Probate Horror Stories and How to Avoid Making Mistakes with Creditors
By Don Drake, Connelly Law Offices, Ltd.
"Probate is a legal process that involves the administration of a deceased person's estate, and, if done correctly, does not have to be a nightmare-inducing experience," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "However, it is not uncommon for this process to create horror stories that can lead to internal strife, familial infighting, and even criminal charges."
There are several reasons why probate can become a challenging and complicated process. One of the main reasons is that many decedents fail to prepare for their death, leaving their affairs in disarray. This can make it difficult for the personal representative or executor overseeing the estate after death to locate and track down the decedent's assets. In such cases, records may not be easily accessible, leading to delays, confusion, and disputes among the family members.
"Another reason why probate can be a daunting experience is familial infighting," said Attorney Connelly. "Unfortunately, greed and emotional ties to items can lead to heirs and even personal representatives/executors stealing from the probate estate. This can create internal strife among families, and in some cases, criminal charges may be filed. The person who does the stealing justifies their actions by claiming that the relative would have wanted them to have the item. In other cases, honest disagreements may occur, and these need to be resolved by the probate court, which can take years."
Probate battles, often thought to be confined to regular folks outside the public eye, can also befall celebrities, leading to publicized legal disputes that capture the nation's attention through newspapers and TV programs. The rich and famous are not immune to the emotionally draining and financially costly legal proceedings that can arise after the death of a loved one. Let's look at a few of the most infamous probate horror stories among the so-called A-listers.
Celebrity Probate Horror Stories
The experiences of some of the most famous people in history have shown that proper estate planning is essential to ensure that your assets are distributed according to your wishes after your death. Marilyn Monroe, for instance, had a valid will, but the probate of her estate was a lengthy and cumbersome process that took 39 years to conclude. As a result, the IRS took half of her estate in estate taxes. The remaining assets were eventually passed on to a friend whom she had never met, but who died before the probate was concluded. The friend's widow inherited the assets and made almost $40 million dollars from Marilyn’s estate.
Elvis Presley's estate, on the other hand, was mismanaged by an unscrupulous personal representative he chose to handle it. After the IRS took 73% of his $10 million estate in estate taxes, the personal representative squandered $2 million, leaving Elvis' beneficiaries with only $1 million.
Aretha Franklin's death was another example of how an absence of proper estate planning can cause chaos and confusion. When she died, her family could not locate a valid will, and the probate court was instructed to proceed with intestate succession. However, her children later discovered several handwritten wills while cleaning out her home. The wills contained different and contradictory terms, leading to intense litigation that forced the executor to resign.
Bob Ross, the famous artist known for his soothing television shows, made a terrible mistake by keeping his distance from the business side of his enterprise. His business partners gradually acquired more ownership, leaving his son with little inheritance from his father's artistic legacy.
Avoiding These Battles
Attorney Connelly advises that a comprehensive estate plan should be in place to avoid such horror stories. This includes having a will, a trust, and other legal documents that outline how assets should be distributed after death. By doing so, the personal representative or executor can manage the estate efficiently, reducing the chances of familial infighting and other complications.
"It's crucial to seek the help of a qualified professional while dealing with probate as attempting to handle it without the right expertise can lead to terrible experiences," stated Attorney Connelly. "Many families have also made the mistake of hiring attorneys without experience in the probate court in an attempt to save money, only to end up spending more due to the unqualified attorney's mistakes, which can extend the process for months or even years."
Creditors and Probate
One major aspect of the probate process is handling the debts owed by the deceased person, also known as creditors. The probate court will oversee the process of notifying creditors of the death, and they will have an opportunity to make a claim against the estate for any debts owed. The will's executor is responsible for identifying and paying valid claims, using the estate's assets. If there are not enough assets to pay off all debts, the court will prioritize which creditors get paid first. It is essential to understand the probate process in relation to creditors to ensure that all debts are properly handled, and the assets of the estate are distributed fairly. Let's take a closer look at this process.
Outstanding Debts
"Upon the death of an individual, it is the responsibility of the personal representative or executor to take the necessary steps in the probate process, which includes formally notifying all creditors," said Attorney Connelly. "This notification is crucial to provide an opportunity for creditors to file a timely claim to the probate court for estate payment of the claim."
