REAL ESTATE INTERESTS IN PROBATE AND NON-PROBATE – PART 2
By Cary A. Lind
Bond in lieu of Probate and alternatives.
It is possible in most cases to pass good title to real estate without formal Probate. To do so, you need to work with a title company to satisfy its requirements for guaranteeing title. What the title company requires, you must provide, but the requirements in general will be discussed below. For a more in-depth treatment, I again recommend Chicago Title Insurance Company’s publication entitled Rights of Heirs and Legatees and Their Purchasers in Illinois Real Estate by Paul Peterson. Bear in mind that you cannot use a small estate affidavit for distribution of real estate. That procedure may only be used for personal property.
To understand the process, you should start by looking at who can complain if Probate is avoided. Each category of potential complainants needs to be addressed.
First, the distributees must be ascertainable and agreeable. If one person is the sole heir and sole legatee, the situation is easy. Difficulties result when the parties and issues multiply. Proper determination of the heirs must be made first. If any are minors, disabled (without a valid power of attorney or guardian), undetermined, or disputed, court proceedings will be needed in order to resolve the questions. If all of the heirs can be determined by affidavit of heirship and if all of them will sign the necessary documents, you can usually satisfy the title company.
If there is a will, you will need the cooperation of the legatees as well as the heirs. If all of them can and will cooperate, you should again be able to satisfy the title company. If not, you may need Probate to establish the validity of the will and to cut off the rights of any heirs who are not named in the will. As with heirs, if any legatee is not of age and competent, you may need the court in order establish good title.
The second group of potential complainants are creditors. Unlike heirs and legatees, you probably cannot get all of the creditors to “sign off” on the non-Probate procedure. Under the Probate Act, claims get paid before any distribution, so the creditors come ahead of the distributees. The title company is concerned about creditors claiming against the purchaser or other insured party because claims were not paid. In order to protect itself, the title company takes two different routes. First, it requires a personal undertaking from all distributees, whereby the distributees agree jointly and severally to indemnify the title company against all claims, fees, expenses, etc., from any claims which may be asserted against it. That is well and good, but what if a legatee skips town, blows the money, and is uncollectible? The title company’s second requirement is a bond to insure its risk, thus the phrase “bond in lieu of Probate.” The bond for Chicago Title Insurance Company is two percent of the value of the decedent’s interest in the real estate during the first twelve months after death and one percent during the second twelve months. After two years, all claims are barred, so no bond is necessary.
The third possible complainant is the United States government, in particular with regard to taxes. Although technically a third-class claimant, the U.S. government has additional rights. The Federal Estate Tax is an automatic lien on all real estate owned by the decedent. To address estate taxes, the title company will require a statement of information, setting out the value of the estate and also giving information on the funeral expenses . From that sworn information, the title company can determine if the estate is large enough that it should be concerned about Federal Estate Taxes or whether the funeral bill is of any concern. Between the statement of information and the personal undertaking, the title company expects to have recourse if necessary against those who receive the proceeds of the real estate sale. If that fails, the loss will be charged against the bond.
With all of the above in mind, the question is when you can or should use a bond in lieu of Probate. You cannot use one if the Estate contains more than $100,000 in personal property or if Probate is otherwise necessary, such as where there is a will, will contest, citation proceedings, heirship issues, etc. Beyond those situations, it becomes an economic and timing issue. Which costs less? If the real estate in question is worth $200,000, a bond in lieu of Probate will cost $4,000 during the first year after death. I can usually do a Probate for significantly less than that sum, and distribution will usually be six to nine months after the appointment. Similar calculations should be made in each case. The other issue is timing. Can the distributees maintain the property and wait for two years in order to avoid the bond? I recently consulted with one client where the decedent owed approximately $14,000 in credit card debts, and the family chose to wait out the two-year period to avoid the debts.
Until approximately August, 2001, at least one title company in the Chicago area used to guarantee transfers of real estate without Probate and without bond. Then they changed their policy. The choice now is among a bond in lieu of Probate, formal Probate, or waiting until two years after the date of death. You and your client will have to decide which route to take.
©2002 by Cary A. Lind, all rights reserved.