No one looks forward to the passing of a loved one, but many people cannot help but wonder about a future inheritance. Often when a person dies and leaves money or property, the beneficiaries and heirs want to know about the overall value of the estate. Most jurisdictions require an executor or trustee shares this information with beneficiaries and heirs. However, this can cause individuals to expect a particular inheritance and start planning how to spend or invest it. An estate may have to settle a number of expenses that can cause the value of an inheritance to drop, and thus disappoint beneficiaries or heirs.
The executor or trustee has a duty to determine whether the deceased owed anyone money. This often requires a thorough search of the deceased’s financial records and contacting the deceased’s creditors to identify any outstanding balances. Creditors may include:
- creditors that hold a mortgage on real property
- business partners
- credit card companies
- medical providers
It is often required for the executor or trustee to give notice in an appropriate newspaper or legal publication to notify unknown creditors that they must present any claim within a certain amount of time or they will forever be barred from bringing them in the future. Once creditor claims are presented, the executor or trustee must determine which claims are valid and pay them. In some cases, the executor or trustee may need to challenge and even litigate some claims in court. In that case, the litigation costs may exceed the amount of the claim, which will impact inheritance values.
Depending on the number of creditors and the amounts owed, an estate may run out of money during the course of administration. Ultimately, this will leave the heirs of the estate of the beneficiaries of the trust with nothing.
In addition to creditor claims, an estate must often pay administration fees. The most common estate expenses are:
- burial and funeral expenses
- tax preparation fees
- property appraisal fees
- expenses related to storing and shipping personal property to heirs and beneficiaries
- expenses related to home repairs and improvements to prepare real property for sale
- maintenance costs for real and personal property during administration of the estate or trust
- attorney fees
- trustee or executor fees
- probate court fees
Depending on the size of the estate and the nature of the accounts and property held by the estate, these expenses may make a significant dent in the final amount available for heirs or beneficiaries.
Some of the fees listed above can be reduced or eliminated with good planning during the deceased’s lifetime. For example, using a fully funded revocable living trust usually avoids the need for probate of an estate. A trust may therefore reduce attorney fees and court costs significantly. Nevertheless, professionals such as attorneys and property appraisers may still be needed even if not dealing with probate. In many cases, however, their involvement can be significantly reduced by avoiding probate.
Controversy between family members is financially disastrous. It can impact the amount of money and property ultimately available for distribution. When such agreements cannot be resolved through mediation or negotiation, family members lawyer up and settle in for a long, drawn out court battle. In such cases, the attorney fees alone can spiral into the tens and even hundreds of thousands of dollars. The terms of the estate planning document often authorize the trustee or the executor to use the estate or trust property to pay for a defense against attacks by the heirs or beneficiaries. When this happens, even heirs or beneficiaries not involved in a challenge or contest can end up with far less than they might have expected.
There are several ways to maximize the amount of money and property ultimately available for your heirs and beneficiaries:
- Carry enough life insurance so that your trustee or executor has sufficient cash to quickly pay off any creditor claims.
- Use nonprobate methods for distributing your assets, such as trusts and beneficiary designations.
- Write out a clean set of instructions to those who will be in charge of final affairs. Let them know exactly who your creditors are, which estate documents are the most recent, and who they should contact upon your passing.
- Talk to your loved ones beforehand to make sure they know what to expect when you die and what your expectations for them are.
- Work to resolve disputes between loved ones while you are still alive.
- Clearly specify in legal documents who will get what.
- Consider making funeral arrangements and purchasing a prepaid funeral plan before you die.
- Work closely with your attorney to make sure your trust is properly funded. Check that your other estate planning documents are up to date and clearly reflect your wishes.
Why is This Important?
The effort put into planning your estate can have significant impact on how much of your money and property gets into the hands of your heirs and beneficiaries. Still, it is important to properly set expectations for your beneficiaries. Not all expenses are avoidable. We are here to assist you and your family as you have discussions about the expenses of probate or trust administration and proposed inheritances.
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.