In September’s article I explained the meaning and purpose of a probate bond, as well as the usual circumstances in which a probate bond will be required. Essentially a probate bond is a financial guarantee bond issued to protect the interests of heirs and creditors of an estate from the negligence or fraud of the executor or administrator of the estate. In this article I highlight some frequently asked questions about the amount of the bond and who pays for the bond.
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.)