This chapter was first published by IICLE Press.

Transcription

1 This chapter was first published by IICLE Press. Book containing this chapter and any forms referenced herein is available for purchase at or by calling toll free

2 5 Managing Decedent s Personal and Real Property LORRAINE K. CAVATAIO Mathis, Marifian, Richter & Grandy, Ltd. Belleville COPYRIGHT 2009 BY LORRAINE K. CAVATAIO. 5 1

3 ILLINOIS ESTATE ADMINISTRATION I. Introduction A. [5.1] Scope of Chapter B. [5.2] Statutory Sources of Managerial and Investment Authority C. [5.3] General Duties and Liabilities of Executor D. [5.4] Breach of Fiduciary Duty Generally E. [5.5] Damages for Breach of Fiduciary Duty F. [5.6] Protection from Liability G. [5.7] Delegation H. [5.8] Liability for Agents or Advisors I. [5.9] Role of Probate Court II. Management of Personal Property A. [5.10] General Comments B. [5.11] Authority To Sell Personal Property C. [5.12] Procedure for Selling Personal Property D. [5.13] Deposit of Personal Estate with Corporate Fiduciary To Reduce Bond E. [5.14] Mortgaging, Pledging, or Leasing Personal Property F. [5.15] Mortgage of Agricultural Commodities G. [5.16] Procedure for Mortgaging, Pledging, or Leasing Personal Property H. [5.17] Completion of Decedent s Contract To Sell Personal Property I. [5.18] Transfer of Securities J. [5.19] Operation of Decedent s Business III. [5.20] Investment of Estate Assets IV. Management of Real Property A. [5.21] General Comments B. [5.22] Real Estate Management Checklist C. [5.23] Administration of Real Property That Qualifies for Special Use Valuation Election D. [5.24] Leasing Real Property E. [5.25] Selling or Mortgaging Real Property F. [5.26] Procedure for Sale or Mortgage of Real Property G. [5.27] Completion of Decedent s Contract Regarding Real Property 5 2

4 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY V. Sample Pleadings A. [5.28] Petition for Authority To Sell Personal Property B. [5.29] Petition for Authority To Pledge Personal Property C. [5.30] Petition for Authority To Sell Real Property ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 3

5 5.1 ILLINOIS ESTATE ADMINISTRATION I. INTRODUCTION A. [5.1] Scope of Chapter During the administration of the estate, the executor must manage all of the personal and real property of the decedent to meet all the financial needs of the estate and to prepare the assets for distribution to the ultimate beneficiaries under the will of the decedent or by the laws of intestacy. Management of the personal and real property may include selling, mortgaging, leasing, or investing assets during the administration of the estate. The actions taken by the executor to administer these assets may be authorized either under the will or by the probate laws. This chapter outlines the executor s duties and responsibilities in managing the decedent s personal and real property. CAUTION: A significant majority of estates are now administered independently under Article 28 of the Illinois Probate Code. Many powers of an independent executor or administrator may be exercised without a court order. When those issues arise in an independently administered estate, most of the petitions, orders, and reports discussed in this chapter will not be necessary. This chapter assumes that independent administration has not been granted and that the estate is in supervised administration. Also, executor as used throughout this chapter refers to executors, administrators, and administrators with will annexed. B. [5.2] Statutory Sources of Managerial and Investment Authority The statutory references for management of the decedent s personal property are located in 19-1 through of the Probate Act of 1975 (Probate Act), 755 ILCS 5/1-1, et seq. The statutory references for management of the decedent s real property are located in 20-1 through of the Probate Act. These powers listed in Articles 19 and 20 of the Probate Act can be superseded or expanded by the terms of the decedent s will. For example, the decedent s will can waive the requirement of the executor to obtain a court order to sell an asset. A decedent may authorize independent administration under the terms of a will, or the court may grant independent administration as provided in 755 ILCS 5/28-2. If the court approves independent administration, the provisions of 28-1 through of the Probate Act govern the duties of the executor. With reference to the management of the personal and real property of the decedent in independent administration, 28-8 provides the specific duties of the executor. Because some of these duties and responsibilities are similar to the duties and responsibilities under Articles 19 and 20 of the Probate Act, the remaining provisions of this chapter focus on the provisions of Articles 19 and 20. During the administration of a decedent s estate, the executor may be required to invest assets of the decedent. Sections 21-1 through of the Probate Act outline the specific investments an executor is able to make during the course of administration of a decedent s estate. C. [5.3] General Duties and Liabilities of Executor An executor has a duty to manage the decedent s estate. This duty is expressed as the highest degree of fidelity and utmost good faith but limited in degree of skill and diligence to the 5 4

