“You’re the Executor – Now What?”
by HOFFMAN & ASSOCIATES and JIM UNDERWOOD, CPA/PFS, CFP®, AEP, JAMES UNDERWOOD CPA, CFP®
You previously agreed to serve as the executor for a family member, close friend, or client. Now the time has come for you to take on the role – what’s next?
While being named as the executor or personal representative is a big honor, it can also require a considerable amount of time and work. Being named under the Will does not require that you accept the responsibility, so a close reading of the Will and discussions may need to happen to determine your willingness and/or ability to serve and carry out the necessary activities. In particular, try to determine whether you might be stepping into the middle of existing or potential family conflicts. If so, seek local advice from a qualified probate attorney as to your potential exposure when deciding whether to accept this responsibility.
Confirm that the funeral home will be obtaining a death certificate and certified copies, and contact the Social Security Administration to notify them of the decedent’s death. Be aware – they may take back any funds that were distributed to the decedent’s account after his death.
If probate is necessary, it is usually a good idea to collaborate with the decedent’s attorney to start the process with the Probate Court in the county of residence (which may or may not be the county where the decedent passed away). Present the original signed Will and a proper petition to the Court and the Judge will issue you Letters Testamentary, the legal document that authorizes you to act as the executor. Ask for several original copies, as you frequently need to present them as proof of your authority over brokerage accounts, bank accounts and other assets.
After receiving the Letters Testamentary, either you or the attorney need to file the required notice to creditors in the decedent’s county’s local legal newspaper so that any outstanding claims can be presented to the estate for consideration. These claims will have priority over most other creditor claims.
Compile an inventory of all estate assets and their estimated fair market value, using appraisers if needed (in some cases appraisals may be required to establish the new tax basis of an asset to be sold or distributed). Depending on the terms of the Will, the Probate Court may require a formal estate inventory and/or annual accountings that will be provided to estate beneficiaries down the road. This may help to determine what inheritance taxes may be due, but it is necessary no matter what to have a detailed listing of all the assets for which you are responsible. Remember that beneficiary designations on retirement accounts, insurance policies or other assets control their disposition, regardless of what the Will says. The asset will normally be a part of the taxable estate, and while the executor can assist the named beneficiaries in filing a claim, you have no authority over such assets. For many items, especially those with similar descriptions, such as jewelry, collectibles, or family heirlooms, it is a good idea to include pictures of the assets in the inventory report to help avoid confusion, suspicions, or family arguments.
Notify the IRS and obtain a tax identification number for the estate if you will need to open banking or investment accounts for estate assets. You will also need it when filing any required income tax returns for the estate.
Transfer bank accounts, where there is a “surviving owner” (the account may read “POD” for payable upon death, “TOD” for transfer on death, or joint owners with “JTROS,” joint tenants with right of survivorship). The surviving owner should take a certified copy of the death certificate to the bank to transfer the account.
Notify any financial planners/account managers who the decedent worked with. Coordinate with them to open new bank and/or brokerage accounts in the name of the estate and transfer existing personal account assets to the new accounts. It is important to obtain date of death values for all marketable securities (excluding those held in retirement-type accounts). Generally, this will be the average of the high and low price for each security on the day of death. Many brokers will calculate this amount for you. Doing this will reflect the correct date of death tax basis so that the calculation of gains and losses on future sales is correct.
Contact any life insurance companies regarding policies owned by the decedent and payable to the estate and obtain claim forms and instructions regarding how to file the claim and receive the proceeds. If the decedent had a relationship with an insurance agent, contact them, as they can be very helpful in this process.
If there is no surviving spouse, arrange to secure the real estate and the personal property so that it can be transferred to the correct beneficiaries at the proper time. It is generally good practice to have the locks changed on the residence at this time. It can be helpful to change the mailing address on various bills that need to be paid during the administration of the estate so that they come directly to you going forward.
Contact a tax attorney or experienced CPA to assist with the filing of taxes. Generally, a Form 1040 individual income tax return will need to be filed for the portion of the year covering January 1st until the date of passing. Additionally, an IRS Form 1041 “estate” income tax return may need to be filed covering the remaining portion of the year from the date of death until December 31st (or any other fiscal year end that is selected by you, generally for tax planning purposes, when the initial return is filed) and annually thereafter for any year that the estate has any taxable income, until it is closed. Depending on the primary residence of the individual, state income tax returns may also be required – again, both for the individual and the estate. Estate tax liability is uncommon at the current exemption amounts of $12.92 million, so it is only applicable to a small minority of very large estates. However, in order to preserve a first-spouse-to-die’s unused exemption, a Form 706 is required to be filed regardless of the size of the estate.
During the estate administration period, as long as you are comfortable that all debts or other claims have been resolved or provided for, you can distribute any specific dollar amounts or property to a beneficiary as directed by the Will. You can also make interim distributions to the remainder beneficiaries, as long as you keep significant assets in the estate to handle any future or unexpected expenses or contingencies.
Remember to read the Will carefully and, when allowed, make distributions in cash or in-kind to the beneficiaries for the correct dollar amounts, but also giving consideration to future potential growth or desired ownership of specific assets. It is helpful to try to understand the needs and desires of the various beneficiaries when making these decisions.
When considering making distributions which are not pro rata for each asset, it is wise to consult the estate’s attorney to determine whether the written consent of the heirs should be obtained. Likewise, when you are ready to close the estate, if no reporting to the Probate Court is required, it may be good to have the beneficiaries sign a formal release prepared by the attorney.
Before closing the estate and making final distributions to the beneficiaries, consider whether you will be taking an executor’s fee. The amount varies based on the types of assets you transferred as the executor, so be sure to consult the attorney.
In conclusion, you can provide a great service in serving as an executor, but always try to anticipate and deal with conflicts among heirs. You should be impartial and fair, and, for your own liability, stick to the terms of the Will as closely as possible. As with other clients, provide added value due to your professional knowledge and expertise by keeping good records and documentation and by making “tax wise” decisions when appropriate. Also, be sure to collaborate with other professionals as needed to serve the surviving family members well.
