Guidelines for the Personal Representative of an Estate
The job of the Personal Representative begins with the death of the person who has named you as Personal Representative. The following are general guidelines for carrying out the duties of a Personal Representative. These are not intended to be legal advice.
What is Probate?
Probate is a court-supervised process to accomplish the transfer of property from a deceased individual (the “decedent”) to the decedent’s beneficiaries as identified in the decedent’sWill. The Personal Representative is appointed by the probate court to handle the administration of the estate. The Personal Representative is a fiduciary with responsibilities to both the probate court and to the beneficiaries.
Types of Decedent’s Assets
For the purposes of the administration of the estate, the assets considered a part of the estate may be placed into one of three categories. The character of an asset, as belonging to one of the categories listed below, can determine whether such assets should be reported on various probate and tax forms. It can also affect whether the Personal Representative has title to the asset, as well as the degree of responsibility and accountability that the Personal Representative may have with respect to the asset.
(1) Category One. This category includes property, the disposition of which is governed by the provisions of the Will. The Personal Representative receives (for the purposes of estate administration) the title to all such assets and will hold title until such assets are sold or converted to cash and paid out in payment of debts or distributed in cash or in kind to the beneficiaries. Such assets are, in the aggregate, popularly called the “probate estate.”
(2) Category Two. This category consists of property which, by reason of either (a) form of ownership, or (b) contractual provisions, upon the death of the decedent is transferred to third parties, regardless of the provisions of the decedent’sWill. An example of (a) above is property, real or personal, held jointly with right of survivorship. An example of (b) above is a life insurance policy on the life of the decedent payable to a third party beneficiary.
(3) Category Three. This category consists of property in which under state law, the decedent had no interest at death, but solely for purposes of computing estate tax due (state and/or federal) is considered as part of the decedent’s “gross estate.” Other than reporting the existence of such property on tax and probate forms, possibly paying a tax based in part thereon, and in some cases collecting some portion of the estate tax from the recipients of such property, the Personal Representative normally has no responsibility for it.
Commencing a Probate Administration
Following is a description of the major steps in a typical probate administration of an estate that is large enough to require the filing of an federal estate tax return (Form 706). Smaller estates may follow an abbreviated process. It is also important to consider the filing requirements of state estate tax returns. The major steps of the probate administration include:
(1) Selecting a Lawyer and Other Professionals. The probate administration is a legal proceeding. You quite likely will need the services of a lawyer. Our law firm will be glad to talk with you as to how we can help you with this work.
(2) Finding,Reading, and Interpreting Estate Planning Documents. A decedent’s estate planning documents normally consist of a Last Will and Testament and sometimes a Revocable Trust. When a Revocable Trust is used, the dispositive provisions may be contained in each document. The decedent may also leave a memorandum outlining the distribution of tangible personal property, such as furniture, art, clothing, automobiles, china, crystal, silver, etc. It is your responsibility to find these estate planning documents. Often a person signs multiple Wills and Revocable Trusts over a period of years. It is therefore important to make sure that you have the latest version of these documents. Many times there are amendments to these documents. An amendment to aWillis typically called a Codicil. It is your responsibility to read these documents and to fully understand all of the dispositive provisions. If any provisions are ambiguous, it is your responsibility to obtain legal advice on the proper interpretation of these documents.
(3) Information Gathering. Before an estate administration can be commenced, it is necessary to get basic information on the decedent, the estate, and the beneficiaries. This information includes a copy of the death certificate as well as names, addresses, telephone numbers, dates of birth, and social security numbers of all beneficiaries. You will also need to gather all the other information needed to complete the petition to commence the probate administration.
(4) Commencing a Probate Administration. The probate administration is most often commenced by filing with the clerk of court a petition for informal probate, which does not require any filings with the District Court; there are situation however where a petition is filed with the District Court. If there is a Last Will and Testament, the original is submitted with the petition and becomes part of the court file; if there is no Last Will and Testament, a Personal Representative can still be appointed for purposes of administering the estate. The clerk or court will review the petition for probate and upon being satisfied everything is in order, will issues “letters” of administration appointing the Personal Representative, who will then have the full authority to act on behalf of the decedent to administer the decedent’s estate.