6 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY 5.5 prudent person rule. In re Estate of Venturelli, 54 Ill.App.3d 997, 370 N.E.2d 290, 12 Ill.Dec. 667 (3d Dist. 1977). This means that the executor in managing and investing assets in the decedent s estate is responsible to act as a prudent person would when handling his or her own affairs. This is a lesser standard than the prudent investor rule. This standard will require the executor to monitor the assets and to, in most cases, minimize any losses to the estate. Venturelli, supra, is discussed in detail in In re Estate of Pirie, 141 Ill.App.3d 750, 492 N.E.2d 884, 97 Ill.Dec. 225 (2d Dist. 1986). D. [5.4] Breach of Fiduciary Duty Generally An executor is a fiduciary and is held to the prudent person standard. If an executor should breach this fiduciary duty, the executor will be held personally liable for any losses sustained by the decedent s estate. Furthermore, if the executor is found guilty of self-dealing, then he or she is liable for the amount of the profit received as a result of the self-dealing. Thus, an executor must be cautious when receiving an individual benefit from a transaction with reference to the estate s assets. The best advice is to obtain either the written consent of all beneficiaries or a court order authorizing the transaction that otherwise would appear to be self-dealing by the executor. Once an executor breaches a fiduciary duty, the presumption arises that the transaction was fraudulent. Thus, the burden of proof shifts to the executor to prove by clear and convincing evidence that the transaction was fair and that the executor did not breach the fiduciary duty. NC Illinois Trust Co. v. First Illini Bancorp, Inc., 323 Ill.App.3d 254, 752 N.E.2d 1167, 256 Ill.Dec. 925 (3d Dist. 2001). E. [5.5] Damages for Breach of Fiduciary Duty Depending on the severity of the actions of the executor in breaching his or her fiduciary duty, the estate may be entitled to punitive damages and prejudgment interest as well as compensatory damages for the resulting breach. Generally speaking, the estate will always be entitled to compensatory damages to make the estate whole after the breach of the fiduciary duty. In the interest of making the estate whole, the court when warranted by equitable considerations may also award prejudgment interest on the amount lost as a result of the breach. The theory is that if the breach had not occurred, the estate would have been earning interest on that money lost. Thus, to make the estate whole, the estate should be entitled to both compensatory damages and the loss of income on the compensatory damages. NC Illinois Trust Co. v. First Illini Bancorp, Inc., 323 Ill.App.3d 254, 752 N.E.2d 1167, 256 Ill.Dec. 925 (3d Dist. 2001). In NC Illinois Trust, the court went one step further and, due to the egregious nature of the actions of the bank as executor, awarded punitive damages as well. Generally, punitive damages will be awarded in circumstances such as fraud, actual malice, deliberate oppression, or willful and wanton behavior or when the wrong involved some violation of duty springing from a relationship of trust and confidence. Id. The amount of punitive damages is designed to serve three distinct purposes: (1) to act as retribution, (2) to deter the bad actor from committing similar wrongs in the future, and (3) to deter others from similar conduct. Given these factors, when reviewing an award for punitive damages for breach of fiduciary duty, the court will consider the nature and enormity of the wrong, the financial status of the bad actor, and the potential liability of the bad actor. Punitive damages are generally awarded in cases of self-dealing. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 5

7 5.6 ILLINOIS ESTATE ADMINISTRATION F. [5.6] Protection from Liability Given the extensive nature of damages that can be awarded for a breach of fiduciary duty, an executor can protect himself or herself from this liability exposure by keeping all beneficiaries involved and informed and by seeking court approval of any and all transactions that may appear to be self-dealing or may give rise to a claim for breach of fiduciary duty. Furthermore, the executor should seek out competent legal advice and follow that advice. G. [5.7] Delegation Generally, an executor has the duty to administer the estate without delegation of duties. Chicago Title & Trust Co. v. Zinser, 264 Ill. 31, 105 N.E. 718 (1914). However, if the will of the decedent specifically authorizes the executor to delegate any powers or duties, the will overrides the general duty not to delegate. Although the executor generally may not delegate any powers or duties, this does not prevent the executor from seeking counsel from other advisors whom the executor believes to be more qualified on the topic in question. Although the executor may seek this advice, the executor must make the ultimate decision on the issue in question. To prevent any issues with the beneficiaries of the estate regarding any fees paid by the executor to any investment advisors or banks, etc., the executor should seek permission of the court by way of petition to hire the investment advisor, bank, etc., and to pay it a reasonable fee for its services. H. [5.8] Liability for Agents or Advisors As stated in 5.7 above, an executor generally cannot delegate any powers or duties to an agent or advisor. However, if the executor, under authority of the will or court order, delegates powers or duties to an agent or advisor, the executor will not be personally liable for the acts of the agent or advisor. Nevertheless, the executor will be personally liable if the executor fails to exercise ordinary prudence in selecting the agent or advisor and if the executor fails to properly monitor or supervise the agent s or advisor s work. In particular, just as an individual would supervise or monitor the work completed by an agent or advisor of that individual, an executor must do the same when delegating powers and duties as executor to an agent or advisor. This is required under the prudent person rule. If the will specifically designates an individual to manage a particular asset, the executor is relieved from personal liability for the decedent s selection of the agent or advisor. Depending on the specific language in the will, the executor also may be relieved from personal liability for the acts of this designated agent or advisor, but the executor as a prudent person should still periodically review the acts of the designated agent or advisor. I. [5.9] Role of Probate Court In an estate that is not administered under independent administration, the probate court supervises the acts of the executor during administration and verifies that the actions taken by the executor are appropriate and authorized. Even in supervised administration, however, court approval may not be required by the executor to act if the will grants the executor a specific power that overrides the statutes and specifically authorizes the executor to act without court approval

