Estate Settlement 101
By Don Kuehn
You've probably heard the terms tossed about: probate, estate taxes, heirs, administrator, joint property, wills and trusts. After someone dies, the task of closing out the person's affairs falls on the individual named as the "executor."
An estate executor basically is responsible for collecting and managing all assets, paying taxes and expenses, and administering and distributing the assets for the benefit of the heirs. It's a big job and one not without a number of headaches.
This isn't a ceremonial or honorary title-like being named a godparent. It's serious business often fraught with lawsuits and acrimony over the smallest heirloom or asset.
Who should you ask to take on this role? If you have adult children, that's a place to start. Or your siblings. Or a close family friend. But most experts recommend employing a bank trust department as the primary executor and naming a friend or relative as co-executor.
If you are asked to be the executor by a family member or friend, think twice. Before you say yes, ask to see the will so you can understand the person's wishes and can discuss details of inheritances and bequests. Prepare to spend a lot of time and energy hashing through the details of someone's life and material affairs.
One suggestion is to agree to be named co-executor along with the bank trust department. That way you can oversee the process and assure that the terms of the will are carried out in a manner consistent with the deceased's requests, but you can leave the legal details to the bank.
One of the first tasks the executor should tackle is finding a competent attorney who is experienced in estate planning to help navigate the minefields of state law. But even with legal guidance, it's the executor who retains fiduciary responsibility for administering the estate and reporting to the courts. Take note: The executor also is subject to being sued individually by disinherited family members or loved ones who feel slighted by the management and distribution of property.
So, what could possibly go wrong? I have a will that spells out exactly what I want done with all of my "stuff." Well, here's a scenario loosely borrowed from a recent story in my local paper:
Before Aunt Jane died in 2003, she had a will detailing such things as setting up a $20,000 trust fund to care for her beloved cats. Problem was, the cats were all dead long before Aunt Jane's will went to probate.
The family heirlooms, like a cut-glass punch bowl and glasses, a gold tea pot, pictures from the Paris Exposition of 1855 handed down by Aunt Jane's grandparents, and the Haviland china were all carefully identified for inheritance by members of Jane's family. But the 1985 will predated Aunt Jane's move to a nursing home and the sale of many of the treasures Jane had taken such pains to dole out to her loving nieces and nephews.
The few remaining items are being fought over in court. Legal fees far exceed the value of the heirlooms, but that hasn't dissuaded family members from waging a battle royale over the crumbs of Aunt Jane's bequest.
That punch bowl was supposed to go to her nephew Jack, but Jack died about a year after Aunt Jane. Jack's second wife feels entitled to that inheritance, but his first wife June is still in the picture.
June testified in court that Aunt Jane had told her numerous times that she wanted her to have the punch bowl, and Jack's son (by his first marriage) also told the court that Aunt Jane promised him the bowl several times. But Jack's second wife has a legitimate legal claim and her adult children seem to covet that punch bowl, too.
The court is still weighing the merits of the competing claims four years later.
In various states, the laws may require as little as six months to close the estate; in others, it can take up to five years if there is a problem disposing of property or if issues are being contested. If minor children are involved, the executor's job may last for several additional years.
Locate as many of the following documents as possible: wills, deeds, bank books, stock certificates, military discharge papers, Social Security card, tax forms, car and boat titles, insurance policies, etc.
If you agree to be an executor, you must collect and inventory all assets and determine their value at the time of the death. That doesn't mean you have to count every pair of socks, but you do have to include "a drawer full of socks" in the inventory.
You'll tally all personal property and the contents of safe deposit boxes, monitor checkbooks, and review the personal papers of the deceased to see who is owed money. Then check the mail for statements and bills that may come only quarterly.
You also have to locate all potential heirs. If there have been one or more divorces, this can be a major commitment of time and effort. No distributions can be made until everyone has been located and identified. That could involve hiring a private investigator to track down "crazy old uncle Ed" whom no one has seen in years. Or, if the will says "I leave half of my assets to be divided equally among my nieces and nephews," your job is to track down every one of them.
You'll have to stop heirs from walking off with personal property until probate is complete, and keep insurance policies in force to protect the assets.
Valuables such as jewelry, antiques and securities should be kept in a safe place to which only the executor has access. And you may have to manage the deceased's investments (usually converting them into cash for later distribution to heirs) and even make necessary repairs to the family home to keep it in saleable condition.
Keeping accurate records is very important. Most states require a detailed accounting of every dollar that is spent from the estate. The executor's final act is to file a form with the courts called a "closing statement," which shows all income received (and any losses) as well as what is paid to creditors or distributed to beneficiaries.
Unless someone later comes forward, the executor's job is done when the court is satisfied that all affairs are settled. For your efforts, you get paid a fee set by state law (the industry standard is about 3 percent of the value of the estate). And you will have earned every penny of it.
Remember, this is not an honorary position. Being named an executor is serious business that will test your skills as an accountant, negotiator, cop, attorney and investor. As Pat Curry, in an article for Bankrate.com, quips: "If you've ever wondered how to get back at someone who has made your life a pure hell, you might consider making him or her executor of your will."
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to email@example.com .
