Thursday, September 27, 2012

What Is The Worst That Can Happen?

           People who tell me that they have considered estate planning but never followed through and completed the process always surprise me. The reasons for putting off the planning process are many and varied. Usually the conversation includes a statement such as, "People keep telling me I need to take care of estate planning,  but I keep putting it off. What's the worst that could happen?"

           Now, I understand that people find estate planning a difficult subject to consider. The concept does not always lend itself to a simple explanation. Perhaps it is because people feel uncomfortable contemplating their own mortality, or they perceive the cost of visiting an attorney is too high. However, no matter what their reason they always seem to find comfort in the belief that the worst-case scenario is not actually so bad. What then are the consequences of failing to have an estate plan?
           First, the good news, it is impossible to die without an estate plan. When a person dies without leaving a Will, Michigan's intestacy statute imposes a distribution plan on that person's assets, no matter what that person would have preferred. However, before Michigan law can dictate who inherits the deceased individual's assets, the estate must pass through the Probate Court. It is in the Probate Court where the consequences of failing to have an estate plan begin to appear.
           When a person dies, whether they have a Will or not, their estate must pass through the Probate process. The Probate Court supervises the legal transfer of a deceased person’s property to that person's eventual heirs. Without a Will, someone must petition the Probate Court for appointment as Personal Representative (the person who will administer the probate process of distributing assets). The Court must hold a hearing to determine whom it will appoint as the Personal Representative. Before this hearing can occur, the court gives notice to all interested parties, including the surviving spouse, all potential heirs, and creditors. At the hearing, anyone who wants the position of Personal Representative petitions the Court, then a Probate Judge will appoint the Personal Representative.
           The Personal Representative’s position is more complicated than simply distributing the estate's assets. The Personal Representative must first complete a series statutorily required tasks. These include providing notice of the death to all known creditors and attempting to provide notice any unknown creditors by placing an announcement in the local legal news. The Personal Representative also must complete a full accounting of the estate's assets to file with the Court. Once the Personal Representative has completed all of these tasks, the statutory waiting period has lapsed, and the Probate Court gives its approval, then the Personal Representative may begin to distribute the estate assets to the heirs pursuant to the guidelines established by the Michigan statute.
           For distribution, the Personal Representative must refer to the state intestacy statutes to determine who receives assets this is where family members are often most surprised. Under the Michigan intestacy statute, the surviving spouse will only receive a portion of the assets if the deceased is survived by a parent or child, with the remainder being split amongst the deceased's other heirs. As you can see, the failure to plan results in the surviving spouse receiving only part of the estate, which is often substantially less than expected. In addition, if a share of the estate goes to a minor child the Probate Court is required set up a conservatorship until the child turns 18 to perform yearly accountings of those assets to guard against misuse. In addition, at age 18, the child is entitled to their full share and has total control to what could be large sums of money.
           In a best-case scenario, where all of the heirs are adults, creditors are known, and there are no substantial conflicts among heirs, probate may be completed within 6 to 8 months. If there are any issues with the estate, the probate process can be ongoing for several years. During that time, each visit to the court will have both a financial and time cost for the estate. In a simple uncontested Probate Court costs are likely to add up to 3 to 5% of the estate's assets. The longer the probate process drags, on the greater the amount of assets consumed by court fees and expenses.
           With proper estate planning, the probate process becomes substantially easier and less expensive. When a person dies with a Will, the Court has clear instructions as to whom the deceased trusts to serve as the Personal Representative of the estate and to whom the estate's assets are to be distributed. Additionally, through the Will, the deceased can request an informal probate of the estate, which dramatically simplifies the process. If the deceased has established a Trust in addition to a Will, the probate process becomes even simpler, as a properly funded Trust allows the vast majority of a person's assets to pass to heirs without going through probate. Even if there are assets to go through probate, having a Will provides instructions, and limits the Court's involvement and reduces the cost of probate.
           This is only a brief synopsis of the problems created when a person dies without estate planning. If a person becomes incapacitated and cannot make decisions for himself or herself, the Probate Court. must decide who has the authority to make decisions for the incapacitated person. This is another unnecessary distraction when your loved ones are concerned about your well-being.
           The reality is that the "worst that could happen" will have very little effect on you if you fail to plan. The cost in time, money, as well as the stress and problems will all fall on the shoulders of your loved ones, who are already dealing with the tragedy of your loss. The estate planning process will cost you a relatively small amount of time and expense, compared to the cost and time expended by your loved ones with the probate process.

Matt Ferrara

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