8 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY 5.11 II. MANAGEMENT OF PERSONAL PROPERTY A. [5.10] General Comments Once an executor receives letters of office, title of the decedent s personal property vests in the executor. Technically, upon issuance of the letters of office, the executor s title to the personal property is retroactive to the date of death of the decedent. As the titleholder of the decedent s personal property, the executor has the duty to collect the personal property, insure and safeguard it during the estate administration, and dispose of the personal property either during or at the close of the estate administration. Immediately upon appointment as executor, if not sooner, the executor should compile an inventory of the personal property of the decedent. Along with this list, when appropriate, the executor should take possession of the personal property. Personal property includes stocks, bonds, jewelry, automobiles, furniture, etc. The executor should insure chattel property (automobiles, jewelry, etc.) from loss during the estate administration. Specifically, if the decedent had an automobile at death, the executor should contact the insurance agent to add the estate as a named insured on the policy and to verify that the premium is current. As soon as possible, the executor should sell automobiles or other depreciable assets that are not income producing and are not specifically bequeathed under the will. Unless authorized under the will to sell the personal property without a court order, the executor must obtain a court order to sell the asset. The proceeds received must be deposited into an estate account. If the asset is specifically bequeathed to an individual under the will and the executor has determined that the asset is not necessary for the payment of taxes, claims, or expenses of administration, the executor may distribute the asset to the individual designated under the will. Of course, the executor may be required under the statutes to have the beneficiary sign a refunding bond. Likewise, even if personal property is not specifically bequeathed, the court may order the distribution of the assets in kind under the terms of 755 ILCS 5/19-1(b). Of course, prior to ordering the distribution in kind, the court must be satisfied that the personal property being distributed in kind is not necessary for the payment of taxes, claims, and expenses of administration. If the personal property is required for the payment of taxes, claims, or expenses of administration, the executor should proceed to liquidate the assets under the provisions of Article 19 of the Probate Act. The liquidation proceeds should then be invested during the course of administration as provided under 21-1 through of the Probate Act. If the residue or the estate as a whole is insufficient to pay the taxes, claims, and expenses of administration, Probate Act 24-3 outlines the order of abatement of assets in the estate. B. [5.11] Authority To Sell Personal Property Section 19-1 of the Probate Act allows an executor with leave of court to sell the personal property of a decedent. 755 ILCS 5/19-1. This requirement to receive a court order can be ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 7

9 5.12 ILLINOIS ESTATE ADMINISTRATION trumped by a provision in the will authorizing the executor to sell the personal property without leave of court. The sale can be either a private sale or a public sale. Generally, with a private sale the executor must provide all the beneficiaries with notice of the private sale and receive each beneficiary s consent to sell the asset by private sale. With a public sale, it is still suggested to give all of the beneficiaries notice of the sale to allow them to appear and bid on items if they desire. By providing beneficiaries with notice or receiving consents from the beneficiaries, the executor can avoid later issues about the manner in which the sale was conducted. C. [5.12] Procedure for Selling Personal Property Section 19-4 of the Probate Act specifies the procedure for petitioning the court for approval to sell personal property. 755 ILCS 5/19-4. The executor must file a petition with the court stating the facts and circumstances that give rise to the necessity to sell the personal property. The petition must include a brief description of the personal property to be sold. Upon filing of the petition under 19-4, the court may hear the petition without notice or the court may require notice of a hearing on the petition to be given to all interested parties as defined under 755 ILCS 5/ A sample petition for authority to sell personal property is in 5.28 below. If the court grants the petition to sell the personal property, the order should include the specific provisions in The order must state whether the sale is a public or private sale. If the sale is a public sale, the sale must be for cash or credit of not more than 12 months duration. Any sale on credit must have security as directed by the court. Notice of a public sale must be given as directed by the court in one of the following methods: (1) inserting a notice or advertisement of sale in a newspaper published in the county where the sale is to be made not less than once nor more than 3 times... the first publication to be not less than 5 nor more than 21 days before the date of sale, or (2) posting a notice or advertisement of sale in at least 4 public places in the county where the sale is to be made for a period specified by the court of not less than 5 nor more than 21 days before the date of sale. 755 ILCS 5/19-5(b). A private sale may also be for cash or credit, but with a private sale, the court at its discretion may not require security on any credit sales. D. [5.13] Deposit of Personal Estate with Corporate Fiduciary To Reduce Bond An executor is required to provide a bond to the court in either one and half times or double the value of the personal assets of the decedent. See 755 ILCS 5/12-5. An executor can reduce or potentially eliminate this bond under the provisions of Probate Act 12-7 by depositing, with court approval and direction, the personal estate of the decedent with a corporation qualified to accept and execute trusts in Illinois

