How to settle an estate

Darol October 22, 2021

After an individual's death, his or her assets will be gathered, business affairs settled, debts paid, necessary tax returns filed, and assets distributed as the deceased individual (generally referred to as the "decedent") directed. These activities generally will be conducted on behalf of the decedent by a person acting in a fiduciary capacity, either as executor (in some states called a personal representative) or as trustee, depending upon how the decedent held his or her property.

Terminology

As a first step, it is helpful to know the meaning of a few common terms:

• Fiduciary - An individual or bank or trust company that acts for the benefit of another. Trustees, executors, and personal representatives are all fiduciaries.

• Grantor - (Also called "settlor" or "trustor") An individual who transfers property to a trustee to hold or own subject to the terms of the trust agreement setting forth your wishes. For income tax purposes the same term is used to mean the person who is taxed on the income from the trust. Confusing, but different concepts.

• Testator - A person who has made a valid will (a woman is sometimes called a "testatrix").

• Beneficiary - A person for whose benefit a will or trust was made; the person who is to receive property, either outright or in trust, now or later.

• Trustee - An individual or bank or trust company that holds legal title to property for the benefit of another and acts according to the terms of the trust. This can be confusing in that you can sometimes be both a trustee and a beneficiary of the same lifetime (inter-vivos) trust you established or a trust established by someone else for you at their death (testamentary trust).

• Executor - (Also called "personal representative;” a woman is sometimes called an "executrix"). An individual or bank or trust company that settles the estate of a testator according to the terms of the will, or if there is no will in accordance with the laws of the decedent’s estate (intestacy), although a person acting in intestacy may be called by a different name, such as administrator.

• Principal and Income - the property or capital of an estate or trust and the returns from the property, such as interest, dividends, rents, etc. In some cases, gain resulting from appreciation in value may also be income.

Other defined terms may be found in our Glossary.

As a general rule, the administration of an estate or trust after an individual has died requires the fiduciary to address certain routine issues and follow several standard steps to distribute the decedent's assets in accordance with his or her wishes. These guidelines focus on activities that occur in an estate or trust immediately after the individual has died.

Understanding the Will

It is very important to read and understand the will or trust so that you will know who the beneficiaries are, what they are to receive and when, and who, if any, your co-fiduciaries are.

Does the will give everything outright, or does it create new trusts that may continue for several years? Does a trust mandate certain distributions ("All income earned each year is to be paid to my wife, Nancy") or does it leave this to the trustee's discretion ("My trustee shall distribute such income as she believes is necessary for the education and support of my son, Alan, until he reaches age 25")? The document often imparts important directions to the fiduciary, such as which assets should be used to pay taxes and expenses. The document will usually list the fiduciary's powers in some detail.

Most fiduciaries retain an attorney who specializes in the area of trusts and estates to assist them in performing their duties properly. An attorney's advice is very helpful in ensuring that you understand what the will or trust and applicable state law provide. For example, at an initial meeting it is common for the attorney to review step by step many of the key provisions of the will or trust (or both) so that you will understand your role. Be mindful that if you accept the appointment to serve as an executor or trustee, you will be held responsible for understanding and implementing the terms of the trust or will.

Managing Estate Assets

It is the fiduciary's responsibility to take control of (marshal) all assets comprising an estate or trust. Especially when a fiduciary assumes office at the grantor's or testator's death, it is crucial to secure and value all assets as soon as possible. Some assets, such as brokerage accounts, may be accessed immediately once certain prerequisites are met. Typical prerequisites are an executor obtaining formal authorization, sometimes referred to as Letters Testamentary, from the court and producing a death certificate. Other assets, such as insurance, may have to be applied for by filing a claim. The usual practice is to engage a professional appraiser to value the decedent's tangible property, such as household furniture, automobiles, jewelry, artwork, and collectibles. Depending on the nature and value of the property, this may be a routine activity, but you may need the services of a specialist appraiser if, for example, the decedent had rare or unusual items or was a serious collector. Real estate, whether residential or commercial, and any business interests also must be valued. Besides providing a valuation for assets that may be reported on a court-required inventory or on the state or federal estate tax return, the appraisal can help the fiduciary gauge whether the decedent's insurance coverage on the assets is sufficient. Appropriate insurance should be maintained throughout the fiduciary's tenure. The fiduciary also must value financial assets, including bank and securities accounts. Bear in mind that for federal estate tax returns for estates that do not owe any federal estate tax, certain estimates are permitted. This might lessen the appraisal costs that must be incurred.

