How to Handle Someone’s Taxes After They Die

Estate Planning Advice
for Every Stage of Life.

How to Handle Someone’s Taxes After They Die

The death of a loved one is always difficult but it can be even more challenging if you are the one who must handle all the resulting tax responsibilities.

There are a couple different ways you can assume the required duties:

    • You may be named as the executor of the decedent’s estate under his or her will.
    • In the absence of a will, you could be appointed as the administrator by the probate court.

Either way, the duties are essentially the same, so for purposes of this article, we’ll call the person with the responsibility the executor.

What must be done? The executor is charged with the task of finding the estate’s assets, paying off its debts, and distributing whatever is left to the rightful heirs and beneficiaries. The executor is also required to file the necessary tax returns and pay any taxes due. If you are the executor and fail to do this, the IRS can come after you personally for tax underpayments, plus penalties and interest. So you need to understand what is involved and get the proper assistance from your attorney.

One of the duties is to make sure the decedent’s final 1040 form is filed. The decedent’s final tax return covers the period from January 1st through the date of death. The return is due on the normal date (generally April 15 of the following year). If the decedent was unmarried, the final 1040 is prepared in the usual fashion. When there is a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive as of year end. The final joint return includes the decedent’s income and deductions up to the time of death, plus the surviving spouse’s income and deductions for the entire year.

The Handling of Medical Expenses

If large uninsured medical expenses were accrued but not paid before death, the executor must make an important choice about how they are treated for tax purposes. Along with any medical expenses paid before death, these accrued expenses can generally be deducted on the decedent’s final 1040 to the extent they exceed 7.5% of adjusted gross income (AGI) in 2017 and 2018.* This is an exception to the general rule that expenses must be paid in cash before they can be deducted. Final medical expenses can easily exceed 7.5% of AGI, especially if death occurs early in the year before much income is earned.

Alternatively, an executor can choose to deduct the accrued medical expenses on the decedent’s federal estate tax return. Of course, this is the wrong choice if no federal estate tax is owed. However, when estate tax is due, deducting accrued medical expenses on the estate tax return is usually the tax-smart option. Why? Because the estate tax rate is 40% while the decedent’s final income tax rate could be as low as 10%. Plus, the full amount of the accrued medical expenses can be deducted on the estate tax return (not just the excess over 7.5% of AGI).

In addition to the final tax return and the medical expenses, here are the rest of the tax-related duties:

File the Estate’s Income Tax Returns. Immediately after death, the decedent’s estate may take over ownership of some or all of the decedent’s assets. If so, the estate will be taxed on its income under complicated IRS guidelines applicable to trusts.

Important distinctions: We are talking about income taxes for the estate, not the final income taxes of the decedent. And the federal estate tax is an entirely different subject.

Small estates (with gross income under $600) aren’t required to file income tax returns. If you are in charge of an estate that must file, get professional help to assist you with this onerous chore because the tax law is very complex.

File the Estate’s Estate Tax Return. The federal estate tax return is filed on Form 706. Assuming the decedent did not make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the estate is worth over $11.18 million in 2018 (up from $5.49 million in 2017). By sizable gifts, we mean in excess of $15,000 to a single recipient for 2018 (up from $14,000 in 2017). If sizable gifts were made, the excess over the $15,000 threshold is added back to the estate to see if the annual limit in effect for that year is surpassed.

Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate tax purposes — even if the money goes directly to policy beneficiaries. In fact, life insurance proceeds are the most common cause of unexpected estate tax bills.

One other very important point: Assets inherited by a surviving spouse are not included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is called the unlimited marital deduction privilege and it’s the most common reason why many large estates don’t owe any federal estate tax.

If you are the executor of a substantial estate, consult with your tax advisor even if you think no estate tax is actually due. If you’re correct, the cost to confirm your conclusion will be minimal. If you’re wrong, filing Form 706 is generally a complicated matter and you may need professional assistance. Also, an experienced estate advisor may be able to find perfectly legal ways to substantially reduce the tax bite or even make it disappear.

*Important Note:  This figure previously rose to 10% for some taxpayers but thanks to the Tax Cuts and Jobs Act of 2017, it reverts to 7.5% for 2017 and 2018.

