Taxation & Estate Planning

What the heck is "bond in lieu of probate"?

By Joel A. Schoenmeyer

In Illinois, you can avoid a probate proceeding so long as the assets you owned in your own name at your death (that is, assets OTHER THAN joint assets, assets with a beneficiary, or assets in trust) have a value of less than $100,000.

But what if you are over that amount, yet your only asset is Illinois real estate? Is there a way to transfer your house to your heirs or legatees without a probate? The answer is (surprisingly) "yes." You can do this by a process called "bond in lieu of probate," by which the heirs or legatees can transfer title to a buyer (maybe one of them, maybe a third party) via a valid deed. Basically, the process requires you to have:

1. Agreement by the heirs (and legatees, if any) to use this process; and

2. A title company that will agree to handle the transaction itself.

What are the concerns with transferring title to a decedent's real estate without a probate? The big one is creditors. Probate exists to transfer the decedent's property to his or her heirs (or, if there was a Will, to the legatees under the Will). But it also exists to allow creditors to be paid money they are owed by the decedent or his or her estate. If there's no probate, how are the claims paid? This is where the title company comes in to the picture. Here's Chicago-area attorney Cary A. Lind's take on the situation:

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.

I don't know if those rates are still applicable (Mr. Lind's article is from 2002), but let's assume they are, and we're talking about the transfer of a $500,000 house. In that case, the bond will be $10,000 (if the transaction is done in the first year after death). That's pretty expensive, I think, especially since the heirs are still required to sign a personal undertaking. I typically handle probate estates for far less than $10,000, and you get the probate "seal of approval" (disallowing claims once the claims period in probate has passed) thrown in for free.

Does this mean a "bond in lieu of probate" is always a bad idea? Not at all. I recently closed a transaction where dad died in 2005, leaving no Will and two heirs (son and daughter, who get along well). Son and daughter worked together in handling the property over the five years after dad's death, but then the two of them agreed that son would purchase daughter's interest. No bond was needed because the time for filing claims had passed, and the transaction was completed for much less than than the cost of a probate. (It happened pretty quickly to boot.)

Full post as published by Death and Taxes Blog on August 17, 2010 (boomark / email).