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April 4th, 2022 The Pandemic was the latest chapter reinforcing the use of Revocable Living Trusts (“RLTs”) for seamless management and administration far beyond the benefits of a Durable Financial Power of Attorney and Will for seniors. Specifically,… Read More
March 15th, 2022 Stein Sperling Estates, Trusts & Probate attorneys Adam Abramowitz, Micah Bonaviri and Steven Widdes were featured in Washingtonian’s roundup of the region’s “Top Financial Advisers” in the March edition, which includes a section on Estate… Read More
Duties and Responsibilities
When a person dies, his or her property must be collected by the personal representative. After debts, taxes, and expenses are paid, the remaining assets are distributed to the decedent’s beneficiaries. Distribution is determined by the person’s will, or the intestacy laws (laws that govern the distribution of your estate if you die without a valid will) of the state in which the decedent was living at the time of death. It is the executor’s or the administrator’s responsibility to collect and distribute the assets and to pay any death taxes and expenses of the decedent.
While many executors and administrators perform these designated tasks in an expeditious and prudent manner, this is not always the case. Moreover, state law usually holds the personal representative to the standard of care of a “reasonable, prudent individual” under all circumstances. What is reasonable and prudent to the personal representative when performing his tasks, however, is not always so to the beneficiaries, especially retrospectively.
The various decisions to be made by the personal representative can often cause complaints by the beneficiaries. Sometimes complaints escalate into lawsuits against the personal representative(s). If the court feels that the personal representative has not acted reasonably and in the best interests of the estate and beneficiaries, the personal representative can be surcharged, which means that the personal representative is personally liable for undue mistakes made in the administration of the decedent’s estate.
As a general rule, the administration of an estate or trust after an individual has died requires the personal representative to address certain routine issues and follow several standard steps to distribute the decedent’s assets in accordance with his or her wishes. These guidelines focus on activities that occur in an estate or trust immediately after the individual has died.
Who Will Be The Best Personal Representative?
Keep in mind that the selection of a beneficiary as your personal representative can result in a conflict of interest. Unless that person is the sole beneficiary of the estate (as a surviving spouse often is), he or she may be forced to choose between his or her interest as beneficiary and the interests of the other beneficiaries. Adding an independent third party as personal representative, either alone or in conjunction with a family member, usually solves the problem.
If you have an interest in a closely held business, the selection of a business associate may also result in a conflict of interest. The associate may be torn between selling the business (which the beneficiaries might want) and keeping the business as a going operation (which he might want). If the business is to be sold, the business associate will be obligated to obtain the best price for the sake of the beneficiaries. However, the business associate may also be eager to buy the business, in which case he will be seeking the lowest possible price.
The personal representative should know and get along well with the family members he will be working for after you are gone. It will be essential that the personal representative be a person who is able to communicate freely and openly with the beneficiaries.
If your estate is not extensive or if all of your assets consist mainly of marketable securities and your residence, the surviving spouse or a reliable family member may be the best choice if that individual is up to the job. But, if your estate contains closely held business interests, commercial or rental real estate, limited partnerships, and the like, you need to select someone with business and financial savvy. One of the personal representative’s most important jobs is to obtain accurate valuations of your assets as of the date of your death. The estate tax is based on the value of the assets in the estate, and the IRS often audits the valuations reported on the estate tax return.
A corporate personal representative, such as the trust department of a bank, is a good choice if you cannot choose a family member for some reason, such as a conflict of interest, or if your estate is likely to be difficult to administer, or if you have chosen the bank to be the trustee of your testamentary trust. Many banks would rather not act as trustee if they feel that something might have been overlooked while the estate was being administered.
As noted above, there may be tax related reasons to appoint a corporate trustee or an unrelated individual as an independent trustee.
Get help from Elder Care Direction
The professionals at Elder Care Direction can help to save you time and money. We are able to assist you with the initial paperwork and with understanding the different responsibilities that you might have. If you need further legal assistance, we can refer you to one of our partner attorneys. Call us today or contact us online to schedule a consultation.
Handling Debts and Expenses
It is the fiduciary’s duty to determine when bills unpaid at death should be paid, and then pay them or notify creditors of temporary delay. In some cases, such as property or casualty insurance bills or real estate taxes, the estate may be harmed if the bills are not paid promptly. Most states require a written notice to any known or reasonably ascertainable creditors. While most bills will present no problem, it is wise to consult an attorney in unusual circumstances, as the fiduciary can be held personally liable for improperly spending estate or trust assets.
