Creditors and Debts
In a probated estate, the personal representative in charge of the estate is required to not only notify known creditors of the deceased of the ongoing probate, but also must publish notice to unknown possible creditors. This gives creditors a time limit for filing a claim to be paid for what is legally owed them. The personal representative can approve the claims or deny them, in which case the creditor can ask the court to rule on the claim’s validity. Heirs and executors like this procedure since it eliminates the chance of a claim being made against the estate months or years after the case is closed and the funds distributed. It creates a short statute of limitations. Anyone who has been hospitalized knows that medical bills sometimes show up months after the medical procedures have been performed. With the death of the local newspaper in so many communities, the publication rule is out of step with reality, but there are legal newspapers that can still accept classified advertisements.
It is a good idea to run a credit check on the deceased, which might reveal creditors that no one knew existed. Of course, all credit cards should be immediately canceled and all subscriptions and recurring payments stopped.
Some states have expanded this protection to trusts, and with that in mind I always put the publication requirement in the trust language. If, however, we know that the law has not been extended to trusts in our state and there is a chance that late claims might be made, we can open a probate for some of the assets that are not passing through the trust to take advantage of the publication protection on claims. The bulk of the assets would then pass as usual through the trust.
Trustee’s Notice to Creditors: If no personal representative of Grantor’s Estate has been appointed so that the publication and notice requirements with respect to creditors have not been discharged, Trustee shall, to the extent required by law, publish and serve notice to all creditors in the same manner as required for a personal representative. Trustee shall pay, to the extent required by law, all proper claims allowed by the Trustee or a court having jurisdiction.
The notice procedure and its protections are one of the advantages of probate promoted by probate attorneys.
In many states trusts now have the same ability to publish notice to creditors, known and unknown, and receive the same protection as probated estates, so that advantage no longer exists.
Debts payable by the probated estate can include unexpected claims, such as might be made by the state. Estate Recovery refers to a state law that allows the state to claim repayment of government benefits, such as Medicaid for nursing home care, from a deceased person’s probated estate. While not all states allow this, where it exists, repayment can completely deplete the probate estate accounts, leaving nothing for the heirs. This can be avoided by having no probate case filed, since the law refers to claims against the estate and not against non-probated assets such as those assets in the name of a trust. This is another reason to avoid probate.
The Trust Protector
Best trust idea ever.
As I have said, creating a trust has become the number-one favored method of avoiding probate and ensuring that the assets are left to beneficiaries in the simplest, safest, and least expensive possible manner. One possible problem with trusts in the past has been making sure that the named trustee carries out the management and distribution of the trust in accordance with the grantor’s wishes and directions. Without court supervision, trustees might not handle the job efficiently, quickly, or even honestly. Self-dealing can be an issue benefiting the trustee but harming the interests of the beneficiaries. Once the trust principal is spent, stolen, or wasted, the money is difficult or impossible to recover. A trust protector is a person or firm whom you name in the trust document to oversee the actions of the trustee in carrying out your directions.
If the trust assets consist largely of real estate, for example, the trustee could have his own relatives or himself, if he is a real estate agent, list the properties for sale and collect commissions of the sale of the property without necessarily getting the best price possible. That would be a conflict of interest that the trust protector could veto. The trustee should not be profiting from trust transactions. The same is true of investment decisions with the trust assets. Being a fiduciary means no speculative investments. Having someone watch over the trustee’s actions, and requiring the trustee to account to another person for what has been done or is going to be done, gives the trust beneficiaries a layer of protection against trustee malfeasance or misfeasance.
Traditionally a trust protector has been used in irrevocable trusts to provide for the long-term carrying out of the objectives of the original trust grantor. A trust set up for children, which then continues on for the grandchildren and even further for great-grandchildren, is a typical type of irrevocable trust benefiting successive generations. The purpose might be to provide income to trust beneficiaries, educational expenses, operation of family businesses, or even managing recreational real estate for their benefit. The grantor needs to be clear as to the irrevocable trust’s intended purpose.
Nowadays we sometimes recommend the use of a trust protector even in revocable trusts that are to become irrevocable at the death of the grantor, as most do, and then are to be immediately distributed. Having co-trustees can lessen the need for a trust protector, presumably because they watch each other.
Who can or should the trust protector be? First, it should not be a trust beneficiary or the attorney for the trustee or for the grantor. The attorney for the grantor is sometimes appointed but this is a grave mistake, since there is a potential conflict of interest if the attorney is the one who drafted the trust. The best choice, in my opinion, is either a professional trust company or the trust division of a bank. They would have to agree to the appointment and will want a copy of the trust document. I have no opinion on professional trust protection companies since they are new and don’t have a track record to examine.
The powers of a trust protector should be set out in detail in the trust document. Here are some common powers that should be included. Just because they have been given these powers does not mean they will have to exercise all of them.
- The power to remove or replace trustees. Trustees are usually family members and may not carry out the duties of trustee in an efficient or honest manner. Some are just lazy. With a trust protector there is someone to advise the trustee and prod them to get things done in accordance with the grantor’s intention and the trust instructions. If they are not doing the job, then the trust protector should have the power to remove or replace them.
- Settling disputes between co-trustees and/or beneficiaries. The trust protector can act as a referee and final word if there are disputes regarding distribution of assets, sale prices, investments, or timing of distributions.
- In long-term trusts, the trust protector should have the power to change the terms of the trust if there is a change in the law or taxation significant enough to impact the trust purposes.
- The trust should specify that both the trustees and the trust protectors are to act in a fiduciary capacity toward the trust beneficiary. Some state laws do say that, while others presume that the roles are fiduciary. Having the trust state that fiduciary status gives the beneficiaries protection and legal recourse if the trustees and trust protectors do not act in a fiduciary manner.
- The trustee should be required to have the trust protector approve all investment and distribution decisions.
- Trust protectors should be compensated, and the manner and amount of compensation should be stated. Referring to the fees charged by schedule of a professional bank trustee or protector gives some guidelines.
There are lots of other specific powers that are often included by the drafter of a trust. The nature of the trust assets as well as the trust grantor’s intentions will determine how detailed these powers need to be. If the trust is a special-needs type, which extends for the lifetime of a special-needs beneficiary, particular care should be taken to protect the assets for the beneficiary without affecting other benefits to which he might be entitled. Similarly, a trust set up to manage family-owned businesses will have its own set of specific powers different from those that are managing only investment assets.
My advice to have your final trust document reviewed by another attorney is reiterated here. A second opinion, preferably set out in an opinion letter, is a very good idea.
(To be continued...)
This excerpt is taken from “How to Avoid Probate for Everyone: Protecting Your Estate for Your Loved Ones” by Ronald Farrington Sharp. To read other articles of this book, click here. To buy this book, click here.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