Handling Debts and Expenses

It is the fiduciary's duty to determine when bills unpaid at death, and expenses incurred in the administration of the estate, should be paid, and then pay them or notify creditors of temporary delay. In some cases the estate may be harmed if certain bills, such as property or casualty insurance bills or real estate taxes, are not paid promptly. Most states require a written notice to any known or reasonably ascertainable creditors. While most bills will present no problem, it is wise to consult an attorney in unusual circumstances, as the fiduciary can be held personally liable for improperly spending estate or trust assets or for failing to protect the estate assets properly, such as by maintaining adequate insurance coverage.

The fiduciary may be responsible for filing a number of tax returns. These tax returns include the final income tax return for the year of the decedent's death, a gift or generation-skipping tax return for the current year, if needed, and prior years' returns that may be on extension. It is not uncommon for a decedent who was ill for the last year or years of his or her life to have missed filing returns. The only way to be certain is to investigate. In addition, if the value of the estate (whether under a will or trust) before deductions exceeds the amount sheltered by the estate tax exemption amount, which is $5 million inflation adjusted ($5.25 million in 2013), a federal estate tax return will need to be filed. Even if the value of the estate does not exceed the estate tax exemption amount, a federal estate tax return still may need to be filed. Under the concept of portability, if the decedent is survived by a spouse and he or she intends to use any estate tax exemption the deceased spouse did not use, an estate tax return must be filed.

Since the estate or trust is a taxpayer in its own right, a new tax identification number must be obtained and a fiduciary income tax return must be filed for the estate or trust. A tax identification number can be obtained online from the IRS website. You cannot use the decedent’s social security number for the estate or any trusts that exist following the decedent’s death.

It is important to note for income tax planning that the estate or trust and its beneficiaries may not be in the same income tax brackets. Thus, timing of certain distributions can save money for all concerned. Caution also should be exercised because trusts and estates are subject to different rules that can be quite complex and can reach the highest tax rates at very low levels of income. Some tax return preparers and accountants specialize in preparing such fiduciary income tax returns and can be very helpful. They are familiar with the filing deadlines, will be able to determine whether the estate or trust must pay estimated taxes quarterly, and may be able to help you plan distributions or other steps to reduce tax costs.

Most expenses that a fiduciary incurs in the administration of the estate or trust are properly payable from the decedent's assets. These include funeral expenses, appraisal fees, attorney's and accountant's fees, and insurance premiums. Careful records should be kept, and receipts should always be obtained. If any expenses are payable to you or someone related to you, consult with an attorney about any special precautions that should be taken.

Funding the Bequests

Wills and trusts often provide for specific gifts of cash ("I give my niece $50,000 if she survives me") or property ("I give my grandfather clock to my granddaughter, Nina") before the balance of the property, or residue, is distributed. The residue may be distributed outright or in further trust, such as a trust for a surviving spouse or a trust for minor children. Be sure that all debts, taxes, and expenses are paid or provided for before distributing any property to beneficiaries because you may be held personally liable if insufficient assets do not remain to meet estate expenses. Although it is usual to obtain a receipt and refunding agreement from the beneficiary that states that he or she agrees to refund any excess distribution made in error by the fiduciary, as a practical matter it is often difficult to retrieve such funds. In some states, you will need court approval before any distributions may be made. Where distributions are made to ongoing trusts or according to a formula described in the will or trust, it is best to consult an attorney to be sure the funding is completed properly. Tax consequences of a distribution sometimes can be surprising, so careful planning is important.