More Miscellaneous Details

    • If an estate must file income tax or estate tax returns, a federal employer identification number (EIN) must be obtained from the IRS.
    • You should open a checking account in the name of the estate with some funds transferred from the decedent’s accounts.

The bank will ask for the estate’s EIN. Use the new account to accept deposits from income earned by the estate and to pay expenses – such as outstanding bills, funeral and medical expenses, and, of course, taxes.

    • Finally, state income tax returns and perhaps a state estate tax return will have to be filed.
PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

What Immediate Actions Must Be Taken Right After Someone Dies?

Estate Planning Advice
for Every Stage of Life.

What Immediate Actions Must Be Taken Right After Someone Dies?

When a loved one dies, family members are not only in mourning — they may be in a state of uncertainty about what to do next. While everyone is respectful to the loss of the loved one, tension can arise over who must take responsibility for arrangements and costs. Confusion often arises.

In the weeks and months after the death, a person will be appointed by the court and assets will be inventoried and distributed. But what are the steps that must be taken in the first days after the death? This article answers some of the questions you and your family may have in this situation.

Who Pays the Funeral Director?

In some cases, the funeral director wants payment the day of the burial or even prior to the funeral. Yet, the money from the estate and the deceased person’s accounts is not yet available. Who pays? The person who usually covers funeral costs is the family member who is the named executor in the will. Later, the executor will be reimbursed from the assets of the estate when the will is probated.

If the executor does not have the funds to pay the director, then most likely other family members will pitch in to pay the funeral director and be reimbursed by the estate.

What if the estate has no assets to reimburse the executor or family members? Then, all family members should pitch in for the expenses.

If the executor is a non-family member, then the family usually pays for the funeral and is reimbursed from the estate.

If there is no will, the family members will have to choose someone who would be the administrator of the estate and the proposed administrator would pay or family members would pitch in to pay the funeral director. Reimbursement will be from the estate.

If your loved one has bank accounts that are “payable on death” (and don’t go through probate), the beneficiaries might be able to access the accounts in time to pay for the funeral. However, the bank will need to see a death certificate and it may take too long to get one issued (see below for more information about bank accounts).

Note: The decedent may have taken steps to pre-pay for a funeral plan or a burial plot. Check the individual’s personal papers to check for this.

What are Typical Funeral Expenses?

Generally, all expenses that reasonably relate to the burial of a loved one can be considered an expense of the estate. The expense must be relevant to the ceremony or burial or service.

This includes:

      • Casket;
      • Funeral director’s basic service fee;
      • Embalming and body preparation;
      • Cremation;
      • Funeral ceremony and viewing;
      • Hearse;
      • Gravesite;
      • Cost to dig the grave;
      • Headstone and grave marker;
      • Family reception, catered food;
      • Clergy fees; and
      • Florist fees.

Again, all costs must be reasonable. Otherwise, the court may reject the costs (or reimbursements) as an expense of the estate.

When Are Papers Filed in Court?

In some states, there is a waiting period before papers can be filed in court. This is done out of respect for family members to allow them time to grieve. However, if there is an immediate need to file papers to handle a financial matter, the court may entertain an expedited motion or grant temporary letters to resolve the need (for example, to pay health care costs for a surviving spouse; to pay rent; or to run a company). In any event, it would most likely still take a few days before the court would issue an order.

What Happens to Bank Accounts, Credit Cards and Other Assets?

Generally, the proposed executor or estate administrator notifies financial institutions and credit card companies of the death of the decedent — even before the estate administration. This should put a hold on the account. Sometimes, these institutions require a death certificate, which can take a few days to obtain. But it puts banks and credit card agencies on notice in case someone tries to take money from the account or use a credit card.

Once the person has died, no one should write a check from the bank account or attempt to use the decedent’s credit card. Basically, everything is frozen at the date of death until there is a personal representative appointed by the court and an estate account is opened. Further, all other personal assets should remain as is. There is some leeway as to necessities such as moving a car for street cleaning, etc. But generally, nothing should be touched unless necessary to move. All assets should be inventoried as soon as possible.

Important: If a bank account is held jointly by spouses or by two people jointly with rights of survivorship, the account holder who survives can likely write checks. Ask your estate attorney or your bank for more information.

