Taxation & Estate Planning

Alternatives to Paying a Bond

By Joel A. Schoenmeyer

One of the hidden costs of dying without a Will is the cost of a surety bond. Basically, this is an insurance policy -- purchased by the estate -- designed to protect the heirs from a rogue administrator. The idea is that, if the administrator takes the estate assets and runs off to Tahiti, the policy will reimburse the heirs.

In most every Will I've ever seen, the testator nominates someone to act as executor, and waives the requirement that the executor purchase a surety bond. After all, if you trust someone enough to nominate them as executor, you should trust them enough not to run off with your stuff. But if you don't have a Will, then you obviously cannot waive surety.

The amount of a surety bond is based on the value of the decedent's personal estate. (Why isn't real estate included? Because it's exceedingly difficult to run off to Tahiti with a house.) In Cook County, the bond is usually purchased from one of the insurance companies that have set up shop on the 12th Floor. The bond is in the amount of 1-1/2 times the value of the personal estate, so if your probate estate is $1 million, then the bond will be in the amount of $1.5 million. [Note that this is NOT the amount of the premium. The premium on a $1.5 million bond will probably run you $2,000 or more per year.]

The whole bond thing gets ridiculous when we're talking about a typical family situation. For instance, mom dies with $1 million and no Will. Her heirs are dad and her two kids. Should dad really have to pay a premium on a $1.5 million bond? Is dad really going to run off with the entire estate?

Luckily there are a couple of alternatives to purchasing a bond from an insurance (surety) company:

1. Section 12-5 of the Illinois Probate Act (the "Act") allows you to use individuals (rather than a surety company) as sureties. In that case, the amount of the bond is twice the value of the probate estate -- so the individual sureties would be on the hook for $2 million if mom's administrator runs off with her $1 million. Cook County attorneys should be aware of Section 12.5(d) of the Rules of the Circuit Court:

Before a bond with individual sureties is proffered, the representative shall file a petition with the court stating the approximate net worth of each of the proposed sureties, the estimated amount of claims against the estate and a statement as to whether or not all persons entitled to participate in the distribution of the estate as heirs or legatees are adults and consent to the approval of the bond with the proposed individual sureties. The consents of such persons shall be attached to the petition.

2. Deposit in lieu. Section 12-7 of the Illinois Probate Act provides as follows:

Sec. 12?7. Deposit in lieu or reduction of bond. Upon petition of a representative and upon such notice as the court directs, the court may order the representative to deposit for safe?keeping with a corporation qualified to accept and execute trusts in this State such portion or all of the personal estate as the court deems proper, subject to the further order of the court, and that the bond of the representative be reduced so as to cover only the estate remaining in the possession or custody of the representative.

Basically, the idea is that you deposit some or all of the estate assets into a bank account, which is "frozen" (and may only be accessed via further order of the court). So, for instance, maybe we decide that, of mom's $1 million probate estate, we only need to keep $50,000 liquid in order to pay bills. After getting the court's approval, we deposit the remaining $950,000 into the frozen account. As a result, the bond amount is $75,000 (50,000 x 1.5) instead of $1,500,000 (1,000,000 x 1.5).

Full post as published by Death and Taxes Blog on March 25, 2011 (boomark / email).