s probate assets during the period of administration; (3) paying claims against the estate including the decedent’s debts and any spouse’s or child’s awards authorized under state law; (4) paying expenses of administering the estate, including investment management, attorney’s and executor’s fees; (5) filing the decedent’s final income tax returns and income tax returns for the estate; (6) filing any required estate or inheritance tax returns; (7) accounting to the court and the beneficiaries for all of the assets, liabilities, receipts and disbursements of the estate; and (8) distributing the probate assets after payment of debts, claims and expenses to the beneficiaries entitled to such assets under the decedent’s will, or if the decedent died without a will, pursuant to the intestacy statute of the relevant state. As noted above, an executor is appointed by the court and after the executor has completed the administration of the estate the executor is formally discharged by the court. Thus the executor’s job is of a limited duration, although commonly it takes a year or two, and sometimes longer, to administer an estate.

Without a will, a deceased person’s estate passes by the laws of intestacy, which may not reflect the deceased person’s true wishes. The laws of intestacy which generally apply are the laws of the state in which the person resided at death. The persons who receive the deceased person’s property by intestacy receive it outright (except for minors, for whom property will usually be held in a guardianship until age 18), which may not be what the deceased person would have wanted. Finally, if a person dies without a will, the deceased person’s estate will be managed by an administrator selected by the court, and that administrator may not be the administrator the deceased person would have selected.

The estates of persons who die without a will are said to be “intestate,” and their estates are distributed according to state law. The default rules of distribution under state law represent an attempt to be fair, but may not be consistent with any person’s specific goals and desires. For example, in Illinois, the default rules provide for the division of a married parent’s property one-half to the surviving spouse and one-half to descendants.

A will is generally prepared by an attorney. Software is available for preparation of a will without an attorney; however, such wills may inadequately address important issues and in some cases may lack the requirements for a valid will under applicable state law.

A trust is a legal relationship in which an individual or a bank or trust company holds money or other property for the benefit of certain individuals or charities, subject to the terms of the trust. The person who creates the trust (the “settlor”) transfers legal ownership of property to the trustee so the trustee can hold and manage the property for a specified period of time (which may be forever, if the trust is an Illinois qualified perpetual trust) for certain specified purposes. The trustee agrees to hold and manage the property for the benefit of the beneficiaries specified by the settlor in the written agreement, usually referred to as a “trust agreement” or “declaration of trust,” subject to the terms of the trust agreement. The trustee has a legal duty to administer the property as required by the trust agreement and state law. The trust may be created during the settlor’s life (for example, a “living trust”) or may be created upon the settlor’s death (a “testamentary trust”).

A trust generally involves three roles: (i) the person who creates the trust is called the “grantor,” “settlor,” or “donor,” (ii) the person who owns and administers the trust property is the “trustee,” and (iii) the person who benefits from the trust is called the “beneficiary.” A trust may have more than one grantor, trustee or settlor. Further, an individual may serve in more than one role. For example, a grantor or a beneficiary may also be a trustee.