0:00 hello and welcome to trust and Estates weekly I'm your host Kevin bemel and we are here every Monday at 10:00 a.m. Pacific Time 1M eastern time to start off our week of handling trust Estates probates with some uh an opportunity to to share some some knowledge and and get better at at what we do so today I'm going to talk about something called assurity bond now for those of you who are old hands at this you probably have dealt with shity bonds um but for those
0:36 who are new or if if you're uh tuning in um for information about your own estate plan um it's good to know about shity bonds because um it it can have a a significant impact on how your is state is handled on who handles it and and most most defin ly on what it costs to handle your estate so uh I'm going to bring up I I did a little presentation this time um so the the what when and why of shy
1:12 bonds okay um pretty pretty straightforward there and you see here as as is um always the case everything on the way to wow shows relates to the three pillars of attainment we're dealing here in the finances realm um of of the um Pursuits pillar and if you want more information about that please go to our YouTube channel the uh youtube.com theee toow and and I have a an episode on that specifically so let's start out with what is assurity bond
1:50 okay so assurity bond is a type of insurance now most insurance companies do not issue sure bonds so you know typical like Farmers All State those are not bonding companies now um while assurity is a type of insurance um typically it will be a Bonding Company an insurance company that specializes in bonds um that is the actual issuer of the shity bond okay and there are three parties to
2:28 a shity bond first is the principal so the principal is the individual who needs the bond they're being there they're being required by another party to have assurity bond in place in order to fill a particular role typically okay the oblig or the oblige is the party that requires the bond now this will typically be a court as as you'll see when we talk about when
3:05 um a bond is required okay um in and when we talk in the context of trusts and Estates so the obl um or oblige I'm not sure how it's pronounced um the spell checker didn't even say it was a legitimate word although it is um I guess it's the obligat uh obligor obl yeah obligor oblig o um uh is is the party requiring the bond and then you have the shity which is the party that issues the bond that's the bonding company or the insurance company
3:42 okay and they're on the hook for the amount of the bond whatever it is million dollars $10 million Etc okay so keep this this is a little bit different than a lot of insurance policies so if you think about your a auto insurance um you don't really think of it as having three parties you think of it as having two parties there's the principal you who who wants the auto insurance or needs the auto insurance and there's the insurance company that issues it however in most if not all
4:17 states there actually is an oblige and that is the state like here in California um we're required to have um a minimum amount of automobile insurance I believe it's 30,000 uh 15,000 5,000 or I mean 15,000 30,000 5,000 so a minimum of 15,000 in liability coverage um for one accident an overall limit of 30,000 and then I think it's 5,000 for property damage or something like that so um if you're
4:52 driving without insurance um the that's grounds um for uh a citation minimally okay um in other types of insurance there is no oblige you are you know if you own your house outright in other words you have no lender um on your house you're not obligated to have uh um fire insurance for example okay now if you have a lender they're going to rec they're going to require you to have insurance so that if the house burns down they'll get their loan paid back um but um
5:27 typically in insurance policies regular insurance policies there won't necessarily be an oblig um but in in a um in a assurity bond situation there always will be okay next when do you need uh aurity Bond so you'll in an in for an estate situation you'll need an insur you you'll need an in you'll need a shity bond when there's an executive or an administrator now notice it doesn't say
6:05 when there's a trustee so if you have a trust and and you pass away and there's a successor trustee unless you require it in your trust which most trusts don't it's one of the advantages of having a trust there will not be assurity bond in a in a trust trustee situation however when there's an executive in other words there's a will and it's going through probate or there's an administrator either because there's a will but the executive
6:41 for one reason or another either cannot or does not want to administer the estate and so someone else is appointed to do so or the person died in testate you see that they're in point number three and so there is no will and so the court is uh overseeing the probate of the deance estate so in many cases a shity bond will be required now let me add that I I say in many cases but not in all so in some cases the um the
7:20 estate can file uh to have the the requirement for a shity bond waved so I've had that happen in in my career where um I I was appointed as an administrator for um an estate at least for the part that was going through probate okay it wasn't a lot in terms of dollar amount of of of what I was going to be administrating um and so we appli to um have the bond waved and in this particular case the court granted the
