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Monday, January 19, 2015

Closing Small Estates

Ordinarily, when someone dies, the method to pay off creditors and distribute the remainder of the estate is a court-supervised process called probate.  However, when someone dies with relatively few assets, many states allow simplified procedures to close out the estate. 

Some states allow surviving family members to settle a small estate using an out-of-court “small estate affidavit.”  Other states offer an in-court “simplified probate” procedure, which is more involved than the affidavit process.  Some states (like Illinois) offer a choice between the two.  This article will describe the benefits and drawbacks of closing out estates using a small estate affidavit.


Unpopular Probate


In today’s world, probate is often viewed like dental surgery—something that is painful, expensive, and that should be avoided unless absolutely necessary.  But unlike dental surgery which ends after a few hours, probate lasts for months, or even years! 

For the unfamiliar, probate is a public court process where the will (if any) is proven, the deceased’s assets are accounted for, creditors are given an opportunity to file claims against the estate, payment of claims is made, and any remainder is distributed in accordance with directions in the will or by state law.  An uncomplicated case might take eight months to a year, and a complicated case could be much longer.  Expect at least several thousand dollars in legal fees, and possibly much more.

As painful as probate sounds, there are some benefits.  During probate, notice of court proceedings is published in a newspaper to all unknown creditors (like unknown credit card companies, other unsecured lenders, etc).  Those creditors are given a limited period of time to file any claims against the estate.   Once that period is over, they are forever barred from filing claims.  After probate, family members can receive property certain that they have free and clear title, and that nobody from the deceased’s past can try to lay claim to the property.

Benefits of Small Estate Affidavit


As mentioned above, some states allow small estates to be closed out without any court supervision.  In Illinois, estates worth under $100,000, and not containing any realestate can be settled with a small estate affidavit.

The benefits of a small estate affidavit are obvious.  In Illinois, the process is simple:  First, if there is a will, it must be filed with the Circuit Clerk for the county of the deceased’s residence.  After that, one must simply attach a certified copy of the death certificate and a certified copy of the will (if any) to a small estate affidavit, and sign it in the presence of a notary public.  Once those steps are accomplished, the affidavit becomes valid. 

The affidavit can be presented to banks, brokerages, creditors, etc.  Under Illinois law, these entities must respect the power of the holder of the affidavit to act to close out the estate.  The affidavit can be used to draw out funds, close accounts, pay off debts, and pay out remaining funds to heirs or legatees (people named in a will).

If the estate is insolvent (there are not enough funds in the estate to pay off all creditors), Illinois law prioritizes the levels of creditors into seven classes, and (as of 1 January 2015) allows the holder of the affidavit to pay off the claims from the highest priority to the lowest priority where there are still funds remaining to pay off claims.  If the estate is solvent (there are enough funds to pay off all creditors), the holder of the affidavit pays out any remainder to the appropriate heirs or legatees.

Once the holder of a small estate affidavit has completed his or her job (which could be just a few weeks), there is no need to report back to a court.  The family just moves on.  Sounds great, right?

Drawbacks


Traditional probate can certainly be slow and painful, and a small estate affidavit seems like a good bypass.  But remember also that probate has benefits.  Most importantly, creditors get one shot to file their claims.  They either do so, or forever hold their peace. 

The small estate affidavit law does not offer similar protection against creditors.  Imagine if your father died with $10,000 in cash and a mountain of debt, and you transferred all his assets to yourself using a small estate affidavit, without ever notifying creditors.  For obvious reasons, the state would not offer you the same protection as if you had gone through probate and provided fair notice to creditors to file their claims.  In this situation, your father’s creditors would likely come after you for your father’s debts.  Not only would they have the right to do so, in Illinois, they could be entitled to recover their attorney fees from you!  This law gives you an incentive to be sure you find all unknown creditors when using a small estate affidavit. 


By using a small estate affidavit, you trade away the protection from liability to creditors that you would ordinarily receive in probate, in exchange for the convenience of settling the case more quickly.  It may be appropriate for relatively simple, clearly solvent estates, with no family disputes.  However, consider traditional probate if there are likely to be unknown creditors, family disputes, or any other complications.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  

Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

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