Introduction
Handling someone’s estate after they have passed away can be a daunting task. Hopefully the deceased (or the decedent) left a will with detailed instructions, but even with a proper will, navigating probate is a complex, time-consuming process. As the executor (also known as a personal representative), you will be responsible for the following tasks:
- Gathering and assessing the decedent’s assets
- Settling any outstanding debts, liabilities, and bills
- Filing a final tax return (and, if necessary, settling a tax liability)
- Distributing any remaining assets to the beneficiaries
Depending on the structure of the decedent’s estate—namely, if the estate includes a trust—you may also be named as a trustee. This designation comes with a fiduciary responsibility to properly manage the assets held in the trust. It may be a short-term role if the trust is to be immediately transferred to the beneficiary, but it could be a long-term role if the trust has vesting instructions, or if the trust is intended to support future generations.
To aid with these responsibilities, the American Bar Association (ABA) has published six guidelines for individual executors and trustees to follow.
Understanding the Will
If you accept the nomination to serve as the estate’s executor or trustee, it is your responsibility to understand and implement the terms of the will and/or trust. Failure to follow the decedent’s instructions or general failure administer the estate lawfully could have serious repercussions. Interested parties who are harmed by your inaction may sue to recoup any damages, and you could be subject to criminal charges if the court finds you concealed part or all of the will for financial gain.
The ABA recommends that an executor or trustee sit down with a qualified attorney to review the decedent’s will and clearly understand everything that’s required. Note that such a consultation would be paid for by the decedent’s estate, not by the executor or trustee. During this consultation, be sure to address the following topics:
- Are there any co-fiduciaries or co-executors that you are obliged to work with?
- Who are the decedent’s beneficiaries?
- Which assets (or percentage of assets) are each beneficiary entitled to receive?
- Does the will offer any instructions on when the assets are to be distributed to the beneficiaries?
- Does the will grant everything to the beneficiaries outright, or does it create a trust that may gradually distribute assets over several years?
- Does the trust mandate any distributions (e.g. the surviving spouse receives 100% of income generated each year), or does it leave this to the trustee’s discretion (e.g. the trust is to pay for a child’s education until all assets are transferred at age 24)?
Managing the Estate’s Assets
Once a will has been submitted to the county court and probate is opened, the court will provide the executor with Letters Testamentary. These documents formally authorize the executor or trustee to act on behalf of the decedent’s estate, especially when it concerns collecting and valuing assets. You’ll also need several copies of the death certificate, as many financial institutions require proof of death before granting you access to the decedent’s accounts.
With the formal authorization in hand, you’ll need to value the estate’s assets. This is relatively simple for liquid assets such as bank accounts and brokerage accounts, but illiquid assets may require hiring a professional appraiser. Examples of assets requiring formal appraisal include real estate, vehicles, furniture, art, jewelry, or collectibles. If the decedent held any business interests, these will need to be assessed and valued as well, usually with the aid of an accountant.
Handling Debts and Expenses
When the court delivers the Letters Testamentary, it will also require the executor to notify all interested parties of the decedent’s death. Beneficiaries and known creditors should be officially notified by mail, and a notice of the initiation of probate will need to be printed in the local newspaper. The newspaper ad will serve to notify any unknown creditors of the probate proceedings, giving them the opportunity to submit any claims on the estate.
Once all of the estate’s assets have been collected and valued, the executor will settle any liabilities in the following order:
- Administration expenses
- Funeral expenses
- Debts
- Taxes
- All other claims
The initial priority is to set aside enough funds to cover the estate’s ongoing administration expenses. This includes legal fees, appraisal costs, and a fair salary to the executor for their time and effort. Once these are covered, funeral, internment, and memorial costs need to be paid.
The next step is to settle the decedent’s outstanding debts. Creditors are usually given a certain period of time to submit a claim, ranging anywhere from 30 days to 4 months after probate is opened. When legitimate claims are made, the executor is required to sell or liquidate assets to settle the debts.
Once the decedent’s debts are paid, it’s time to pay the tax man. The executor will need to file a final tax return for the year the decedent passed away, and, if necessary, file an estate tax return for individual estates over $5.49 million and joint estates over $11 million. It’s not uncommon for decedents—especially those who were aged or ill—to have missed filing tax returns in recent years, so it’s good practice to ensure that tax returns for the preceding five years are submitted. In the process, you may be required to get a new tax identification number for the estate or trust, as it is a unique taxpayer in its own right; the IRS will assign this from their website (www.irs.gov).
Finally, all other claims against the estate, such as outstanding bills, will need to be settled before the executor can begin distributing assets to the beneficiaries.
Funding the Bequests
The first distributions to beneficiaries—if any—will be spelled out in the decedent’s will. These are specific instructions, such as giving $50,000 to a favorite charity, or $10,000 to an extended family member. This is also the point where some of the estate’s assets may be transferred to a newly-created trust. Before any assets are transferred, though, be sure all liabilities are settled and confirm the funding bequests, as it is difficult to retrieve distributed assets from beneficiaries if a mistake is made.
Administering the Trust
If the estate includes any trusts, the individual named as trustee has a fiduciary responsibility to administer the trust prudently. If ongoing investments are necessary, the trustee will need to choose suitable investments that match the trust’s purpose and goals. Unless the trustee has financial experience, it’s a good idea to consult with a financial advisor for this responsibility, as the trustee will be held responsible for poor financial decisions. A good financial advisor can help select suitable investments, advise on which assets to sell for cash to cover the estate’s liabilities, and how to prepare for or minimize tax implications.
Some trusts are designed to last indefinitely by distributing only the income generated by the trust’s assets; others will have specific instructions to sell assets and gradually distribute the proceeds, ultimately liquidating the trust. A common scenario is for the trust to provide for the surviving spouse until their death, at which point the trust’s assets will be liquidated and transferred to the beneficiaries.
Closing the Estate
After distributing any remaining assets to the beneficiaries, the court will order the estate be closed. Some states require a formal petition to do this. The ABA recommends the executor or trustee draft a document with an attorney that the beneficiaries can sign, signifying that they have taken possession of the assets and that they approve of the executor or trustee’s actions. Doing so will indemnify you against future disputes or claims regarding the estate.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.