10 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY 5.18 E. [5.14] Mortgaging, Pledging, or Leasing Personal Property Section 19-1 of the Probate Act authorizes an executor to sell (discussed in 5.12 above), mortgage, pledge, or lease personal property of the estate. 755 ILCS 5/19-1. Unless the will allows the executor to mortgage, pledge, or lease without a court order, 19-1(a) requires the executor to receive leave of court to mortgage, pledge, or lease the personal property of the decedent. If a will authorizes the executor to mortgage, pledge, or lease without court approval, the subsequent setting aside of the will does not invalidate the act of the executor based on a power in the will to mortgage, pledge, or lease without court approval. 755 ILCS 5/19-1(c). F. [5.15] Mortgage of Agricultural Commodities Section 19-3 of the Probate Act provides specific authority for the executor to mortgage or pledge agricultural commodities. 755 ILCS 5/19-3. This authority is exercisable by leave of court unless the will directs otherwise. A mortgage or pledge under this section is limited in term. The mortgage or pledge term may not exceed one year. Also, the loan must comply with the federal Agricultural Adjustment Act of 1938, 7 U.S.C. 1281, et seq. G. [5.16] Procedure for Mortgaging, Pledging, or Leasing Personal Property Section 19-4 of the Probate Act outlines the procedure for obtaining court approval to mortgage, pledge, or lease personal property. 755 ILCS 5/19-4. Specifically, the executor must file a petition with the court stating the facts and circumstances that give rise to the necessity to mortgage, pledge, or lease the personal property. The executor also must describe briefly the personal property to be mortgaged, pledged, or leased. Upon filing of the petition under 19-4, the court may hear the petition without notice or the court may require notice to be given to all interested parties as defined under Probate Act regarding a hearing on the petition. A sample petition for authority to pledge personal property may be found in 5.29 below. H. [5.17] Completion of Decedent s Contract To Sell Personal Property If a decedent dies before completing the sale of personal property according to the terms of a contract, the executor may seek court approval to complete the contract on behalf of the decedent. The form of the petition would be similar to the petitions referenced in 5.12 and 5.14 above for the sale, mortgage, pledge, or lease of personal property. If the personal property subject to the contract is an item specifically bequeathed under the terms of a will dated prior to the sale contract, the personal property passes to the person it was bequeathed to under the will. This transfer, however, will remain subject to the contract. I. [5.18] Transfer of Securities Although the executor may leave securities titled in the name of the decedent during the course of administration, this may cause delays for subsequent transfers and may cause some income tax reporting issues. If the securities are not titled in the name of the estate, any dividends or other income tax reportable events will be reported under the decedent s social security number. In this respect, the IRS will be looking for a Form 1040 to report these items. This may ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 9

11 5.19 ILLINOIS ESTATE ADMINISTRATION require the executor to complete a Form 1040 showing the dividends and then subtracting the dividends as a nominee distribution to the estate s taxpayer identification number. This complicates the income tax reporting and compliance process. Thus, the executor may want to transfer securities into the estate s name with the estate s taxpayer identification number or hold the securities in street name with the estate s taxpayer identification number with an institution. A transfer generally requires a certified death certificate, letters of office dated within 60 days of the transfer, a letter of direction, an affidavit of domicile, an irrevocable stock power, and the original stock certificate. Of course, there may be a transfer fee. If this is the case and the security is specifically bequeathed and the executor does not need the security for taxes, claims, or expenses of administration, the executor, if allowed by statute given the claims period, may want to transfer the security directly to the named beneficiary to minimize transfer fees. J. [5.19] Operation of Decedent s Business Although a decedent s interest in a business is personal property, the operation of a decedent s business by the executor is discussed in Chapter 6 of this handbook. III. [5.20] INVESTMENT OF ESTATE ASSETS An executor has a duty to invest the funds of the estate during the course of administration. The standard of care for this duty as discussed in 5.3 above is the prudent person rule. The Probate Act outlines the specific investments that an executor is allowed to make on behalf of the decedent s estate. Please note that if the will authorizes other investments, those investments are allowed also, and if authorized by the will, the executor can continue to hold the decedent s investment portfolio in the investments that the decedent held at the time of death and may not have a duty to diversify. The particular investments referenced under Article 21 of the Probate Act are as follows: a. direct obligations of the United States or any agency or instrumentality thereof or obligations fully guaranteed by the United States, if the maturity date is no longer than five years from the date of purchase (755 ILCS 5/ ); b. obligations of a local public agency or of a public housing agency, if the maturity date is no longer than 18 months from the date of purchase (755 ILCS 5/ ); c. savings accounts or certificates of deposit of a state or national bank doing business in Illinois to the extent the deposits are insured by the United States or any agency thereof (755 ILCS 5/ ); d. withdrawable capital accounts, deposits, and investment certificates of deposit of a state savings and loan association or federal savings and loan association doing business in Illinois to the extent the accounts, deposits, or certificates are insured by the United States or any agency thereof (755 ILCS 5/ );