Reasonableness and Respect Are Key

This article only covers some of the immediate issues faced by family members and friends when a loved one dies. Because of the emotional state that most people experience upon the death of a loved one, family members should proceed cautiously when handling the immediate financial needs of the decedent’s estate prior to the opening of an estate by a court. Family members who pay for funeral expenses should keep track of their expenses. They should refrain from attempts to transfer the decedent’s money until authorized by the court. Speak with your attorney about these issues.

More Steps to Take

Does the deceased own pets? Make sure someone takes care of them.

Is the home secured? Ensure the doors and windows of the individual’s home are locked. Cancel newspapers and pick up mail. File a change of address form with the Post Office so the executor receives mail. A home that looks vacant with newspapers and mail piled up can be a magnet for thieves.

What about Social Security? The Social Security Administration should be notified as soon as possible after a person dies. In most cases, the funeral director will report the person’s death to Social Security.

Getting in touch with Social Security ensures that family members will get any benefits to which they might be entitled. In addition, notification allows the government to stop deceased individuals from receiving benefits. (If benefits are erroneously received by survivors, they must be returned.)

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

Can a Trustee Be Held Personally Liable?

Estate Planning Advice
for Every Stage of Life.

Can a Trustee Be Held Personally Liable?

If you are ever appointed a trustee, you will have a fiduciary duty to act on behalf of the beneficiaries. If you breach that duty, you may find yourself in court.

Being a trustee is not an easy job. Trustees must follow the terms of the trust and are accountable to the beneficiaries for their actions. They may be held personally liable if they:

      • Are found to be self-dealing, or using trust assets for their own benefit
      • Cause damage to a third party to the same extent as if the property was their own
      • Become subject to criminal changes for blatant disregard of the law

Basic Principles

If you become a trustee, the following principles can help avoid allegations of wrongdoing that could result in personal liability:

      • Manage the trust according to its terms
      • Keep in mind you have a duty of loyalty to the beneficiaries
      • Choose wisely if you are permitted to seek help from outside professionals
      • Provide and retain good accounting records
      • Keep the beneficiaries up-to-date on activities
      • Exercise reasonable care and skill
      • Ensure trust property is titled correctly
      • Act impartially among beneficiaries
      • Work closely with a co-trustee if there is one

The key to successfully administering a trust is generally to avoid worrying about what could happen if you do something wrong and focus on the best interests of the beneficiaries.

Consider all the Facts

Even then, there can be some liability if a trustee winds up unable to pay trust debts with trust assets or fails to take reasonable care to avoid a decision that causes a loss for the trust. Before making decisions, a trustee should take into account all the facts and consider whether to seek advice from lawyers, accountants, investment advisers or other specialists.

After obtaining advice, however, trustees must make decisions on their own and in good faith. They are not permitted to delegate their decision-making power unless authorized by the trust.

Trustees should not commit to any ongoing action that could effectively limit future discretion. If necessary, a trustee can apply to the courts for directions concerning any trust property, the management or administration of trust property or the exercise of any power or discretion. With court approval for a course of action, they can protect themselves from liability

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

Decanting a Trust: What is It and When is It a Good Idea

Estate Planning Advice
for Every Stage of Life.

Decanting a Trust: What is It and When is It a Good Idea

An irrevocable trust is usually created to take assets out of the estate of the grantor mostly to:

    • Save on federal or state taxes
    • Remove the assets from potential creditors
    • Help protect assets when applying for governmental assistance such as Medicaid

When a trust is first created, the terms may seem sound and reasonable. However, over the years, there may be reasons why the trust no longer works or the circumstances have changed. In order to change the terms of the trust, the trustee usually has to go to court. However, there may be one option to modify a trust that doesn’t require court approval — it’s called decanting.

Trust decanting, which is allowed in some states, is a method for modifying an irrevocable trust. What is beneficial is that you would not have to obtain court approval to modify the trust, which is what usually would have to happen to modify an irrevocable trust. With decanting, the trustee can distribute part or all of the trust principal to another irrevocable trust (called the “appointed trust”). In other words, you pour the assets from one trust to another trust that has different terms.