The fiduciary is responsible for a number of tax returns. First are the personal returns of the decedent: the final income tax return for the year of the decedent’s death; a gift or generation-skipping tax return for the current year, if needed; and prior years’ returns that may be on extension all may need to be filed. In addition, if the value of the estate (whether under a will or trust) before deductions exceeds the amount sheltered by the “applicable exclusion amount,” which is $2,000,000 in 2008 and due to increase to $3,500,000 for 2009, with further changes possible thereafter.
Since the estate or trust is also a taxpayer in its own right, a new tax identification number must be obtained and a fiduciary income tax return must be filed for the estate or trust as well. It is important to note for planning that the estate or trust and the beneficiaries may not be in the same tax brackets. Thus, timing of certain distributions can save money for all concerned. Some law firms (such as White and Williams LLP), and other tax preparers and accountants specialize in preparing such fiduciary income tax returns and can be very helpful. They are familiar with the filing deadlines and will be able to determine whether the estate or trust must pay estimated taxes quarterly.
Most expenses that a fiduciary incurs in the administration of the estate or trust are properly payable from the decedent’s assets. These include funeral expenses, appraisal fees, attorney’s and accountant’s fees, insurance premiums, etc. Careful records should be kept and receipts should always be obtained as most of such expenses are also deductible either for income or death (federal and state inheritance and estate) tax purposes.
What Does The Personal Representative Do?
Being a personal representative is not merely an honorary position. It is a job for a person with both financial know-how and the willingness to carry on with the administration of your estate, sometimes for a period of years.
The personal representative’s five major tasks are:
- Attending to the formalities of probating the will, obtaining a federal tax number for the estate, and hiring professional help. In Maryland, probate is a relatively simple process. The personal representative merely has to file a few papers with the Register of Wills, an administrative officer. The harder parts follow.
- Collecting assets and paying debts. This part of the job includes securing date-of-death valuations for financial assets, getting real estate and valuable personal property appraised, and dealing with creditors’ claims. If your assets include hard to value assets, such as oil and gas interests, closely held business interests, real estate, or an art collection, this process can be difficult. In Maryland, the value of the assets has to be reported to the probate court. The report is required for assets held in a revocable trust as well as for those which pass under a will. If you have real property located in several states, it may be necessary to secure the appointment of ancillary administrators in those states to deal with that property.
- Managing assets, including opening separate bank and brokerage accounts for the estate, collecting life insurance and retirement benefits, retitling property, arranging for the safekeeping of personal assets, insuring the property in the hands of the estate, and making management decisions. The personal representative has to act in the best interests of the beneficiaries of your estate, and not necessarily in the manner you would have acted if you were alive. The personal representative is responsible for any mistakes that reduce the beneficiaries’ shares.
- Filing tax returns and paying taxes. This includes the completion of federal and state income tax returns for you and for the estate itself; a federal or state estate tax return, or both, if your total estate is large enough to be subject to that tax; and state death tax filings.
- Closing out the estate, distributing the assets, and making a final accounting to both the beneficiaries and courts. Your estate can be distributed before the final settlement, but the personal representative has to keep enough in reserve to settle any final tax bills or other claims against the estate. The federal estate tax is particularly tricky, since the IRS has three years within which to audit the return (which must be filed within nine months after death).
The term Personal Representative encompasses both Executors and Administrators, and can used to properly refer to someone who is either an Executor or Administrator.
Related Topic: What are Letters of Administration?
As a result, it is becoming more and more common to refer to the person who is responsible for settling the estate as the Personal Representative of the estate.
The Role of a Trustee
A trustee is an individual named by the person who creates a trust – called a trusted maker or grantor – as part of his estate plan. The trustee oversees the day-to-day management of property that's been placed into the trust.
The grantor and trustee are typically the same people when the trust is revocable. The grantor/trustee can undo the trust and take the property back from it as he sees fit. If he should become incapacitated so he can no longer handle his own affairs, the trust documents he created will typically appoint someone as successor trustee.
The successor trustee would step in and take over management of the trust. He would do the same when the grantor/trustee dies, usually distributing the trust’s property to its beneficiaries and closing it down. Assets held in trust do not have to pass through probate and the court is not typically involved.
An irrevocable trust is one where the grantor creates it then steps aside. He appoints someone else to act as trustee, and he can't later change his mind or take the property back. In this case, the standing trustee would simply continue to manage the trust should the testator die or become incapacitated. As with a personal representative, a trustee can be a person, an institution or a combination of both.