Some of the duties of an executor:
- Arrange for probate of will, to establish its validity.
- Defend will against attack by disinherited relatives or others.
- Obtain authorization to act as executor.
- Give notice to creditors of estate.
- Take custody of valuables.
- Protect and, where advisable, insure other assets.
- Transfer bank accounts and securities to estate.
- Obtain entry to safe deposit box.
- Collect money owed to estate.
- Locate and take control of all other estate assets.
- Supervise operation of businesses or other "active" assets.
- Compile full inventory of estate assets.
- Obtain accurate valuation for each and every asset.
- Keep detailed financial records.
- Determine validity of creditors' claims.
- Pay valid claims.
- Analyze estate's cash position in relation to tax payments,
cash legacies and other payouts to be made from the estate.
- Decide what securities or other assets must be sold to
raise added cash.
- File final income tax return for deceased.
- Review gift tax returns filed by the deceased.
- Explore availability of reduced tax valuation for farm or
business real estate.
- File federal estate tax return.
- File state inheritance or estate tax returns.
- Seek to resolve any disputed tax valuations.
- If negotiations fail, decide whether the estate should go to court.
- Distribute assets to beneficiaries, and perhaps to trusts for
family benefit or charitable purposes, in accordance with the
terms of the will.
- Prepare a full report of estate stewardship in the form of a
detailed final accounting.
The following glossary was taken from the Web site of memoriesofme.com. It contains terms that will be used as you settle an estate.
Administrator: The person appointed by the court to manage your estate when you die without leaving a will. Since they are court-appointed, they are required to post a bond as security. They have the same duties as an executor.
Applicable Credit Amount: An estate tax credit based upon the applicable exemption amount used to reduce the tax on transfers of property either during life (gift tax) or at death (estate tax). Created by the Taxpayer Relief Act of 1997, the applicable credit amount replaced the $192,800 unified credit with a comparable credit that gradually increased to $345,800 in 2006.
Applicable Exemption Amount: A lifetime estate tax exemption used to calculate the applicable credit amount. Transfer of property up to the applicable exemption amount generally will be exempt from unified tax. The applicable exemption amount gradually increased from $650,000 in 1999 to $1 million in 2006.
Attorney-in-fact: The individual who is designated in the power of attorney document to act on behalf of another.
Beneficiary: Someone who receives benefits or funds under a will or other contract, such as an insurance policy.
Community Property: Ten states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) use some form of the community property system to determine the interest of a husband and wife in property acquired during marriage.
Durable Power of Attorney: A written legal document that lets an individual designate another person to act on his or her behalf, even in the event the individual becomes disabled or incapacitated.
Durable Power of Attorney for Health Care: A written legal document that gives another person the authority to act on your behalf with regard to your health care decisions.
Estate: The property or assets you own or have rights to. Also commonly referred to as your possessions.
Estate Tax: A tax imposed at one's death on the transfer of most types of property.
Executor: The person named in your will to manage your estate. This person will collect the property, pay any debt, and distribute your property or assets according to your will.
Fiduciary: A person or institution legally responsible for the management, investment, and distributions of funds.
Grantor: The person who transfers assets into a trust for the benefit of another.
Gross Estate: The total property or assets held by an individual as defined for federal estate tax purposes.
Guardian: The person legally entrusted with the care of a minor child.
Incapacity: The lack of ability to act on your own behalf.
Inter vivos: A type of trust created during your lifetime to hold property for the benefit of another.
Intestacy, Intestate: The term applied when an individual dies without a will.
Irrevocable: Indicating something that cannot be changed or terminated.
Joint Tenancy with Right of Survivorship: A title that can be placed on property that is co-owned. At the death of one of the co-owners, the other will become the sole owner of the property, regardless of what may be conveyed in the will.
Living Trust: A revocable trust established by a grantor during his or her lifetime in which the grantor transfers some or all of his or her property into the trust.
Living Will: A legal document directing that the maker's or signer's life is not to be artificially supported in the event of a terminal illness or accident.
Marital Deduction: A deduction allowing for the unlimited transfer of any or all property from one spouse to the other generally free of estate and gift tax.
Minor Child: A person who has not yet reached the legal age of majority. This age can differ with each state, but generally is between 16 and 18 years. The term does not apply to an emancipated youth.
Power of Appointment: A right given to another in a written instrument, such as a will or trust, that allows the other to decide how to distribute your property. The power of appointment is "general" if it places no restrictions on who the distributees may be. A power is "limited" or "special" if it limits the eventual distributee.
Power of Attorney: A written legal document that gives an individual the authority to act for another.
Probate: The review or testing of a will before a court of law to ensure that it is authentic.
Representative: Someone who is authorized to act on your behalf, such as an executor or a trustee.
State Death or Inheritance Taxes: The tax imposed by the state in which you live and/or where your property is located, if different, on the transfer of that property to another at your death.
Testamentary Trust: A trust that is created upon your death by the terms of your will.
Trust: A written legal instrument created by a grantor during his or her lifetime or at death for the benefit of another.
Trustee: The person named in a trust document who will manage the property owned by the trust and distribute any income according to the document. A trustee can be an individual or a corporate fiduciary.