Estate and Trust Administration For Dummies, 2nd Edition
As more and more of the population reach senior ages—including baby boomers, many of whom do not have wills—an increasing number of people are being thrust into the role of executor, administrator, personal representative of an estate, or trustee of a trust after the death of a loved one. This updated edition of Estate & Trust Administration For Dummiesguides you through the confusing process of administering an estate and/or trust.
Settling an estate and administering a trust can be complicated, messy, and time-consuming for individuals named as executor or trustee, most of whom have no previous experience with such matters. Estate & Trust Administration For Dummies shows you how to make sound decisions for your unique circumstances.
- Guides you through the confusing process of administering an estate and/or trust
- Provides expert advice on unfamiliar estate and trust tax law
- Gives you a practical checklist to follow for all of your estate and trust administration questions and concerns
Whether you're looking for guidance on how to navigate the probate process and estate taxes, settle debts and bequests, fund a trust, comply with tax regulations, or anything in between, this hands-on, friendly guide takes away the mystery and provides detailed answers to all of your estate and trust administration questions.
Part I: Getting Started with Estate and Trust Administration 7
Chapter 1: Operating in a Fiduciary World 9
Chapter 2: Exploring the Ins and Outs of Estates 19
Chapter 3: Identifying Different Types of Trusts 31
Chapter 4: Assembling Your Team Members and Knowing When to Use Them 57
Part II: Administering an Estate 73
Chapter 5: Taking the First Steps after Death 75
Chapter 6: Navigating the Probate Process 91
Chapter 7: Marshalling and Liquidating Assets 109
Chapter 8: Paying the Debts, Expenses, Bequests, and Devises from the Estate 133
Chapter 9: Closing the Estate 147
Part III: Operating a Revocable or Irrevocable Trust 157
Chapter 10: Understanding the Trustee’s Duties 159
Chapter 11: Funding the Trust 171
Chapter 12: Investing the Trust’s Assets and Paying Its Expenses 183
Chapter 13: Paying Trust Beneficiaries 203
Chapter 14: Creating and Keeping Trust Records 217
Chapter 15: Terminating the Trust 231
Part IV: Paying the Taxes 241
Chapter 16: Preparing the Estate Tax Return, Part 1 243
Chapter 17: Preparing the Estate Tax Return, Part 2 263
Chapter 18: Filing Income Tax Returns for a Decedent, Estate, or Trust 287
Chapter 19: Weighing Income Tax Implications 311
Chapter 20: Reporting Tax Info on Schedule K-1 321
Part V: The Part of Tens 333
Chapter 21: Ten Pitfalls for the Unwary 335
Chapter 22: Ten Types of Taxes You May Have to Pay 343
Appendix A: Glossary 349
Appendix B: State-by-State Rules of Intestacy and Estate or Inheritance Tax 359
Margaret Atkins Munro, EA, is a tax advisor, writer, and lecturer with more than 30 years' experience in trusts, estates, family tax, and small business. Kathryn A. Murphy, Esq., is an attorney with more than 20 years' experience administering estates and trusts and preparing estate and gift tax returns.
With ongoing medical advances and an emphasis on healthy lifestyles, Americans are living longer and longer. Even given the vagaries of the economy, many of them enjoy a comfortable standard of living. Over the course of a lifetime, an individual might very well accumulate one or more homes, piles of possessions, stock investments, retirement accounts, and more (including, in some cases, accompanying mounds of debt). All of these assets and liabilities need to be handled properly and competently not only during the owner’s lifetime, but also after his or her death.
It all sounds logical on paper, but when you’re asked to administer a trust or estate for a relative or friend (especially if that person didn’t have a will), this responsibility can feel overwhelming during an already difficult time. That’s why the popular For Dummies® series has provided a practical reference for those in this position.
“Settling an estate and administering a trust can be complicated, messy, and time-consuming for individuals named as executors or trustees,” says Margaret Atkins Munro, coauthor along with Kathryn A Murphy of Estate and Trust Administration For Dummies®, 2nd Edition (Wiley, May 2013, ISBN: 978-1-118-41225-1, $26.99). “Often, this is the case because executors and trustees have no previous experience with these matters, causing them to unwittingly commit costly errors in terms of time, energy, money, and even relationships among the survivors of the deceased.”