The notification process is typically as simple as placing a notice of death in a local newspaper(s) where creditors can respond and file their claim. It is important to note that there may be outstanding debts such as credit card payments, mortgages, car payments, insurance, real estate taxes, utility bills, medical and funeral expenses, and other legal debts incurred but not yet paid.
The timeline for creditors to file a claim varies from state to state, but on average, the creditor’s window of opportunity is three to six months to submit formal claims to the estate for payment. Once the creditor files a claim and there is no contest over the debt, the personal representative/executor will pay the outstanding bill with estate funds, and the creditor will receive payment in full, which ultimately completes the claim.
"When someone passes away, their personal representative or executor must perform thorough research to identify and locate any outstanding creditors," stated Attorney Connelly. "The importance of this due diligence is to avoid any legal issues. It is vital that the assets of the estate are not distributed among the beneficiaries until all the debts and taxes of the estate are entirely paid or dismissed by the probate court. The personal representative/executor is solely responsible for covering all the estate expenses, and if any mistakes are made, they may become personally liable for any outstanding debts unless the beneficiaries return their portions of the inheritance to cover these debts."
Sometimes, creditors may not learn about the death until the debt has become too minor to pursue. In such cases, the creditor may choose to write off the debt as bad debt rather than pursuing repayment that is not cost-effective. However, in other situations, the estate may not have liquid assets, but valuable inheritable property that can be sold to cover outstanding debts in probate court. In such cases, the creditor may force a sale that could delay the probate proceedings and incur additional costs. Secured creditors such as banks receive priority over unsecured creditors in such situations.
Priority Lists
There is a priority order for estate debts. Below is a general list of the debt priorities, understanding that some states may have different priority lists.
Administrative costs – In the probate process, several expenses occur. These include court fees, filing fees, notice costs, attorney’s fees, and the administrator’s commission. These costs can vary depending on the estate's size, the case's complexity, and the specific jurisdiction in which the probate is being carried out. Other expenses may be incurred during the probate process, such as appraisal fees, accounting fees, and taxes. It is important to consult with a legal professional to fully understand all the costs involved in the probate process.
Funeral and burial costs – Every state has specific laws that dictate which expenses can be considered as funeral and burial costs. These costs may include those associated with cremation, interment, urns, markers, and other necessary funerary services. It's important to note that these expenses are all permissible and can be covered as part of the funeral and burial costs.
Government debts – When it comes to financial obligations, it's important to remember that income, property, and estate taxes should be prioritized over other types of debt. These taxes are some of the most important financial obligations one can have and should be paid before other debts. This is because they are enforced by the government, and failing to pay them can result in serious legal consequences, including legal action, fines, and even imprisonment in some cases. Therefore, it's important to prioritize these taxes and ensure they are paid on time to avoid any financial and legal issues.
Final medical bills – In the case of a deceased person, their final sickness or injury is given priority over other unsecured debts. This means that if the deceased person had any outstanding medical bills, they must be settled before other unsecured debts can be paid off. In some cases, hospitals may be willing to negotiate the amount owed on final medical bills and offer a reduced amount if it is paid promptly and in full. It is important to note that settling these bills in a timely manner can help the deceased person's estate avoid prolonged legal battles and financial complications.
All other claims – In the process of debt payment, states tend to focus on the repayment of secured debts, such as mortgages and car loans, before addressing unsecured debts, which are generally considered less important. Unsecured debts may be further categorized into specific and general debts, with the former given priority over the latter. In some instances, debt payment is determined based on the date when claims were filed, while in other cases, debts are pro-rated, meaning that each creditor receives a portion of the available funds based on the amount of debt owed.
"When it comes to safeguarding your assets, it's important to know that certain assets such as retirement accounts and insurance proceeds with a designated beneficiary receive different treatment and provide more protection from creditors," Attorney Connelly said. "Additionally, an irrevocable trust is also protected from creditors upon death. Opting for a beneficiary designation or a specific trust entity can go a long way in shielding an estate from a heavy debt burden."
"The probate process can be quite tricky, and the more assets and debts involved, the more mistakes can be made," continued Attorney Connelly. "Therefore, using an experienced and knowledgeable elder law attorney is highly recommended to avoid problems and make the probate process as smooth as possible. An experienced probate attorney can provide valuable guidance on navigating the complexities of probate and help ensure that all legal requirements are met while protecting the interests of the estate and its beneficiaries."
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