12 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY 5.21 e. interests in one or more common trust funds as established by the Common Trust Fund Act, 760 ILCS 45/1, et seq., to the extent that an investment in such common trust fund account meets the standard of the prudent person rule for the investment of trust funds (An administrator must have approval of the court to invest in a common trust fund.) (755 ILCS 5/ ); f. interests in any open-end investment company registered under the federal Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq., provided that the portfolio of any such company is limited to securities and investments authorized under Probate Act through (755 ILCS 5/ a); g. any other investment authorized by a court of competent jurisdiction or that from time to time has been or may be expressly declared by the General Assembly to be a legal investment by an executor (755 ILCS 5/ ); and h. interests in mutual funds registered under the Investment Company Act of 1940, the investments of which are not restricted to the investments otherwise authorized for representatives in Probate Act through , including without limitation a mutual fund that receives services from or pays fees to the executor, provided that the investment in the mutual fund or funds meets the standard of the prudent investor rule for the investment of trust funds (755 ILCS 5/ ). It is suggested that when possible the executor keep the beneficiaries informed of the investment decisions and obtain the beneficiaries consent to the investments. This will reduce the liability exposure of the executor. IV. MANAGEMENT OF REAL PROPERTY A. [5.21] General Comments Like personal property, the executor is vested with title to the decedent s real property subject to the exempt estate of homestead upon issuance of letters of office. 755 ILCS 5/20-1. Also, unless prohibited by the will or other provisions under Article 20 of the Probate Act, the executor should take possession of all real property. Once again, the executor must safeguard and preserve the asset. This includes insuring the real property during the course of administration. If the property is insured at the time of death, the executor may merely need to add the estate as an additional named insured and continue to pay the premiums as they come due during administration. Some insurance companies will cancel the policy once they are notified of the insured s death. If so, the executor must obtain a new policy to insure the estate s interest. The executor must preserve the real property. This includes paying the real estate taxes and the necessary utilities. For example, the executor can shut off the cable and the telephone, when appropriate, but should not shut off the gas, electric, and water to avoid pipes freezing, etc. All of these expenses, including the insurance premium referenced above, are expenses of administration that should be paid from the assets of the estate as provided under the will or the Probate Act. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 11

13 5.22 ILLINOIS ESTATE ADMINISTRATION If the real property is rented, the executor shall collect all rents in the name of the estate. In essence, the executor steps into the shoes of the decedent as the landlord. Likewise, if the real property is subject to a mortgage, the executor must continue to make payments on the mortgage from the estate assets. Article 20 of the Probate Act outlines the statutory requirements for the administration of real estate. Section 20-1 specifically requires the executor to take possession of the real property as discussed above. Unless a will states otherwise, 20-1(b) does not allow the executor to take possession of real property that is occupied by an heir or legatee as a residence. In this case, the executor may file a petition with the court for possession if possession of the real property is necessary for the payment of taxes, claims, or expenses of administration or the proper distribution of the estate. Likewise, an heir or legatee can petition the court for possession of real property if that real property is not necessary for the payment of taxes, claims, or expenses of administration or the proper distribution of the estate. Finally, the executor may want to sell the real property if the real property is not specifically bequeathed and all beneficiaries agree to convert the asset to cash. In this respect, the executor must follow the rules in the Probate Act regarding the sale of real property unless the will authorizes the sale of real property without court approval. Sales are discussed in 5.25 below. B. [5.22] Real Estate Management Checklist Below is a list of suggested steps the executor should take when taking possession of real property: 1. Carefully review the provisions of the will regarding the handling of real property, specific bequests of real estate, and possession of the real property by an heir or legatee. 2. Locate and identify all real property of the decedent and determine whether the real property should be in the possession of the executor. In this respect, the executor may want to review all deeds, title policies or abstracts, real estate tax bills, or other documentation relating to or affecting title to real property. If the property has been the subject of environmental contamination or other environmental concerns, the executor should review all documentation regarding the environmental issue and consult an environmental expert. 3. Verify whether the property is subject to a mortgage or other lien. If the property is subject to a mortgage, review all mortgage documentation and arrange for the continued payment of the mortgage until a disposition of the real property during administration. 4. Verify that all real estate taxes are paid to date and that all future tax bills during the administration will be delivered to the executor for prompt payment. 5. Verify the condition of each parcel. This includes assessing any needed repairs or maintenance. Also, determine whether the property is secure or whether locks need to be changed or other steps taken to secure the premises