Fortunately, say Munro and Murphy, much of administering a trust or estate is similar to handling your personal finances. However, because of this similarity you can easily forget that you’re actually working in a fiduciary capacity, not an individual one, and that there are some major differences.
“In fact, one of the biggest issues we’ve run up against when assisting clients, family, and friends is in articulating where the differences lie,” shares Murphy.
“One of the smartest things you can do when you assume control of someone else’s affairs is to do your due diligence in learning about your responsibilities before making decisions and moving ahead,” Munro confirms. “Even if you think you know what you’re doing, it’s best to educate yourself on what’s expected of you in your new role, to review relevant terminology, and to make sure you know where to turn for help in case you need it.”
Here, Munro and Murphy share ten pitfalls that often trip up unwary administrators—and that you should avoid:
Failing to terminate an existing real estate purchase and sale agreement. As far as costly mistakes go, not ending an existing real estate purchase and sale agreement when the decedent (or deceased) is the seller is huge! Keeping the original agreement in place may substantially increase the taxes you’ll owe on the sale, costing the estate and eventual heirs.
“Real estate rarely changes hands on the day the buyer and seller agree to the purchase and sale; in fact, it often takes many weeks, if not months, between the handshake and the deed,” points out Murphy. “When a seller dies in mid-property transfer, canceling the old purchase and sale agreement and rewriting a new one, with the estate as the seller, puts you in the best position. Among other things, you’ll avoid having to pay any income tax on the sale.”
Taking a lump sum distribution from a pension plan, IRA, or deferred compensation plan. When you’re trying to figure out exactly how much the estate owns, you may be tempted to liquidate everything into cash. Don’t give into that temptation when it comes to any sort of pension plan, IRA, or deferred compensation plan. As soon as you cash out, the estate owes income taxes on every penny that the decedent hadn’t already paid tax on.
“In addition to the income tax bite, if you’re dealing with a large enough estate, you may also owe federal and/or state estate taxes on the value of the account as of the date of death,” shares Munro. “Rolling the income-tax-deferred account to the heirs, if you can, is far better than taking a lump sum distribution in the estate. Using this technique, no one owes any income taxes until the new beneficiaries begin to take distributions; additionally, you can spread those distributions out over a number of years, lessening the tax bracket each distribution is taxed at.”
Creating a feeding frenzy when splitting personal property. Nothing alienates family members like weddings and funerals, and nowhere is this more apparent than when you’re dividing up the decedent’s personal property among his or her heirs. If the decedent failed to leave instructions regarding who was to receive what property, your job as executor is to keep the situation under control.
“We’ve found that the most equitable way to distribute personal property among the heirs is to use multicolored flea market stickers, easily purchased at any discount or stationery store,” recommends Murphy. “Give each heir a different color and have him or her take turns (oldest to youngest, youngest to oldest, or in an order determined by choosing random numbers) tagging one item at a time. By the time you finish, you’ll discover that you’re either surrounded by a rainbow of tags or that people mostly just want one or two remembrances; you can sell the rest or give it to charity. Before the tagging event, don’t allow anyone into the decedent’s residence unsupervised, and especially if you expect contention, change the locks!”
Missing court deadlines. Courts hate to be ignored. Make sure that you place all the probate court’s deadlines on your calendar, circled and underlined. Even if you haven’t been able to complete the task set by the court (preparing the probate inventory, for example), showing up to explain why you’re unable to comply usually buys you additional time. Fail to appear, and the courts often demand immediate compliance.
“Don’t make the mistake of thinking that the probate court isn’t a real court or that the judge isn’t a real judge just because proceedings have been fairly low key to this point,” warns Munro. “These judges have full judicial authority, which includes removing you as executor or trustee, fining you, throwing you in the pokey for contempt of court, or any other such sanctions they deem necessary to make you comply.”
