Frequently we have clients in our office who have recently (or not so recently) lost a loved one – a spouse or a parent, in particular. Often, the first thing out of the client’s mouth is, “I thought she had everything taken care of, but I guess not.” As if the loss of their loved one isn’t enough for clients them to deal with, they are now left to sort out the decedent’s affairs. This process can have major implications and is often very overwhelming.
The following are some examples of messes that people leave behind for their loved ones to clean up after they die:
MORTGAGE/TITLE TO HOUSE
This is a very common problem that we assist clients with following the death of a loved one. There is a variety of complications when it comes to real estate.
Spouse (or adult child) is on deed, but not on mortgage and/or note
This is the issue that we see most often when dealing with a decedent’s estate. Often, due to creditworthiness or other family issues, one spouse will obtain a mortgage for the marital home, but both spouses will be on the deed. For simplicity’s sake, let us assume the husband is on the mortgage. The husband believes that if he predeceases his wife, she will be able to stay in the house because she is on the deed. This is incorrect. What will happen to the mortgage? If the wife is able to make the mortgage payments, she will have to go through a very long, drawn out process to assume the mortgage. If the wife is unable to make the payments, she will most likely lose her house. If she is cognizant, timely, and works with an attorney, she may be able to enter into a deed in lieu of foreclosure, so the debt will be addressed. Sometimes, she may even be able to get some money from the mortgage company in exchange for the house. If the wife does not act in time or in the proper manner, she will lose the house and may have the mortgage company pursuing her husband’s trust and estate in court for the balance of the mortgage.
House is not addressed within proper estate planning documents
If a person passes away and has not properly planned for what will happen with their house, issues will arise. For this example, let’s assume the decedent is a widowed mother with one adult son. If there is a mortgage on the house, the son (unless someone else is designated in the mother’s estate planning documents) will be left to deal with the mortgage company similar to the example above. Regardless of whether there is a mortgage on the property, the son will have to open a probate estate in order to have the court decide what should happen to the house (and any other probate assets). People tend to assume that if they only have one child, everything will just go to that child. While that is most likely correct, it isn’t automatic. The surviving child will have to go through the long, expensive, painful process of probate court.
BANK, RETIREMENT, AND INVESTMENT ACCOUNTS AND LIFE INSURANCE
We often have clients in our office with boxes upon boxes of their deceased parent or spouse’s old financial statements, tax returns, etc. If they are unable to find all of the decedent's financial records, they might be unable to trace all of his or her assets. If assets cannot be located, heirs might not get everything they're entitled to, and the unclaimed assets will eventually revert to the State. It is best to make sure there is a least one person who has a list of all assets, accounts, and policies, including financial institution or insurance company, account or policy numbers, and beneficiary information.
Failure to name beneficiary
If a person dies and leaves assets behind that do not have a co-owner or beneficiary, the asset will have to be probated. The probate process is very slow and can be expensive. It is also usually quite taxing on the person or persons involved in the process. Additionally, the court will decide which heirs will get what. Oftentimes, the distribution does not match the wishes or the intention of the decedent. By the time the heirs are finished with probate, there might be very little of the asset left after expenses. We recommend to clients that they review the beneficiary designations on all of their accounts and policies.
A growing number of people leave estates with insufficient assets to pay off debts. If that happens, the person in charge (usually the personal representative or executor) can attempt to negotiate lower amounts with creditors. If they can't agree, the personal representative can ask a court to declare the estate insolvent. Certain types of creditors will have priority over whatever is in the estate. For example, state laws may require a secured debt, such as a mortgage, to be paid in full, ahead of a credit card.
In an ideal situation, the personal representative will be aware of all of the decedent’s debts and pay them out of the estate. If a debt, such as a tax bill, appears after the estate is settled and heirs have already received their money, it might be impractical to try to recoup monies from the beneficiaries to satisfy the liability What if the heirs have already spent the money? Their liability is generally limited up to the amount they inherited. It is wise for the personal representative to hold back money out of an estate for at least a year to address such occurrences. Otherwise, creditors could pursue the estate -- as well as the personal representative and the beneficiaries.
Missing/lost estate planning documents
We always encourage our clients to let their loved ones know they have used an attorney to place their affairs in order. If no one is aware, the loved ones are left to search for any such documents. They may check the decedent’s house, safety deposit box, or have to try to track down the decedent’s past advisors. If a will and other estate planning documents cannot be located, it will be up to the heirs to open probate and have the court decide what should happen to the decedent’s assets, in accordance with Michigan’s intestacy statutes.
Incomplete or out-of-date estate planning documents
We get many clients in our office who have had a change in circumstances and wish to update their estate planning documents. Such situations include a divorce, death, birth of a child or grandchild, a change in wishes, or a change in family circumstances. They wish to update their named fiduciaries or update who in the family gets what. This can often be done by simply amending older documents. It becomes a problem if one of these changes occurs and documents are not updated. If changed wishes are not put down in writing in a properly executed document, these changed wishes will (may) not be followed. All that the heirs will have to go on are the out-of-date documents, which no longer reflect the wishes of the decedent. Unfortunately, the documents are legally binding and must be adhered to. This is how an ex-daughter-in-law ends up owning a part of your family cottage. If there is a change in circumstances, it is always best to discuss with your attorney whether or not formal changes need to be made.
LEAVING ASSETS TO CHILDREN UNEQUALLY
Surprisingly, people often do not realize the battle they have initiated by leaving assets to children unequally. Clearly, there are reasons that clients choose to do this, and we do not judge them for this, but we do remind them that it could cause problems in the family following their passing. In most cases their decision will not be anything new for the family. But sometimes, it is a shock to the decedent’s children. This often causes animosity to the point of taking legal action, whether or not it is warranted or has a legal basis. Even if assets are left to children unequally, with the proper estate planning documents in the proper manner, it will not prevent the child who feels jilted from filing a lawsuit. Their siblings will have to pay attorney fees and costs to fight this frivolous lawsuit. Usually, the damage done cannot be overcome? If that is a risk the client is willing to take, it can be done, as long as it is a known and understood risk.
The loss of a loved one is difficult enough on its own. It is even more painful when it is coupled with a legal mess that needs to be resolved. These are only a handful of the multitude of messes that people can leave behind. It is best to have these issues addressed during life, so that loved ones are left to grieve in peace without bill collectors breathing down their neck or an impending lawsuit.