14 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY Review all real property insurance policies and contact the appropriate insurance agent or company to list the estate as an additional named insured and to forward all future bills to the executor s address. The executor should also cancel any unnecessary insurance coverage and seek a refund of the premium. Likewise, if the property is not insured or is underinsured, the executor should obtain adequate insurance coverage at the expense of the estate. 7. Have all utility bills forwarded to the executor s address for prompt payment. The executor should also disconnect all unnecessary utilities cable, telephone, etc. and minimize the remaining utilities by turning the heat/air conditioner to a minimal level and turning off all unnecessary lights, appliances, etc. 8. If the property is leased, obtain copies of all leases and inform the tenants to forward all future payments payable to the estate at the executor s address. 9. When appropriate, consider whether the executor should hire an agent to manage the rental real property during the administration. This may depend on the number of rental properties involved. 10. When necessary for estate tax purposes or sale purposes, arrange for appraisals of the real property. 11. Determine whether the property should be sold or otherwise transferred to an heir or legatee and when the sale or transfer should take place. C. [5.23] Administration of Real Property That Qualifies for Special Use Valuation Election Internal Revenue Code 2032A allows the executor to make a special election with reference to farm property to value the real estate based on its use as a farm rather than at its highest and best use, which is the general standard for valuation of real estate. Code 2032A special use valuation provisions have various requirements to be met in order to use the special use valuation. These requirements are defined as qualified real property, which is real property that meets the following criteria: 1. it is located in the United States; 2. it was acquired from or passed from the decedent to a qualified heir as defined in 2032A; 3. it was being used and is used for a qualified use (a farm or a trade or business other than farming); percent or more of the adjusted value of the gross estate consists of the adjusted value of the real or personal property that meets the requirements of items 2 and 3 above; percent or more of the adjusted value of the gross estate consists of the adjusted value of real property that meets the requirements of items 2 above and 6 below; and ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 13

15 5.24 ILLINOIS ESTATE ADMINISTRATION 6. during the eight years ending on the decedent s date of death, there were five or more years during which (a) the property was owned by the decedent or a member of the decedent s family; (b) the property was used for a qualified use by the decedent or member of the decedent s family; and (c) there was material participation by the decedent or member of the decedent s family for a qualified use. For the special use valuation to be used, the executor must make an irrevocable election on IRS Form 706, Estate (and Generation-Skipping Transfer) Tax Return, and each person with a interest in the farm must sign a written agreement to pay any additional estate taxes if the farm ceases to meet the first three requirements of the definition of qualified real property within ten years after the decedent s death, except in a situation in which the qualified heir dies. The use of Code 2032A is limited in that the reduction of the value of the real property cannot be greater than $1,000,000 as indexed for inflation. Also, in order for 2032A to be utilized, the executor must follow the particular guidelines and requirements of 2032A and the various regulations provided thereunder. All of the proper agreements and supporting documentation regarding this election must be attached to the Form 706 as outlined in the rules. Anyone electing 2032A special use valuation should double-check that all requirements of 2032A have been met prior to filing the Form 706. The Form 706 cannot be amended to perfect the special use valuation election. An election by the executor to treat the property as special use valuation property under Code 2032A will also require the executor to follow the rules of 2032A regarding material participation in the management of the property. Code 2032A requires a qualified heir to participate materially in the management of the special use property for a period of ten years after the decedent s date of death. The rules for material participation are very strict, and only certain leases qualify. Thus, if special use valuation is elected, the executor must be cautious to make sure that the material participation requirements are met by the type of lease and/or an express agreement with a qualified heir to manage the special use property. If a qualified heir fails to materially participate in the farming of the property for the period specified in 2032A, the estate will be subject to a recapture tax equal to the tax saved as a result of the original special use valuation election. Therefore, it is very important that the executor or his or her counsel review and comply with the requirements of 2032A if an election is made. D. [5.24] Leasing Real Property An executor may lease the real property of the decedent as provided under the will or with leave of court as provided in 755 ILCS 5/20-2. Obviously, if the will allows the executor to lease real property without court approval, the executor may enter into a lease of the real property as long as the terms of that lease are reasonable given the prudent person standard. Even if the will allows an executor to lease the real property, if the real property is the subject of a specific bequest, the executor must file the consent of the beneficiary of the real property to the lease with the court. 755 ILCS 5/20-2(a). If the will does not include a power to lease real property without court approval, 20-2 allows an executor to seek court approval to lease the property. The executor must file a petition

