Estate administration is an important fiduciary duty. If you have been named as executor of a loved one’s estate, then you should have some basic knowledge about the requirements of estate administration and distribution of assets. Fiduciaries, in the probate and estate context, are usually executors or trustees. Here are some of the basics.
The basic steps required in probate
The first step in probate involves initiating the court proceedings by filing a petition. This petition should be filed in the probate court in the county where the deceased was residing at the time of death. Once the initial petition has been filed with the court, a hearing will be scheduled typically within thirty days. Notification of the hearing must be published through the court’s procedures so that potential heirs and creditors are aware of the hearing date. After the executor is formally appointed, he or she needs to take possession of the property in the estate that is subject to probate. If certain property requires transfer of title to someone, the executor will handle that as part of his or her duties.
Order of distribution of estate property
Distribution of the estate’s assets requires that creditors be paid before heirs receive any inheritances. All legitimate debts and funeral expenses must be included. Creditors are required to submit claims for payment of their debts. According to the laws in the state where probate has been opened, creditors must submit their claims within a certain deadline. Once debts are paid, estate taxes are next. Any assets that remain are then distributed to the appropriate heirs or beneficiaries.
Distribution of assets to heirs or beneficiaries
The first distributions are made pursuant to any will or trust that exists. Wills or trusts will specify certain gifts of cash or property to be distributed to named individuals. Once those distributions are made, the remaining property will go to whoever is entitled to the remainder. Most times, the property can be distributed directly, however in some cases the property must be transferred first to a trust for the benefit of a particular individual.
Distributions to heirs must not occur until all other expenses are covered
One of the worst mistakes an executor can make is distributing assets to the beneficiaries before all debts and applicable taxes have been satisfied. The executor is usually not held liable for unpaid debts or taxes of an estate. On the contrary, if heirs have been paid, but there are inadequate funds remaining in the estate to satisfy the expenses, the executor could be personally responsible. In certain states, the executor is required to obtain court approval before any distributions can be made to the beneficiaries. This requirement is helpful for executors.
Trust administration basics
The primary concern with administering a trust is appreciating the difference between the principal of the trust and the income earned from the trust. In many cases, the trust requires that the income earned from the trust property will be distributed to one individual, while the principal of the trust is distributed to someone else. For example, a trust may require that the trust income be paid to the surviving spouse upon the decedent’s death, and the principal paid out only in specific situations. Then, upon the surviving spouse’s death, the remaining principal will be paid to the decedent’s children.
Executors should obtain advice when necessary
An executor should not make assumptions about his or her duties. Every estate is different just as the terms of each will or trust are unique. For that reason, you cannot assume there will be a “standard distribution.” In fact, there really is no such thing. So, if you lack financial experience you would be wise to consult with a professional regarding such aspects as investments, for example. Knowledge regarding which assets should be sold in order to have cash for expenses, taxes and other cash distributions, as well as, how to minimize income and capital gains taxes, can be extremely helpful.
Don’t forget to pay the estate taxes
Every estate with a gross value that exceeds $5.45 million, is required to pay estate taxes. Form 706 along with the required tax payment must be paid within 9 months of the decedent’s death. An automatic 6-month extension of time for filing the return is available, for all estates by filing IRS Form 4768. But it is important to remember that the form does not extend the time to pay the taxes that are actually due. Also, the surviving spouse can elect to add their deceased spouse’s unused estate tax exemption to their own, which is known as “portability.”
If you have questions regarding estate administration, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (816) 974-3030.