Trust Administration

Trusts are designed to distinguish between income and principal. Many trusts, especially older ones, provide for income to be distributed to one person at one time and principal to be distributed to that same person a different time or to another person. For example, many trusts for a surviving spouse provide that all income must be paid to the spouse, but provide for payments of principal (corpus) to the spouse only in limited circumstances, such as a medical emergency. At the surviving spouse's death, the remaining principal may be paid to the decedent's children, to charity, or to other beneficiaries. Income payments and principal distributions can be made in cash, or at the trustee's discretion, by distributing securities as well as cash. Never make assumptions, as the terms of every will and trust differ greatly. There is no such thing as a “standard” distribution provision.

Unless a fiduciary has financial experience, he or she should seek professional advice regarding the investment of trust assets. In addition to investing for good investment results, the fiduciary should invest within the applicable state’s prudent investor rule that governs the trust or estate and with careful consideration of the terms of the will or trust, which may modify the otherwise applicable state law rules. A skilled investment advisor can help the fiduciary decide how to invest, what assets to sell to produce cash for expenses, taxes or outright gifts of cash, and how to minimize income and capital gains taxes. Simply maintaining the investments that the decedent owned will not be a defense if an heir claims you did not invest wisely or violated the law governing trust investments. In all events, it is important to have a written investment policy statement stating what investment goals are being pursued.

During the period of administration, the fiduciary must provide an annual income tax statement (called a Schedule K-1) to each beneficiary who is taxable on any income earned by the trust. The fiduciary also must file an income tax return for the trust annually. The fiduciary can be held personally liable for interest and penalties if the income tax return is not filed and the tax paid by the due date, generally April 15th.

Closing the Estate

Estates may be closed when the executor has paid all debts, expenses, and taxes, has received tax clearances from the IRS and the state and has distributed all assets on hand. Trusts terminate when an event described in the document, such as the death of a beneficiary, or a date described in the document, such as the date the beneficiary attains a stated age, occurs. The fiduciary is given a reasonable period of time thereafter to make the actual distributions. Some states require a petition to be filed in court before the assets are distributed and the estate or trust closed. When such a formal proceeding is not required, it is nevertheless good practice to require all beneficiaries to sign a document, prepared by an attorney, in which they approve of your actions as fiduciary and acknowledge receipt of assets due them. This document protects the fiduciary from later claims by a beneficiary. These formalities are recommended even when the other heirs are relatives, as that alone is never an assurance that one of them will not have an issue and pursue a legal claim against you. Finally, a final income tax return must be filed and a reserve kept back for any due, but unpaid, taxes or estate expenses.

Categories: Free Article

Darol

Attorney. Podcster.

How to Create a Bullet-Proof Family Bank and Why

In this episode, we will be talking about ways to create the family bank, why it’s important, the benefits and the job descriptions attached to the family bank, which is an irrevocable non-grantor trust, which will protect your assets.

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How to Protect Your Wealth in a Time of Crisis

This episode marks the first of 30 daily episodes to help listeners build a true asset protection system. Published on the same date the host’s home state issued a quarantine, stay at home order, the episode describes the emphasis on publication of reliable information rather than perfectly produced podcast episodes.

Learn how medieval lawyers devised the first asset protection trust to save the estates of England during the bubonic plague and how this legal construct still exists today.

Ria March 25, 2020

The 2020 Secure Act and the Three Money Models To Help You Work Around It

This episode is a legal update with a higher view of planning to include three necessary philosophies of wealth planning to help you make the appropriate decisions. The episode describes the 2020 Secure Act but in the context of estate planning law, dating back to British medieval common law, three other important legal changes in the preceding five years and the new reality of planning with retirement accounts. This episode introduces you to idea of “workarounds”. Yes, that’s right! We can mitigate the negative impacts of the SECURE Act.

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, one provision of SECURE nullifies all of the benefits of the act and is a threat to your family’s generational wealth. That is a bold statement, I realize. I stand by it.