7:57 waiver okay had they not um you know I I would have had to have gotten a bond it was I think the total amount was under a million dollars in terms of what I was administr administrating um the the you know the cost of the bond wouldn't have been a whole lot but it still would have been a cost okay and um generally speaking the cost of a bond is about 0.1% of the bond amount so on a million dollars um that would be let's see a million 100,000 10,000 it' be about $1,000 okay so I mean you know you could
8:35 say well against a million dollars $1,000 isn't a lot of money no it's not but but on the other hand why pay $1,000 to the bonding company if the parties are willing to wave the or don't see a need for the bond and the court is willing to wave it okay so it isn't the case that every time there's an executive or an administrator a bond is required um but in many cases it will be now when will it be well first of all when state law requires it okay so in certain and this this varies from state to state as does all all the laws
9:11 relating to um probate and and and Estates Etc um so if state law requires that an executive or an administrator um have a bond and there're isn't a provision in that law for for the judge to have discretion to wave it so then there's going to have to be a sh Bond that's that's just the bottom line okay another situation where a bond may be required is with a large or complex estate okay so if an estate and and this by the way will connect to
9:48 um the fourth one the executive or administrator's Financial conditions so if you've got an estate with $50 million of assets let's say let's say $25 million of assets okay and the executive has a net worth of let's say you know $500,000 so in that case it's very likely that the executive will be required to get assurity bond because um the executive does not have the financial wherewithal to um compensate the estate anything close to it if there's some
10:25 kind of if you make some kind of mistake Etc okay and we'll talk about about that a little bit more under the next slide why okay but the larger and the more complex the estate okay the greater the amount of knowledge and liability that the executive or the administrator is carrying and therefore the more likely it'll be that a bond requirement will be imposed okay so that's just something to keep in mind now by the way let's say a $25 million Bond right the cost of that
11:02 bond is going to be $225,000 or thereabouts I mean it it can vary a little bit um but you you can see that you know that that's a big expense again it's a against the overall value of the state it's still a tenth of 1% but still $225,000 that's that's a a pretty large expense okay but it may ver like like is the often the case with insurance it may very well be worth it okay um depending on what the situations are okay if the uh decedent dies
11:38 intestate okay so in that case there there won't be an executive because there was no will appointing an executive but the court will point an administrator okay and in that case in the case of an administrator appointed to handle an intestate uh estate um it's very likely there's going to be a bond requirement now depending on um what what the state is comprised of and the um the bread of
12:14 authority the administrator has that will have an impact on the size of the bond so let's say you have an estate and it's it's overall it's worth $10 million okay and let's say3 million of that is is liquid assets things like cash stocks bonds Etc and the other $7 million is uh real estate okay and let's say that the administrator instead of being given um essentially essentially unlimited
12:49 Authority the administrator has authority to do everything except sell or encumber the real EST encumber means like put a loan on the real estate in that case the bond may be reduced from $10 million the overall value of the estate to $3 million okay since the administrator only has unlimited authority over the liquid assets that's really what's in danger um since the administrator cannot sell the real estate without the Court's
13:25 approval there's you know very little chance that anything uh you know nefarious can be done in that regard the Court's going to be involved okay and so the the court may not um impose a bonding requirement on that portion of the estate because in this case the administrator's Authority has been limited with respect to the real estate okay so all of those factors can play into um the size of of of the bond okay now you may be think well what would happen if the estate only had real
14:02 estate right and the administrator you know did had limited Authority in other words couldn't sell or encumber the real estate would the bond be waved I suppose it's possible I haven't seen a situation like that and when you think about it there's probably if there's real estate unless it's some kind of non-income producing real estate there's going to be at least some cash lying around and there and probably some of types of assets okay but in in in any event um if the authority of the administrator is limited so then that
14:40 may reduce the size of the bond required okay and then I mentioned um before talking about larger complex Estates the executive Executives I should have said or administrators Financial condition may also um have an impact on um whether there's a bond and how much the bond will be so let's say you've got a family situation where um let's say there's uh three children um and and only one of them has been appointed executive and it
