Recently I received an email from a client asking me what went wrong in her parent’s estate plan so as to make it so that they had to go through probate. She asked, “isn’t the purpose of getting a trust so you don’t have to go through probate? Everyone tells me to get one so that it is easier, but my parents had a trust and this hasn’t been easy at all”.
Her’s is a valid question. Her parents set up a revocable living trust (not with me) and took care to make sure their real estate was titled in the name of the trust as well as their bank accounts and most other property. They even went so far as to designate their trust as a contingent payable on death beneficiary in case they happened to die together. They thought that it was as turnkey as they could make it. Why then is she having to deal with probate?”
In a very long email, I responded to her question. The problem was one of timing and failure to act quickly. What had transpired was the following:
Her Dad passed away and the investment account was ready to make a payout to her mom who was the payable-on-death beneficiary. Her mom, however, for reasons not yet clear to me, failed to present the claim to the investment company. Shortly after her Dad passed away, her mother passed away too. The investment company was directed to make the following payouts: 1st to mom, and if mom predeceases Dad, then to the family trust, and if mom predeceases dad and there is no family trust, then to children equally.
At first glance, a casual observer might think, well Mom has passed so that means that the trust should get it, no probate no mess, just a clean transfer, but a more careful reading demonstrates that it is not so simple.
Pay Attention to the Timing
The investment company is in a bit of quandary. They had an obligation pay a substantial sum of money to a dead person. If they cut the check, no one will be able to cash it. The decedent is no longer able to sign it. Even if someone had a financial power of attorney (which they did) it is ineffective because all Powers of Attorney expire at the death of the principal. Had Mother redeemed her claim of the death benefit she would have received it quickly and would have probably deposited the money into an account owned by the trust. Because this didn’t happen, mother’s estate has ended up receiving the amount and not the trust.
Utah’s Small Affidavit Limit $100,000
Utah’s small estate affidavit limit is set at $100,000. This means in order to take possession of property, a duly appointed personal representative has to ratified by the Court before third parties can distribute the property without incurring liability for a wrongful distribution. This can be terribly frustrating for an heir and I am sure that the decedents are rolling over in their graves to think that they tried to make it easy but it is still going through probate. In addition to the $100,000 trigger, any real estate has to go through probate as well.
My client’s mother failed to claim her death benefit before she died. The investment company was obligated to pay my client’s mother and even though there was a plan in place for a contingent beneficiary, the contingent beneficiary was unable to inherit because her benefit vested first, which in turn, necessitated taking the estate through probate Court
What Could Have Been Done?
The first lesson we take away from this is, don’t delay claiming any death benefits that are owed to you. If you are unable to claim them or pick them up (maybe you are moving and don’t know where to send the check yet) then contact the investment company and provide for a contingent beneficiary if you fail to live long enough to receive them. Your health will determine how big of a risk this is for you, although accidents can happen at any time.
The second option would have been to switch the order of the beneficiaries. First to the trust and if the trust has been dissolved, then to the mom/wife and if the wife/mom has predeceased, then to the kids equally. Had this order been observed, the investment company would have had no problem cutting a check to the trust. Typically, the surviving spouse will remain a successor trustee after the death of the first spouse and can use the trust assets for his/her benefit. If the surviving spouse dies before the claim is presented, then the successor trustee can receive the check just as the original trustee.
Some revocable living trusts place restrictions on the use of trust property after the death of the first spouse. The reason for this is to maintain eligibility for the unified gift tax exclusion. This might be one reason why the beneficiary schedule was set up the way that it was. Currently, the gift tax exclusion is so high that it removes the need for the limitations imposed by these trusts, which brings us the third and final takeaway: after a life-changing event, review your estate plan with your attorney. He or she will be able to advise you on the time sensitive steps (if any) or new risks you need to be aware of due to the changed circumstances.