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for.

Most people do not care enough to spend time let alone money on taking specific actions to adjust their plan, if they have one, to account for the changes brought to us courtesy of SECURE. Perhaps, there is nothing wrong with this attitude. If you view SECURE from the perspective of the government, it makes sense. Too much money is being protected for the benefit of families and not taxed. The government and even the economy is better off to get that money back into circulation.

However, I doubt that people decide to pay unnecessary taxes, fees and stand idly by as wealth is lost because they are on the government’s side. During most of my career, I thought this attitude, that action should not be taken to avoid a financial loss, was just a mental hiccup, a cognitive bias that prevents some people from making correct decisions about wealth. However, as I have grown in my profession, I now see that it is more related to one, of three, philosophies about wealth. Unfortunately, the attitude that is passive about protecting wealth is the traditional and, therefore, prevalent model. The reasons it is traditional is all about human longevity. Throughout all of human history, humans have lived short lives. In the Middle Ages, when probate and trust law invented, men lived, on average, to be just twenty-five years. That average age was not doubled until the early 1900s, over a thousand years later. However, in the last century, the average life expectancy of an American male has almost doubled again. Biologically, there are more opportunities and different challenges than the current perspective of the Law even realizes.

The law is reactive, not proactive. As such, the traditional model has only sought to pass wealth from an asset owner to the next generation because the asset owner would live a short life as would the next generation. Life has been so difficult in terms of survival, the Law has simply left it at that. As such,

There are three models in planning, the traditional model is estate planning and views life and, therefore, wealth, as short. The other two models do not. I will refer to these models often and you should always think in their terms because the model you choose will require actions specific to that planning model. If you view the purpose of your money as a simple, outright transfer to the next generation, then estate planning is your swim lane. SECURE Act is not a threat because the estate planning model is not focused on the protection of wealth beyond just your lifetime. However, if you view wealth as the means by which you plan to empower your family for more than your life plus ten years, then one of the two other models are applicable to you.

THE THREE MODELS OF PLANNING

Estate Planning

The objective of estate planning is estate transfer. The word “estate” is a legal term that refers only to the assets once owned by a now deceased person. The Law is reactive, not proactive. Therefore, traditional estate planning limits its objective to the transfer of assets of a person to either a spouse or the next generation in a limited way.

Asset Protection

The objective of asset protection is different. Asset protection, as I define it, includes all of estate planning but has the focus is on the protection of assets while the assert owner, his or her spouse are still alive. The trigger event for estate planning is the death of the asset owner. The trigger event of asset protection is now!

Generational Family Wealth Planning

The objective of family wealth is to strengthen a family around a set of core values and a vision for the future. The assets of a successful family finances the family using all of the tools of estate planning and asset protection but the time horizon is seven generations. There is an entire course dedicated to the devices you used to this model.

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A swarm is what geologists call the grouping of earthquakes that have hit Guanica, Puerto Rico. Swarm is as good a name as any to describe over a thousand earthquakes in such a small area, many above 5.0 and at least two above 6.0. While there has not been a “big one”, a single massive quake to bring sudden and dramatic devastation, the constant month-long shaking of the homes, road, stores and spirits of Guanica has been even more cruel if not as renowned.

This tragedy is also headquartered in the one place on earth I intended to call home. I had spent impactful moments there. Playa Santa, just outside of Guanica, was the location of a lovely apartment with a view of the Caribbean. The landlord had my deposit in escrow and only my signature on a lease awaited. I had gone to a remote beach every other day to clean the plastic from it. I yelled at Playa Santan roosters that just had to wake at the playful satanic hour of 4 am. A lot had happened in such a short-time in Guanica and Playa Santa, the launch of this very podcast as one example, that I just had to tell the story of my time there and the friends who still struggle there.

As if on cue, however, the episode does succeed in laying out an investment idea. Really, this idea is an investment method. I first heard of it from a client about a year ago. I keep this method tucked away until the very last moments of the podcast.

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