15:15 just so happens that the one appointed executive um doesn't happen to have a lot of assets okay so um it may be that um the court will impose a bond on on that child um due to the fact that he has you know few assets um he's he's the executive under the will um but because he doesn't have any kind of financial wherewithal so then the court is going to make sure that assurity bond is put in place in order to confirm his appointment as executive
15:50 okay and and I should I should quickly mention that merely because a will specifies an executive that does not give that person Authority the moment that the um the uh writer of the Will dies so when the decedent dies the executive still has to open a probate and one of the first activities that will happen with respect to the probate will be the confirmation of that executive as the executive okay so it's
16:26 it's it's by no means automatic in the sense that the person dies and and now the executive takes takes over the court is going to um is going to um appoint the executive officially and issue letters of administration to the executive okay and until the executive has those letters of administration the executive cannot officially act on behalf of the estate okay so that that's the um that's the when of shity bonds
17:04 okay and the why so the there there's essentially two wi's they're they're interrelated and and it really comes down to the shy bond is financial protection to the oblige against the principal failure to perform or against malens um so um let's let's take a a situation where um uh okay so we have an estate being
17:40 administered by an executive and the executive is not particularly um you know well-versed in financial matters um and as a result um the estate takes a significant loss um let's say the uh the exeutive um doesn't maintain um the insurance on a property okay the insurance lapses and and and and the property burns down okay and now there's you know if the property is worth a lot less than it would have been
18:17 with you know the building hole okay so that's not assuming it wasn't you know the the the administrator didn't do it on purpose that's not malason um but it is the principal's failure to perform and so in a situation like that the bond the uh Bond issuer um the uh the bonding company the insurance company um would probably get a claim filed against it um in order to make the estate whole okay that's what they're
18:52 there for so when someone applies for a bond one of the things that going to be looked at is as you as you you you would guess from the previous slide what is the financial condition of the principal the person who needs the bond but also what is their background what kind of work have they done how experienced are they in um acting in handling financial matters um and in particular in acting as an administrator or an executive okay and so that's
19:28 that's by the way you know not not to toot my own horn this is true in general so for professional fiduciaries because it's our business right um you know there's less questioning in terms of well does this does this person who's applying for the bond um do they know what they're doing it it's it's what we do right and so um there's typically if for a licensees there's typically a presumption that um they know how to handle these things okay um now of course merely because someone has a license doesn't mean that they won't
20:04 commit malfeasance um there's there's always Temptations right and of course malfeasance is you know the principal doing something on purpose so let's say for example you know the principal um stole let's say there was um uh a valuable collection um um a coin collection okay um and the principal um in going through the personal effects of the decedent finds the coin collection and steals it essentially okay and so
20:42 then you know the estate the the administ administration of the state is going on at some point um somebody says GE you know I thought uh you know Bob um had a big coin collection what happened to it and there's an investigation made and it's gone and it turns out uh so is the administrator he absconded with the coin collection okay so that's malens and in that case too um the bonding company would probably uh find that a claim is filed um in order to recover the value of that coin collection assuming it was known what it is okay so who's being protected well in
21:21 in in the end it's the beneficiaries that are being protected so although the court may be oblige the court may be the one requiring uh that the executive or administrator post a bond or get a bond same thing post a bond okay the court is doing so to protect the beneficiaries okay so um you know especially if um the beneficiaries are not um particularly sophisticated in financial matters
21:56 certainly if they're minor okay and so um you know they they don't have the ability to handle these kind of matters because they're not at least 18 years old so in that case you know the court is going to impose the bond requirement in order to protect those people who are supposed to be getting the proceeds of the estate okay just real quickly right the the the probate process is one of the executive or administrator first of all um performing
22:33 an inventory of all the assets of the estate right I've talked about this more more uh broadly in in in another episode you can look it up but gather the assets of the estate find out what debts are owed value the assets pay the debts and then uh distribute the remaining assets of the estate in in in in very simplified form that's what the administrator or the executive does who is getting who are getting the distributions it's the beneficiaries