A list of some of the reasons why decanting might be desired, depending on the trust language and state law:

1. To extend the trust’s term

2. To fix drafting errors or makes ambiguous terms clear

3. To move a trust to a state with more favorable laws

4. To adjust powers of appointment

5. To change trustee provisions

6. To combine multiple trusts

7. To separate trusts

8. To convert a support trust to a discretionary trust

9. To convert a trust to a special needs trust

10. To qualify a trust to own stock in an S corporation

One caveat and something that should be considered when creating an original trust is that it must give the trustee the power to distribute trust principal. If there is no power to invade trust principal, the trustee cannot decant the trust.

What state is the best state for decanting a trust? It depends on various regulations and your specific needs. One state or another may be a better jurisdiction to create your trust or attempt to use decanting methods.

In states without a decanting statute, common law may provide the power to decant if the trustee has authority to invade the trust for the benefit of the beneficiaries. However, a trustee may find him or herself in court if an interested party believes the trustee did not have the authority to decant the trust.

In addition, there is a need to consider tax consequences that may stem from:

    • Changing a beneficiary’s rights to, or interest in, trust principal or income;
    • Adding new beneficiaries;
    • Adding, deleting or changing beneficial interests;
    • Transferring from a grantor to a non-grantor trust;
    • Changing the identity of the donor or transferor for gift or generation-skipping transfer tax purposes.

If decanting a trust seems right for you, discuss the option with your attorney. This is generally a complex strategy but may allow a trustee additional flexibility.

Not All States Allow Decanting: Questions to Ask

The strategy of decanting a trust is only permitted in some states. Even if states do allow it, there are certain restrictions. Here are some questions that should be answered if you are interested in decanting:

1. Does your state have a decanting statute?

2. Does your state statute allow a trust with an ascertainable standard? (An ascertainable standard is one that restricts the trustee to make distributions to the beneficiary based on health, education or support needs.)

3. Does your state statute require the trustee to send notice to the beneficiaries of the trust? (Not all states do.)

4. Does the state statute allow a trust with an ascertainable standard to be decanted into a discretionary trust? (A discretionary trust is one that allows a trustee to determine when and if principal and income distributions should be made.)

5. Does the state statute allow the trustee to remove a mandatory income interest?

6. Does the state statute allow the trustee to decant a trust that gives a beneficiary the power to appoint assets to someone who is not a beneficiary of the first trust?

7. Is the state a favorable dynasty trust jurisdiction? (A dynasty trust can grow for generations and provide tax benefits. However, state laws vary.)

8. Is the state a favorable domestic asset protection trust (DAPT) jurisdiction? (This is an irrevocable, sprendthrift trust that can be established in certain states and provides creditor protection.)

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

Should You Serve as Executor?

Estate Planning Advice
for Every Stage of Life.

Should You Serve as Executor?

When someone asks you to serve as executor of his or her estate, it is generally meant as a compliment that he or she trusts you to serve in this important role. But don’t simply accept the role before you have given the matter serious thought. Not only does the job come with significant responsibilities, but you may find yourself in the middle of family squabbles. Before agreeing to take on the role of executor, consider the following:

Understand the duties involved.

Locate and value all assets. 

This includes dealing with the probate court and filing all required documents; preparing a complete inventory of assets; notifying life insurance companies of the death; collecting money owed from employers, pensions, Social Security, and other sources; and arranging for property appraisals. While the will is in probate, the executor is responsible for maintaining and investing the assets. If a family business is involved, the executor may need to manage or liquidate the business.

Pay the estate’s obligations. 

This includes paying creditors; arranging for the family’s immediate living expenses; and preparing and filing all income, estate, and inheritance tax returns. If assets must be sold to pay debts, the executor must decide which assets and when to sell them.

Distributing the estate. The executor must decide when and how to distribute the estate’s assets to the heirs. The executor may find himself/herself resolving conflicts among family members. After the assets are distributed, a final accounting must be prepared for the court.

Look for potential problems. 

In most situations, executors perform their duties with no problems. If any of the following situations apply, however, you might want to decline from serving as executor:

The person is unwilling to show you his or her estate documents. Without knowing all the details about the estate, you can’t determine whether heirs may disagree or whether the estate plan is more complex than you are comfortable handling.