16 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY 5.26 with the court briefly describing the real property and improvements to be leased and the facts and circumstances of the lease. A copy of the proposed lease should also be attached to the petition. Upon the filing of a petition to lease real property, the court will set a hearing on the petition within ten days. The executor must give all interested parties as defined in 755 ILCS 5/ notice of the hearing not less than five days prior to the hearing date. The petition in this matter would be similar to the petition for the sale of real property with some modifications. A sample petition for authority to sell real property is in 5.30 below. E. [5.25] Selling or Mortgaging Real Property A decedent may authorize an executor to sell or mortgage real property under the terms of the will without court approval. If the will contains such a term, once the executor has made the determination that it is necessary to sell or mortgage the real property, the executor may do so without leave of court. Real property includes subsurface interests. For example, real property includes gas, oil, coal, or other mineral interests. If a will does not include a provision authorizing the sale or mortgage of real property, then the executor must turn to 755 ILCS 5/20-4 for guidance on requesting court approval to sell or mortgage real property. In neither case a will or the Probate Act may an executor sell or mortgage real property that is the subject of a specific bequest unless the real property is necessary for the payment of taxes, claims, or expenses of administration. To determine the priority for abatement of bequests for the payment of taxes, claims, or expenses of administration, see 755 ILCS 5/24-3. When an executor sells or mortgages real property, the executor may be required to file an additional surety bond for the proceeds. 755 ILCS 5/12-9. If an additional surety bond is required, it must be filed with the court before the entry of any order authorizing the sale or mortgage of real property. The requirement for an additional surety bond also applies to a sale or mortgage under a power in a will or a sale or mortgage during independent administration. 755 ILCS 5/ F. [5.26] Procedure for Sale or Mortgage of Real Property Section 20-5 of the Probate Act outlines the procedure for requesting court approval to sell or mortgage real property. 755 ILCS 5/20-5. In particular, the executor shall file a petition with the court that issued the executor s letters of office. This petition should include the facts and circumstances giving rise to the need to sell or mortgage the real property, a description of the real property and the interest of the decedent therein, the approximate value of the real property, and the nature and extent of all liens on or other interests in the real property. A sample petition for authority to sell real property is in 5.30 below. The executor should also attach a copy of the proposed mortgage and/or sales contract to the petition. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 15

17 5.27 ILLINOIS ESTATE ADMINISTRATION As many of the petition requirements may not be known by the executor by reviewing the decedent s paperwork located at the time of death, the executor may want to order a title search on the property to verify the ownership interest and any liens or other encumbrances of record. If the executor orders and receives a title search, he or she may want to attach a copy of the title search report to the petition for further support of the statements in the petition. If the real property is subject to any liens or encumbrances, all parties holding liens or other encumbrances must be made party defendants to the petition and served with copies of the petition as in other civil cases. If any of these named defendants are minors or unascertainable, the court will appoint a guardian ad litem to represent their interest. As described in 5.25 above, prior to the entry of an order granting this petition, the executor must file additional bond as required under 755 ILCS 5/12-9. If an issue should arise as to the value of the real property that is the subject of the petition, the court has the authority to appoint an appraiser or several appraisers to appraise the property and report the findings to the court. 755 ILCS 5/20-8. The fee of the appraisers must be set by the court at a reasonable sum plus expenses. Once the court enters an order allowing the sale of real property by a method other than under the terms of a sales contract as approved by the court, the executor upon completion of the sale must report the sale to the court in the form provided in 755 ILCS 5/20-9. This verified report should describe the real property sold, identify the purchaser, and specify the date and terms of the sale and the manner in which the sale was carried out. Upon the filing of the report of sale, the court shall set the report for hearing with due notice to all parties who have entered their appearance in the matter. At the hearing, the court may either confirm the sale or disapprove the sale and order the real property to be resold. Thus, if the court directs a manner in which the real property is to be sold, the executor should be sure to follow that direction of the court. Because the court reserves the right to disapprove the sale, a deed cannot be tendered by the executor until after the court confirms the report of sale. 755 ILCS 5/ This deed must be delivered within 30 days after an order confirming the sale of the real property. If, instead, the real property is mortgaged, the order of the court granting the petition to mortgage the real property must state the maturity date, the amount of the mortgage, and the rate of interest. 755 ILCS 5/ The proceeds from the mortgage then are reported to the court on the next accounting. G. [5.27] Completion of Decedent s Contract Regarding Real Property If a decedent executes a real estate contract to purchase real property but dies prior to completion of the contract (i.e., payment of the purchase price under the contract), the executor is granted the authority to petition the court for approval to complete the contract. 755 ILCS 5/ This petition, like the others referenced in 5.24 and 5.25 above, should include a description of the real property involved, the nature of the improvements thereon, an estimated