23:08 there could be one there could be several it depends um on the estate okay so it is to protect those individuals that the bond is posted now what happens um once the probate is closed um that's it the bond is done okay the premium is earned and and if you know if there was no claim so uh you know good for the bonding company I mean that's why by the way you can see at at at 0.1% right bonding companies are not paying
23:44 off very often if they had to they couldn't stay in business right so so that's that's the idea behind the bond now by the way I should add that typically um Bond premiums are annual pre premium so if it takes more than a year for the estate to go through probate um you know another premium may come due in order to renew the bond for a second year okay it just it just depends how the bond is written um but but typically it that that's that's how it's done um and it makes sense the you know
24:20 the longer um the uh the bonding company has their money at risk um you know the more premium they're going to want to um collect in order to make sure that they're able to pay their claims in the same way that we don't pay a one-time premium to get an automobile insurance policy right we we pay a I mean annual or it could be every six months whatever your policy require requires it's an there it's an ongoing premium in essence okay so the same is true for uh for assurity bond okay so that's you know um
24:55 not a not a particularly complex subject but it is something that you should know about um and and by the way you know going back to what I said at the beginning one of the reasons for having a trust is you can avoid the bonding requirement if you choose to because the in with a trust the court will not be involved in the administration of your estate so the court will not have the authority to impose a bond on your successor trustee now that isn't to say that as part of the instructions of your trust you can't you can't require a a bond you
25:33 can most trusts wave the bond on the successor trustee in order to preserve the assets of the trust okay but that would be your decision as the grantor or trustor the person creating the trust you get to decided uh not the court okay so um it's it's again it's another re reason for considering um having a trust in instead of doing you know having just a will all right and I think that's it
26:08 GNA have uh yeah so if you if you have any questions would like some help is always these um links will be in the show notes feel free to drop a question into any of our social media sites or if it's something personal you can always email me there at my email address address and I will respond if it's something within my um body of knowledge and if not I'll let you know I'll recommend that you consult a lawyer or an accountant or whatever whatever professional it is um that can give you the answer okay and then we've got some
26:45 uh legal issues here legal stuff okay we'll go ahead and close this out and so that's our show for today and uh hope you found this useful gives you a little bit of background on dealing with shity bonds and um especially if you're planning your own estate this is a question to ask the people who are advising you what you know what may or may not be necessary with respect to assurity bond um at you know at the time my estate is administered and um it should be a pretty easy question for
27:21 them to answer for you if they're stumbling over it oops maybe uh you know time to look for for uh a different different um advisers okay but uh you know it is a question to kind of have on your list um because it is it is a cost to your estate so thanks very much for joining me today tomorrow my show at at 10: am Pacific time is business lessons from the military and uh let's see what is what is my topic
27:56 uh oh so I'm going to be talking about um military departments and unified commands those sound pretty esoteric and I think for most of us they are I'll tell you before I joined the military I had no idea there was a difference between the two I thought you know the Navy and and and and the department of the Navy they they decided you know where they were going to fight or they took orders where they were going to fight it does not work that way it's much more complex and the structure that the military uses um
28:33 to um to you know handle the nation's defense I think is very instructive for us uh who are running businesses or who are working for other businesses as well so do tune in to that and then on uh Wednesday at 10: a.m. Pacific time my show people making money we're going to talk about how to build your real estate portfolio using a concept known as leverage if you speak to anyone with large real estate holdings almost for
29:09 sure they used leverage to build it now there's leverage can be good and it can be bad so obviously you want to use leverage in a good way and so that's what we're going to talk about and also we're going to talk about um sort of what what happens if you find yourself in bad or negative leverage okay so do tune in for that and then uh seven days from today uh next Monday we'll be back for the next episode of trust and estate weekly so thanks very much for joining me today wishing you a Wonder wonderful rest of the day and signing off as I always do Marie darling you are my bell
29:47 all the best folks