An heir is disinherited or heirs receive substantially unequal distributions. While it is certainly within the person’s rights to disinherit an heir or make unequal distributions, those situations are more likely to lead to court battles. You should decide whether you want to get involved in that situation.

The person isn’t well organized. One of your primary duties is to track down, manage, and distribute assets. If the individual doesn’t have his or her affairs well organized, you could spend excessive time hunting for documents and assets.

Take safeguards. 

If you decide to serve as executor, try to protect yourself by taking these steps:

Ask the person to limit your liability. Executors can be sued by heirs. Make sure your liability is restricted unless you commit “gross negligence.”

Make sure you can hire an attorney and/or accountant. Be sure to use those professionals to help you with your duties. The use of professionals will also help limit your liability, since they will be more familiar with the process and can help you perform your duties appropriately.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

Is It a Good Idea to Name Co-Executors?

Estate Planning Advice
for Every Stage of Life.

Is It a Good Idea to Name Co-Executors?

When drafting a will, you need to decide who’ll be the executor or personal representative handling your estate when you die.

Individuals who serve in these roles are fiduciaries with a duty to properly administer your estate. When selecting an executor or personal representative, many people gravitate toward individuals they feel should handle the task — for example, a surviving spouse or oldest child.

But you should also consider whether the person has the requisite time, financial savvy and attention to detail. Dealing with all the tasks to close an estate can be a tough, time-consuming job.

This may lead you to wonder about naming two people to the job so you take some of the burden off of a single person or combine the skills of one individual with the attributes of another. Or, you may have another reason altogether, such as not wanting to hurt someone’s feelings.

Weigh the decision carefully. There are cases in which co-executors or co-personal representatives work well together. But there are times when it can lead to delays in administration, strife and even litigation. You may think you’re easing the burden when you may actually be adding to it.

In many cases, it’s best to have one executor or personal representative because it’s easier and more efficient. If the person named in your will dies or cannot take on the role, a successor or alternate executor or personal representative can (and should) be named.

Possible Combinations

If you believe you don’t have anyone who can act alone, then selecting co-fiduciaries may be the choice you want to make. Just make sure the two parties can work together.

There are many choices, including:

  • A surviving spouse and an adult child,
  • A surviving spouse or child and a professional, such as an attorney or CPA,
  • Two or more adult children,
  • A family member and a business partner, or
  • A family member and an institution, such as a bank or trust company.

Sometimes a good team is a relative who knows the dynamics of the family and a professional or institutional fiduciary who can handle the financial aspects of the estate. This usually works better than having two family members handle the job. Why? Two family members may have a tendency to bring emotional baggage into the picture — if there’s any to bring.

Keep in mind, however, that more than one person can slow the process. For example, let’s say you have two children and you want to name them both because you don’t want either one to feel left out. In this scenario, they may both have to sign all documents related to the estate, including tax returns and checks to pay debts. This can be cumbersome, especially if they live far from each other.

Choose Carefully

Another concern with co-fiduciaries is that they may attempt to act alone. Communication is key. Co-executors or co-personal representatives should keep each other informed and consult with each other before making decisions.

If the two people aren’t on the same page, there could be a claim of breach of fiduciary duty if one of them believes the other is mismanaging the estate. In some cases, one of the individuals may go to probate court and ask for the other to be removed.

As you can see, it’s often advisable to name one executor or personal representative.

However, if you still want to name two or more people, choose carefully. Speak with your attorney to review the costs and benefits. Also, keep in mind that if co-executors or co-personal representatives have different attorneys, the attorneys should consult each other before making any decisions.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

How to Wrap Up an Estate

Estate Planning Advice
for Every Stage of Life.

How to Wrap Up an Estate

If you’re an executor or personal representative of an estate — or even an heir — eventually you want closure on the estate. Sometimes, estate proceedings continue to be open for years with no end in sight.

There are certain steps that must be taken to close the estate. This article describes the general procedures. The exact process depends on state law.

Will or No Will

When someone dies, an estate proceeding is necessary if the person owned separate assets without designated beneficiaries. If there’s a will, the executor or personal representative named in it should open an estate proceeding to probate the will.

