We all have aging parents, siblings, relatives or friends that may need our help as they age. Some events in our lives may trigger the involvement of probate court.  The probate courts oversee the proper settlement of estates and management of guardianship. Let our Q & A section help you understand the process.

What are an estate executor, executrix, and administrator? A person named in a will to act in the proper settlement of the estate is an executor (if male), or executrix (if female). If no person is named in the will to serve as executor or executrix, probate court will appoint an administrator to handle the distribution of the estate. Each of these (executor, executrix, and administrator) has a fiduciary duty, or duty of trust, to properly settle and close the estate. (For executor responsibilities, see executor.org)

What is the purpose of a probate bond? Why do I need a probate bond? Who benefits from the probate bond? The bond is a financial guarantee by the bond company in the amount of the bond insuring performance as administrator the estate. The bond protects the beneficiaries of the estate from acts such as misrepresentation, fraud, and theft of assets by the executor/executrix/administrator.

If there is a failure on the part of the executor/executrix/administrator, probate court may request reimbursement from the bond company to replenish misappropriated assets. Any number of factors may be involved in probate court’s decision to require a bond. One very common factor is if the executor/executrix/administrator lives in a different state than the estate itself is located. In such a case, even if a will states the executor/executrix/administrator can serve without a bond, most courts will require a probate bond anyway. The concern is due to different procedures and rules in different states, as well as the actual distance of the executor from the estate.

What does it mean for an executor/executrix/administrator having a bond in his/her name? In effect, the executor/executrix/administrator is signing a personal guarantee with the bond company agreeing that he/she will perform the required duties to process and pay all bills, including taxes, of the estate and properly distribute any remaining assets to the heirs of the estate. If he/she defaults on any duties, and the probate bond is invoked for payment of misappropriated funds, the bond company is obligated to pay within the terms of the bond. The bond company then has recourse against the executor/executrix/administrator and can sue him/her for damages and reimbursement of all misappropriated monies.

What probate bond amount is usually required? How long is a probate bond needed? Probate court will usually require the probate bond to be issued at double the estate assets listed, as a protection to the estate. Bear in mind there can be unknowns in the actual value of an estate, such as real estate estimates not always being similar to actual sale price, or the possibility of finding hidden assets in the future.

A probate bond is a one-year contract that is required to renew until the estate is closed. Costs of a probate bond are considered a legitimate expense of the estate and are paid out as an expense prior to any disbursement to heirs. Our next article will discuss costs of a probate bond, and what can be done to mitigate the costs.

Who pays for the probate bond? The expense of a probate bond is an expense of the estate for which interests the bond is written to protect.

How much protection should the probate bond provide? Usually the courts require a bond amount that is twice the value of the estate.

Can the bond amount be reduced? If the executor or administrator is able to show most of the estate assets are secured by a savings account with court authorized withdrawals (not subject to liens or liabilities, i.e. debts or mortgages), then the bond amount may be reduced.

Can the probate bond be avoided altogether by giving the court something else? If the executor or administrator can offer a secured savings account or asset account of the estate that has withdrawal restrictions set in place by the bank, the court may allow that in lieu of a probate bond. Another possibility is to provide the court with an irrevocable letter of credit (ILOC) showing the asset amount requested by the court. Since real estate is not considered liquid, courts will not allow real estate values be used in any asset calculation to avoid the need for a probate bond. Keep in mind that the primary function of the probate bond is to serve as a financial guarantee, so options to bypass the requirement for a probate bond are very limited.

Also, the options noted directly above can become complicated and costly very quickly. Banks and financial institutions may charge fees for setting up special accounts. ILOCs also are subject to bank fees, and the bank generally requires financial review of the estate as well as some asset security given to the bank PRIOR TO issuing an ILOC.

Is there a possibility of obtaining a credit or discount on a probate bond premium? If the probate bond requirement is $500,000. Or more, there may be some eligible premium credits.

Most estates close within one year, and the premium for the probate bond is fully earned, i.e. there is no refund. If the estate is very large and complex requiring it to be open for more than one year, there is an option of paying the probate bond premium up front for two years or more, which usually results in a discount of 25% off of the second and third year’s full premium. If a multi-year bond premium has been paid up front, and the estate closes before the end of the second or third year, then a pro rata refund of premium after the first full year will be given. (EX. An estate closes at the end of 18 months; the unused premium for six months of a 2-year prepaid probate bond would be refunded.)