(5) Obtaining Tax Identification Numbers. An estate is a separate taxpayer. As a result the Personal Representative will have to apply for a tax identification number (“TIN”) for the estate, which will be used when opening any bank or other accounts in the name of the estate. This number will also be required for the filing of the estate’s fiduciary income tax return (Form 1041), if one is required. The Personal Representative will be required to file this return each year during the estate administration. If there is a separate trust, the Personal Representative will be required to get a separate return for that trust and file annual fiduciary returns for each trust.
(6) Finding, Protecting, and Valuing Assets. After being appointed, the Personal Representative must file an Inventory describing and placing a value on all of the assets of the estate and the amount of indebtedness secured by liens on such estate assets. This Inventory must normally include a listing of all property. This may include both “probate assets” and “non-probate” assets (such as joint property with right of survivorship and life insurance policies on the decedent). The values of the assets are established by various means.
One of the major responsibilities of the Personal Representative is to locate and identify anything of value which is part of the decedent’s estate at death. We can assist you with techniques and procedures used to search for assets.
(7) Ongoing Probate Estate Administration. An estate checking account should be opened to receive the income to the estate and pay out estate expenses.
Some of your tasks during an ongoing probate administration include:
(8) Liquidity Needs. One of your most important tasks will be to make sure that you will have sufficient cash to meet all of the estate’s obligations. Cash will be needed to pay i) the debts of the decedent, ii) the expenses of the estate administration, iii) income taxes, iv) estate taxes, and v) certain types of bequests.
(9) Creditor Claims. Shortly after theWillis probated, you are required to begin advertising in the newspaper for creditors of the estate to present their claims. The notice will appear for three consecutive weeks. Creditors are directed to file their claims within four months after the first publication of notice or their claims will be barred (with certain exceptions). The Personal Representative is responsible for reviewing all claims and disallowing any improper claims.
The Personal Representative is responsible for seeking out creditors of the decedent. All known creditors of the estate (i.e., individuals or entities to whom the decedent owed money during his lifetime) need to be notified of the pending probate proceedings. A copy of the creditor notice should be sent to each known creditor.
(10) Tax Returns. As noted above, the estate is required to file both fiduciary income tax returns on an annual basis and the estate tax return. (Please see the following discussion on the estate tax return.)
(11) Transfer of Real Estate. The Personal Representative also has a duty to file detailed descriptions of any real property which the decedent may have owned. We can assist in this function by preparing and filing for the Personal Representative the necessary real estate descriptions. The real property is transferred by the Personal Representative and the recording of an appropriate deed. This document evidences the transfer of title from the decedent to the beneficiary.
(12) Final Accounting. Upon the settlement and closing of the estate, the Personal Representative must file with the probate court a final accounting showing all of the decedent’s assets owned at death and all receipts, disbursements, and interim distributions. At the same time the Personal Representative will file a schedule of distribution for the remaining assets. This schedule shows the proposed distribution of all bequests and assets that must be made before the estate is closed. In this connection, accurate financial record-keeping is absolutely necessary. You should keep careful and detailed records with respect to all monies or assets paid to the estate and all disbursements of any kind made by you, including dates of payment, amounts paid, and reasons for payment. It is always important to remember that the estate is a different taxable and accounting entity. Assets and income coming into the estate must not be commingled with either personal assets of the Personal Representative or with the beneficiaries until the assets are, in fact, to be distributed. The probate court may require that each item of disbursement shown on the accounting may be substantiated by the submission with the accounting of canceled checks, bills marked paid, or signed receipts. Failure to keep such records will result in the expenditure of much time, effort, and expense in preparing these accountings which are required by law.