If there’s no will, a family member — usually a spouse or child — will commence an estate proceeding seeking to become the court-appointed administrator of the estate.

In both cases, the opening of an estate is done through the local probate court.

After obtaining the authority from the court to administer an estate, and after opening an estate bank account, the executor or personal representative must perform many tasks. For example, he or she will “collect the assets.” This might involve selling real estate, stocks and other property to turn into cash for deposit. It also might involve transferring certain assets to the beneficiaries as set forth in the will.

Stumbling Blocks

Difficulties and delays can arise if there are creditors, multiple beneficiaries, disputes among family members and other issues that might include heirs that cannot be located, a will that has contradictory language or internal court delays.

It can take time to sell certain assets, if necessary. For example, some people die owning businesses, multiple homes, cars, or boats, or unusual assets, such as airplanes. The market for these items might be down because of the economy or other factors.

In addition to collecting the assets, the executor or personal representative pays the debts and taxes. In some cases, money from selling the assets is used to pay debts.

Some people who are unfamiliar with the process may think that an executor or personal representative can collect and distribute assets within a short period of time. However, even if the estate has no outstanding issues, an executor or personal representative cannot seek to close the estate until after the time:

  • Creditors are allowed to make a claim (usually five to seven months, depending on the state); and
  • Outstanding estate taxes are paid (usually within nine months of the estate opening, depending on any extensions). The IRS and state tax authorities issue estate tax closing letters when an estate tax return is accepted. However, keep in mind that most estates are not large enough to owe estate taxes. The federal estate tax exemption is $5.60 million for 2017 (up from $5.49 million in 2017).

Distributing the Assets

Depending on all these factors, it may be difficult to finalize the collection and distribution of assets. In any event, when the time comes to distribute them, the executor or personal representative can:

  • Contact the heirs and beneficiaries and inform them of their shares.
  • Provide an informal accounting to the heirs. This includes any fee or compensation the executor or personal representative wants to receive for his or her services, according to state law. An informal accounting may prevent the need for a formal accounting to the court if all the heirs are in agreement as to their shares of the estate and the distributions they will receive.

Prior to distribution, one of the heirs may demand a formal accounting. If so, the executor or personal representative may have to submit one to the court and the court would review it. The court would then decide how to settle the estate.

However, as explained above, a formal accounting is generally not necessary if the beneficiaries and heirs are in agreement on their shares and the expenses. If so, they sign written releases or waivers.

This is what usually happens. However, there are times when beneficiaries or heirs refuse to sign releases. In those situations, the executor or personal representative may consider filing for a judicial accounting so that the court can review and approve it. At that time, the executor or personal representative could request the court to release him or her from any liability.

Note: In some cases, courts require the executor or personal representative to file with the court any tax returns that have been filed with taxing authorities prior to closing the estate.

Don’t Wrap Up Too Soon or Take Too Long

Although it may be tempting to wrap up an estate and distribute the assets, an executor or personal representative must be cautious about moving too quickly. If the assets are distributed and there are still debts and taxes owed, the executor or personal representative could be held personally lia8ble.

How long does it take? It depends on many factors including the size and complexity of the estate. It’s not unusual to take a year or longer. On the other hand, if the executor or personal representative doesn’t move things along in a reasonable amount of time, the court, the heirs or the beneficiaries may intervene. (Some states require the executor or personal representative to provide an affidavit explaining what is causing the estate to stay open for so long.)

Keep in mind that heirs and beneficiaries often feel the process is moving too slowly and their inheritances are being delayed. Communication about the status of the estate may help prevent disputes.

Navigate the Challenges

Bringing an estate to a close can be time consuming and complicated. Contact your attorney for assistance if you’re an executor, personal representative, beneficiary or heir and you have questions about the process of closing an estate.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group. 

When Should You Select a Professional Trustee?

Estate Planning Advice
for Every Stage of Life.

When Should You Select a Professional Trustee?

Most of us know that a trust is a useful way to safeguard financial assets for your benefit or for someone else. But the common misconceptions about trusts could cause you to bypass them entirely, or plan to use them improperly.

