Chapter 8 Avoiding Probate

• Library: Estate Planning for Same-Sex Couples (ABA) (2015 Ed.)

Chapter 8 Avoiding Probate

Avoiding probate can benefit lesbian and gay clients especially when clients worry about their will being challenged. Keeping assets out of probate lessens the chances of a challenge. Creating an estate plan that keeps client assets out of probate is a goal of many clients.

Wills and trusts are the foundation of a good estate plan. Trusts are often used to avoid probate. Unlike a will, trusts are private and not subject to a court's supervision. However, trusts are not the best option for everyone nor are they the only available option for avoiding probate. Clients who have small estates and want to avoid probate may want to consider these other options to accomplish their goals. In many cases a trust may be more complicated than the client requires.

Reducing or eliminating probate assets allows clients to ensure their wishes are carried out. Most will challenges are filed because of money. Take the money out of the equation and probate challenges often disappear.

Will challenges are not the only reason to avoid probate. People also want to avoid the process because it is time-consuming and costly.

Lesbian and gay clients want an estate plan that will protects their designated beneficiaries, honor their relationships, and prevent challenges from estranged or vindictive family members. Couples want to protect each other and the assets they accumulated together. Settlement of the estate moves faster if the assets are outside probate.

Probate creditors submit claims against the estate and those claims must generally be filed within a specified period. Failure to meet those requirements leaves the procrastinating creditor in the dust. If most of the decedent's assets are nonprobate assets that transfer on death, creditors may find there is no estate to file against.

Creditors can only file against the decedent's assets. If the assets are transferred to a beneficiary, there are none available to pay debts.

A. Estate-Planning Issues Involving Marriage Equality

The surviving spouse in a married lesbian or gay couple may be liable for the deceased spouse's debts. There is a movement in the country to challenge this presumption on liability. It seems to be an old chestnut that has been around for many years. With marriage equality, married same-sex couples may be the catalyst for challenging the presumption. This issue may also cause some couples to pause when considering whether they should marry.

Creditors may claim that a valid marriage exists in order to hold the surviving spouse liable for the decedent's debts. Whether courts recognize the marriage for purposes of paying creditors is unlikely, but some creditors may push the envelope. Once marriages are recognized some creditors may file to reopen closed probate cases by arguing the marriage should have been recognized and the debt paid. Another question that arises following the Obergefell decision is whether debts that preexisted the marriage are marital debts. Reopening closed probate cases, for example, will present some interesting legal issues for probate lawyers. Even though the state marriage bans were always unconstitutional, does a creditor have standing to reopen a probate when a debt was the decedent's alone? It seems unlikely, but, again, this is one of those questions lawyers representing married same-sex couples will be grappling with until things get sorted out.

As a practical matter, clients should be advised to avoid accepting responsibility for a deceased spouse's debts unless required to do so by law. Clients need to be warned that neither creditors nor collection agencies decide what the law requires.

Another question involves debts that arose when a married same-sex couple lived in a recognition state and then moved to a state that does not recognize the marriage. Anticipate a creditor arguing that the marriage is valid and the surviving spouse is liable even though the decedent died in a nonrec-ognition state. This argument will be especially pertinent now since all marriages are recognized.

These questions will present an interesting legal exercise for lawyers and an expensive headache for the surviving spouse.

Another question involves whether a probate court in a nonrecognition state can ignore a valid marriage. If there is no will, can the surviving spouse seek to be covered by the state's intestate succession statute? Can a marriage be valid for inheritance purposes? Is that different from considering marriage for other purposes? When the Supreme Court decides a law is unconstitutional, the rules of construction generally hold that the law was unconstitutional from the get-go.

The Obergefell decision may prompt lawyers to reopen closed probate estates if the surviving spouse would benefit from such an action. This is especially true in intestate cases. Some "heirs" may be ordered to return any assets they were given at the time of the initial probate.

These are some of the questions and issues that are anticipated but are without simple answers.

B. Standard Methods of Avoiding Probate

Avoiding probate requires advance planning by the clients and their lawyer. Living trusts, joint tenancy with right of survivorship, payable-on-death accounts, transfer on death provisions, life insurance beneficiary designations, pension or retirement fund beneficiary designations, and gifts are ways to avoid probate. Some of these formats are easy to create and administer, others require more time and effort.

Living Trusts

A living trust, also known as an inter vivos trust, can be either revocable or irrevocable. A revocable living trust gives the grantor complete control over all property transferred to the trust during her lifetime. These trusts provide a flexible format allowing the grantor to make changes to the trust.

An irrevocable living trust must be handled very carefully because once established it becomes permanent and cannot be changed—by anyone—without establishing some type of fraud or coercive behavior.

Stephanie and Marge were married in Iowa in 2009. In 2011, Stephanie and Marge adopted a little girl, Amy. Marge also owned a very successful business with annual sales in excess of $5 million.

In 2011, Marge was struck by an inattentive driver and seriously injured while riding her bicycle. She sustained a traumatic brain injury that prevented her from managing her affairs and running the business.

Her brother, who was a lawyer, drafted an irrevocable trust agreement naming himself and Marge's two sisters as co-trustees and co-beneficiaries. The trust was funded with the proceeds of a settlement from the driver who was responsible for the accident that totaled approximately $4.5 million. Marge's brother also sold the business for over $2 million and deposited those proceeds into the trust.

Marge signed the trust document while in a rehabilitation facility. Stephanie found out about the trust after it was signed. She hired a lawyer and, while the trust itself could not be changed, managed to have a court order issued removing the brother and siblings as co-trustees and co-beneficiaries. Stephanie became the trustee and the couple's daughter, Amy, was named as the successor beneficiary.

While the challenge was pending, Marge's siblings withdrew over $1.2 million from the trust for their own benefit.

Practice Tip

The initial will questionnaire can be an important tool if you intend to assume responsibility for transferring assets. The clients must disclose all assets on the questionnaire.

The engagement agreement should include a provision that you are not responsible for transferring assets that are not disclosed by the client. Include a provision telling the client of his continuing responsibility to let you know about newly acquired assets.

An annual reminder letter to trust clients should be sufficient notice that they need to tell you about any new acquisitions. Use this letter as an ongoing offer to help even if you are not responsible for adding assets to the trust. And let the client know if additional fees are involved.

Living trusts are more...