The Personal Representative, will also be responsible for filing a number of federal and state tax returns of various kinds:
(1) Estate Tax Return. If the “gross estate” (which means the fair market value of all property in which the decedent owned an interest, undiminished by debts and includes such items as life insurance at face value even though payable to third parties) exceeds the amount protected by the unified estate and gift tax credit in the year of death (under current law $5,000,000 for calendar years 2011 and 2012 but scheduled to drop to $1,000,000 in 2013), a federal as well as perhaps a state estate tax return will be due nine months after date of death and any tax which is due must be paid at that time.
(2) Decedent’s Income Tax Returns. The Personal Representative is also responsible for the final state and federal income tax returns of the decedent, not only for the year in which the decedent died, but also for all previous years, if any, for which returns were or will be due but have not been filed. Thus the Personal Representative must determine if sufficient income was received by the decedent during the year of death and for previous years in order to determine whether income tax returns are due.
(3) Fiduciary Income Tax Returns. If the estate receives income during any year, a federal “fiduciary” income tax return must be filed for the estate. A state fiduciary income tax return must be filed as well for any state in which the estate earned income during the estate’s administration. Your lawyer will need to consult with you from time to time concerning estate income and, if returns are required, to prepare or have them prepared for you.
It the responsibility of the Personal Representative to ensure that proper tax planning is done during the administration of the estate. This involves planning for the decedent’s final income tax return, the estate tax return, the estate’s income tax return, and the beneficiary’s income tax return to reduce the overall estate and income tax burden of the estate and its beneficiaries. This is ordinarily done by 1) equalizing (through timing of distributions) the taxable income of the estate, trust(s), and beneficiaries, 2) claiming available deductions against the highest marginal tax brackets of the estate, trust(s), or beneficiaries, and 3) selecting fiscal year accounting periods to defer the payment of taxes. Administration expenses should be paid in the year in which they will provide the greatest income tax benefit, if there is a possibility that they may be claimed as an income tax deduction. Several types of expenses may be taken as a deduction on more than one tax return. For example, medical expenses incurred during the last illness might be taken either on the final income tax return of the decedent or on the estate tax return. Administration expenses incurred during the administration of the estate may be taken as deductions on either the estate tax return, the estate’s income tax return, or potentially the income tax return of the residuary beneficiary.
If the decedent owned any Individual Retirement Accounts (IRAs) and qualified plan distributions at death, the Personal Representative will need to consider all of the requirements for distributions. This is a very complicated topic and needs to be discussed with the estate’s lawyer.
Finally, the Personal Representative will need to discuss with the beneficiaries the possibility of using qualified disclaimers to redirect assets to contingent beneficiaries. This may provide for significant estate tax savings. The discussion of qualified disclaimers needs to happen at the very beginning of the estate administration process. This is another very complicated topic and needs to be discussed with the estate’s lawyer.
Personal Representative’s Fee
The Personal Representative is entitled by law to receive a commission (fee). The estate’s lawyer will be glad to discuss this with you. The commission will be income to you and taxable when you receive it. You are not required to accept the commission and if you intend to waive it, you should advise the estate’s lawyer as soon as possible. The commission will constitute a tax deduction for the estate which may be applied against the estate tax or the income tax of the estate and is reportable income to the Personal Representative.
Closing the Estate
After all of the assets have been collected and the debts and taxes paid, the Personal Representative must then distribute the remaining assets to those persons entitled to receive them. Distributions of estate assets to beneficiaries can be complex. The timing of distributions can have significant tax consequences and there are provisions of state law which alter the amounts beneficiaries may seem to be entitled to receive.
Time Period for Estate Administration
It is usually not possible to complete the administration of an estate in less than about one year. Normally an estate administration takes longer than that, typically up to eighteen months. If there are disputes with tax authorities, it can take even longer. If the estate is required to file an estate tax return, then the estate administration period might be two to three years from the date of death. Consequently, you should not expect to complete the administration of the estate in a very short period of time.
Consulting with a Lawyer
Many of the items mentioned above are best addressed with the assistance of a lawyer.