Myth #1: Now that Federal Law Allows a $5-Million-Plus Exemption and Includes “Portability,” Estate Taxes Are No Longer a Problem 
A revocable living trust is designed to avoid the expense and public nature of the probate process. It performs the basic functions of a trust, allowing the management of assets for someone who is not capable of managing those assets themselves. A simple revocable living trust, however, does not save estate taxes, although it may defer estate taxes upon the death of the first spouse.

Note: Even though the federal estate tax exemption is expected to rise to $11.2 million million for 2018 (up from $5.49 million in 2017) many states still have estate taxes with much lower thresholds. Talk with your estate planning advisor about your situation.

Myth #2: The Only Purpose of a Trust is to Save Estate Taxes 

A trust can be used to safeguard assets from estate taxes, but that is not its only purpose. The primary purpose of a trust is to manage assets and control their distribution. Some trusts can also save income taxes, in addition to estate taxes.

For example, you might want an irrevocable trust to help protect you from the cost of care if you need a nursing home or home health care in a state with community Medicaid.

Another example: With a irrevocable charitable remainder trust, you can fulfill philanthropic desires. In this case, the donor places assets into the trust that may qualify for an income tax deduction.

By placing the assets into an irrevocable trust, they are removed from the estate and save estate taxes. The charitable remainder trust pays income to the donor and upon the donor’s death, the assets pass to charity.

Yet another type of trust is used when someone remarries and they want to ensure that, at their death, their assets pass directly to their children rather than to the children of their new spouse’s prior marriage.

Myth #3: You Have a Small Estate So You Don’t Need a Trust 

Your estate may be larger than you realize. Factor in the value of your retirement plans, life insurance, and your home. Your estate could be large enough to be subject to substantial estate taxes, causing you to benefit greatly from the estate tax shelter provided by a trust.

Another situation where you may benefit from a trust is with a special needs trust. An example would be a family with a disabled adult child who receives government assistance for basic living and medical expenses. A special needs trust would allow friends and family to donate money directly to the trust, which then uses the money to provide extras for the child, such as trips to visit relatives, clothes, or entertainment. In this way, the trust can provide for the child without jeopardizing government assistance.

Myth #4: If You Create a Trust, You Lose Control

If an irrevocable trust is created, you generally lose control. However, revocable living trusts remain under the control of the trust creator. There are also some irrevocable Medicaid trusts that may allow you some control.

There are types of trusts that offer flexibility. Depending on state law, an incentive based trust may stipulate that the beneficiary graduate from college or attain a certain age before becoming eligible to receive trust income or assets.

Myth #5: Family Knows Best 

A trust will manage and distribute your assets, so it may be better not to have a family member or a friend in charge. Assets must be managed according to the specific requirements of the trust. Failure to administer the trust properly can cause loss of assets or the tax advantages of a trust.

Consider professional management, either as a sole or co-trustee, to ensure the trust is being followed and utilized to its fullest advantage. Your attorney or estate planning advisor can help you decide the best option for a trustee (or trustees).

Myth #6: A Trust Will Keep Creditors at Bay 

Some trusts are designed to protect your assets from creditors. This is a very complicated area of the law and should be left to your attorney. Keep in mind that trusts established to protect assets generally do not protect those assets from an event that occurred prior to the trust being established.

Trusts can be an integral part of planning for your financial future. It is important to discuss your specific financial situation and the relevant trust options with an attorney specializing in estate planning or another financial professional. With their assistance, you can build a complete financial portfolio while protecting and managing your assets.

Name a Successor Trustee

If your trustee dies, becomes incapacitated, or decides he/she doesn’t want to serve as trustee, you should have a successor trustee named — or at least describe how one should be selected, such as through a majority vote of the beneficiaries.

PERKINS & ZAYED, P.C.
1745 South Naperville Road, Suite 100
Wheaton, IL 60189
Phone: 630-665-2300 | Toll Free: 877-TRUST-50
Fax: 630-665-4343
Email: admin@trust-lawgroup.com
The information contained on this website is for informational and educational purposes only and is not legal, tax or financial advice. Always consult a qualified licensed attorney and/or appropriate professional to provide advice for your individual needs and circumstances. Use of this website does not create or constitute an attorney-client relationship. This website may include advertising material for Perkins & Zayed, P.C., The Estate and Trust Law Group.