Forgetting tax filing deadlines. You wouldn’t fail to file your own tax returns; don’t forget to file the trust’s or estate’s, either. Income tax returns (Form 1041) are due three and one half months after the estate or trust’s year end, and estate tax returns (Form 706) are due nine months after the date of death.
“Place these dates on your calendar and begin preparation far in advance of the due date so you know about any problems or lack of information far in advance of the filing deadline,” suggests Murphy. “Don’t forget, extensions are available if you’re unable to file returns when due, and you may amend returns that turn out to be incorrect.”
Failing to communicate with heirs and legatees. Keep heirs and legatees (individuals left specific property under the will) in the loop as much as you can. By letting them know on a regular basis where you are in the process and when they can realistically expect a payment from the estate, you’re stopping most, if not all, of their complaints before they have a chance to even think of them.
“You can’t please all the heirs all the time, especially those who are upset that they weren’t named executor,” comments Munro. “But do be especially responsive to their concerns. The estate process is under the probate court’s supervision, so an heir who complains to the judge creates more work for you because you now have to respond to the judge’s questions as well.”
Exercising poor fiduciary judgment. As more people have started investing personally, they think they’ve become much more sophisticated and knowledgeable about the entire investment process. And they’ve also become much more likely to comment unfavorably on your handling of the trust or estate’s assets. As the executor and trustee, you must act prudently and deliberately, seeking advice when you need it, investing the assets wisely, and paying the bills and the beneficiaries when they’re due to be paid.
“Remember that the decendent or the donor chose you to look after his or her property because of your good judgment, and part of that judgment is knowing when to ask for help,” points out Murphy. “Don’t hesitate to employ a professional to help you in choosing investments for the estate or trust. If you do turn to professional help, make sure that you check references and determine how much experience that person has in the investment of trust and estate assets.”
Underestimating the devotion required. People rarely understand the magnitude of the task in front of them when someone asks them to act as executor or trustee. Even if they did, the date when the job ceases to be theoretical and the action really begins is often so far in the future that they can’t even imagine such a time.
“If you’ve accepted an appointment as an executor, administrator, or trustee, you’ve agreed to act reasonably and responsibly,” explains Munro. “This job isn’t a small favor you can discharge in an hour or two, or even in a day or two. It’s a major commitment on your part to carry out the stated wishes of the testator or grantor. Treat this commitment seriously.”
Taking nonsanctioned shortcuts. Although you may want to look for ways to reduce your workload, resist the temptation to find an easier route through the administration process. Failure to follow through on any of your responsibilities may open you up to removal as fiduciary, as well as potential lawsuits from any person having an interest.
“No one will ever disagree that many of the steps you’re supposed to take seem pointless and laborious, but you must take them nonetheless,” confirms Murphy. “So if you’re supposed to publish a notice in a certain paper, make sure to do so. If you should have a piece of property appraised, don’t assign it a value, and move on; hire an appropriate appraiser, pay the fee, and get the appraisal in writing. Taking shortcuts through an estate or trust may save you some time up front, but the cleanup costs on the other end, when the IRS wants to see the proof that you’ve valued something correctly or your accounts don’t balance, can be huge.”
Paying from the wrong pocket. Money may always seem like money to you, but within a trust, it belongs to either principal or income. And although making a distinction between the two may seem silly when paying trust bills, you really must. Because different people may be entitled to receive money and property from either income or principal, make payments (whether expenses or distributions) from the correct side of the account is crucial. More than on trustee has been sued because they paid all trustee fees from principal (or income), for example.
“When you make all payments from one side, you favor the eventual owners of the property on the other side (because their share will grow faster),” adds Munro. “To avoid any hint of favoritism, allocate fees and expenses against the type of income that generated the cost. When you’re not sure (like with your trustee’s fee), create an equitable formula so that a certain portion of your fee is always paid from principal, and the rest from income.”
“Administering a trust or estate isn’t always easy or pleasant, but it can be done by a layperson with the right information and a commitment to fully and correctly completing the task,” concludes Murphy.
“Mishandled, estate or trust administration can cause permanent family rifts and legal troubles; however, competent and careful management helps keep family members and Uncle Sam happy. Most importantly, the wishes of the decent are honored and kept intact.”