18 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY 5.28 value of the real property, and the amount unpaid on the purchase price. The court may hear this petition without notice or may require notice to all interested parties as defined in 755 ILCS 5/ The executor is not limited to merely requesting permission to complete the purchase but also may ask the court for direction as to how to handle the real property. Likewise, if a decedent executes a contract to sell or lease real property, the executor may petition the court for authority to complete that contract or lease. 755 ILCS 5/ The petition must include a description of the real property and the facts related to the sale or lease. The court may hear this petition without notice if the court finds notice to interested persons is not required to protect their interests or may require notice to all interested parties as defined in If the contract required a warranty deed from the decedent, the executor can execute a warranty deed on behalf of the estate to bind the estate as though made by the decedent, but this does not personally bind the executor. As stated above, if the real property that is the subject of the sales contract or lease is specifically bequeathed under a will that predates the contract or lease, the contract or lease is not treated as a revocation of the devise; rather, the property passes to the beneficiary subject to the contract or lease. 755 ILCS 5/4-8. V. SAMPLE PLEADINGS A. [5.28] Petition for Authority To Sell Personal Property STATE OF ILLINOIS IN THE CIRCUIT COURT OF THE TWENTIETH JUDICIAL CIRCUIT ST. CLAIR COUNTY IN PROBATE IN THE MATTER OF THE ESTATE OF ) ) No. 03-P-, Deceased ) ) PETITION FOR AUTHORITY TO SELL PERSONAL PROPERTY Comes now, Executor of the Estate of (Estate), and for this Petition for Authority To Sell Personal Property under 755 ILCS 5/19-1 states as follows: 1. The Decedent died on, The Decedent left a Last Will and Testament dated, 20 (Will), which was admitted to probate on, was appointed Executor on, 20, and letters of office were issued to as Executor. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 17

19 5.29 ILLINOIS ESTATE ADMINISTRATION 4. The Estate owns a 2000 Honda Accord Sedan with VIN# (Automobile). 5. The Automobile is not subject to any liens or encumbrances. 6. Upon information and belief, the Executor believes the Automobile to be worth $. 7. The Automobile is not specifically bequeathed under the Will, nor has the Decedent directed that the Automobile not be sold. 8. None of the residual beneficiaries desire to receive the Automobile as part of their distribution, the Automobile is depreciating in value, and the Estate is incurring ongoing expenses to insure the Automobile. The Executor believes that it is in the best interest of the Estate to sell the Automobile to reduce the risk of depreciation and ongoing expenses and to prepare the Estate for distribution. 9. The Executor requests authority of this Court to sell the Automobile at a private sale for cash. WHEREFORE, the Executor prays that this Court enter an order authorizing the Executor to sell the Automobile at a private sale for cash and for such other and further relief this Court deems just and proper. B. [5.29] Petition for Authority To Pledge Personal Property Attorney of Record [Caption] PETITION FOR AUTHORITY TO PLEDGE PERSONAL PROPERTY Comes now, Executor of the Estate of (Estate), and for this Petition for Authority To Pledge Personal Property under 755 ILCS 5/19-1 states as follows: 1. The Decedent died on, The Decedent left a Last Will and Testament dated, 20 (Will), which was admitted to probate on, was appointed Executor on, 20, and letters of office were issued to as Executor

20 MANAGING DECEDENT S PERSONAL AND REAL PROPERTY The Estate holds 500 shares of Anheuser Busch, Inc. stock (Stock). 5. Upon information and belief, the Executor believes the Stock to be worth $. 6. The Stock is not specifically bequeathed under the Will, nor has the Decedent directed that the Stock not be sold. 7. Due to the short-term needs for available funds to pay debts and expenses of the Estate, it is necessary for the proper administration of the Estate to seek a loan from XYZ Bank for $10, for a one-year term at a rate of five percent per annum. A copy of the loan is attached hereto as Exhibit A. 8. XYZ Bank requires the Stock to be pledged as security on this loan. 9. The Executor requests authority of this Court to pledge the Stock. WHEREFORE, the Executor prays that this Court enter an order authorizing the Executor to enter into that loan as referenced in the attached Exhibit A and pledge the Stock as security on the loan and for such other and further relief this Court deems just and proper. C. [5.30] Petition for Authority To Sell Real Property Attorney of Record [Caption] PETITION FOR AUTHORITY TO SELL REAL PROPERTY Comes now, Executor of the Estate of (Estate), and for this Petition for Authority To Sell Real Property under 755 ILCS 5/20-4 states as follows: 1. The Decedent died on, The Decedent left a Last Will and Testament dated, 20 (Will), which was admitted to probate on, was appointed Executor on, 20, and letters of office were issued to as Executor. 4. The Estate holds a fee simple interest in [description of real property] and commonly known as (Real Property). 5. The Real Property is improved with a single-family residence with rooms and a -car attached garage. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 5 19

21 5.30 ILLINOIS ESTATE ADMINISTRATION 6. The Real Property is not subject to any liens or encumbrances per the title commitment attached hereto as Exhibit A other than unpaid real estate taxes of $. 7. Upon information and belief, the Executor believes the Real Property to be worth $. 8. The Real Property is not specifically bequeathed under the Will, nor has the Decedent directed that the property not be sold. 9. The Estate has insufficient assets to pay the debts, expenses, and claims of the Estate and needs to convert the Real Property to cash to pay for these debts, expenses, and claims. 10. The Executor requests authority of this Court to enter into that Sales Contract as attached hereto as Exhibit B. WHEREFORE, the Executor prays that this Court enter an order authorizing the Executor to sell the Real Property on the terms and conditions as referenced in the Sales Contract as attached in Exhibit B and for such other and further relief this Court deems just and proper. Attorney of Record