After a loved one passes away, there are a number of things that must be done to settle the final affairs of the deceased person (the “decedent”). Assets must be collected, debts paid, tax returns filed, and distributions made according to the decedent’s wishes. Generally, these tasks are completed by the person(s) selected by the decedent to act as the personal representative of the decedent’s estate and/or the trustee of the decedent’s revocable trust (collectively referred to below as the “fiduciary”), depending on how the decedent’s property was held.
The span of time between the decedent’s death and the final distribution of the decedent’s assets to the beneficiaries is commonly known as the post-death administration process. It can take anywhere from several months to several years to complete, depending on the size of the estate, the existence of any creditors or contested claims, and the complexity of tax and other relevant issues.
The post-death administration process is different in each case. But no matter how simple or complex an estate may be, this process typically involves three main goals: (1) to gather information, initiate probate (if required), and collect and safeguard the estate assets; (2) to pay or otherwise satisfy debts, taxes, and other administration expenses; and (3) to distribute the remaining assets to the beneficiaries. Each of these steps is described in more detail below.
Initial / Ongoing Steps
Soon after a person dies, some initial tasks must be completed in relatively short order. These tasks include, among other things, the following:
- Contacting relatives, close friends and key advisors to notify them of the decedent’s death.
- Making arrangements with the funeral home.
- Arranging for publication of the obituary.
- Inventorying contents of all safes and safe-deposit boxes.
- Contacting the Social Security Administration and the three credit reporting agencies (Experian, Equifax and TransUnion) to report the decedent’s death.
- Canceling all credit cards in the decedent’s name.
After completing the more immediate tasks, the fiduciary should start gathering the information and documents that will be needed to administer the estate. Most notably, this means locating copies of the decedent’s original estate plan documents (e.g., last will and any codicils, revocable trust and any amendments, beneficiary designation paperwork for life insurance and retirement assets, etc.). The fiduciary should also prepare an initial inventory of the decedent’s assets to determine how those assets are presently held and whether probate must be opened for the decedent’s estate.
Probate is a court-supervised procedure for administering the decedent’s assets. However, not all assets are subject to probate; typically, probate only governs assets titled in the decedent’s individual name at death. Certain types of assets are not normally subject to probate, such as assets titled in a revocable trust or assets that pass by beneficiary designation, pay-on-death designation, or joint tenancy. The laws of each state vary, so an attorney should be consulted early in this process to determine whether a probate proceeding is necessary.
In Nebraska, for example, probate is required if the total fair market value of all the decedent’s personal property, wherever located, less liens and encumbrances, is more than fifty thousand dollars ($50,000). Probate is also required if the decedent owned Nebraska real estate with a collective value exceeding fifty thousand dollars ($50,000). The value of the decedent’s real estate for this purpose is determined by the assessed value of the property for the year in which the decedent died, less unpaid real estate taxes (including interest) due at the decedent’s death.
Collecting, Safeguarding and Valuing Estate Assets
To help prevent theft or loss, the fiduciary should collect all assets comprising the decedent’s estate after the decedent’s death. For bank and brokerage accounts, this means the fiduciary must provide the bank with a copy of the document that establishes the fiduciary’s authority to act, such as the court-issued “Letters of Personal Representative” (if a probate is opened) or a copy of the trust agreement (if the account is held by a trust). Other types of assets, such as insurance policies and retirement assets, may have to be applied for by filing a claim with the applicable company holding such assets.
If the decedent owned a home, the property should be secured and closely monitored to protect it against vandalism and destruction. The fiduciary must also pay the mortgage, insurance, utilities, and real estate taxes for the property as they come due. If the decedent owned any rental property, the fiduciary should ensure that the tenants continue to pay rent and comply with the lease terms. In addition, appropriate insurance coverage should be maintained throughout the administration process (especially for any unoccupied property) in order to safeguard the assets in the fiduciary’s possession or control.
The fiduciary must also ascertain the value of the estate assets as of the decedent’s date of death. This is relatively straightforward for assets like cash, marketable securities, and other publicly-traded assets. For real estate, the fiduciary may need to engage a professional real estate appraiser who can determine the property’s fair market value. An appraiser may also be needed in order to value any rare or unusual items of the decedent’s personal property, such as jewelry, artwork, collectibles, or closely-held business interests.
Managing Estate Assets
A fiduciary has a statutory duty to manage the estate assets in the best interests of the beneficiaries. Thus, the fiduciary should avoid conflicts of interests, self-dealing, or other actions that might put the fiduciary’s own interests above the beneficiaries’ interests. The fiduciary should also keep his or her own assets separate from the estate assets and keep detailed records of all receipts, disbursements, and other important actions involving the estate. Cash and other liquid assets should be invested prudently and conservatively to prevent depletion of the estate assets. A fiduciary who violates these duties may be subject to legal action by the beneficiaries or creditors.
Paying Debts, Taxes and Expenses
Before the estate can distribute its assets to the beneficiaries, it must first satisfy all creditor claims, taxes and other administration expenses.
Paying Debts and Expenses
Debts incurred by the decedent during his or her lifetime, or reasonable and necessary administration expenses for the estate after the decedent’s death, should be paid with estate property. For example, if the decedent left a checking or savings account, the fiduciary should transfer those funds into an estate bank account and use the money to pay bills. The fiduciary is generally not personally liable for such expenses.
If the estate does not have sufficient assets to pay the decedent’s debts, the fiduciary should consult his or her attorney before paying any creditors. Under Nebraska law, creditors have a limited window of time to come forward with their claims for pre-death debts (generally, 2 months after notice is provided to the creditor, with certain exceptions). Nebraska law also establishes the priority in which debts should be paid. If the fiduciary inadvertently pays estate money to a creditor who is not entitled to receive it, the fiduciary may be required to reimburse the estate for any shortfall caused by such payment.
Nebraska County Inheritance Tax
Nebraska has repealed its estate tax but imposes a county inheritance tax at death. For any amounts that are deemed to pass to the decedent’s spouse or any qualified charity, the inheritance tax is zero. For deemed transfers to immediate relatives (parents, grandparents, siblings, lineal descendants, and the spouses of such persons), the inheritance tax is 1% of the fair market value of the property passing to the beneficiary over an exemption amount of $40,000 per beneficiary. With respect to deemed transfers to more remote relatives or others, the inheritance tax ranges from 13% to 18% over a nominal exemption amount. The Nebraska county inheritance tax must be paid within one year of the decedent’s date of death.
Federal Estate Tax
If the gross value of the decedent’s estate exceeds the decedent’s unused federal estate tax exemption ($11,700,000 in 2021, reduced by lifetime gifts), then a federal estate tax return (Form 706) must be filed with the IRS. Moreover, if the decedent had a surviving spouse, it may be advisable to file the estate tax return, even if it is not technically required, in order to transfer the decedent’s unused estate tax exemption to the surviving spouse (i.e., a “portability” return).
The estate tax return is due 9 months after the decedent’s date of death. This due date can be extended by an additional 6 months if an extension form is timely filed; however, note that extending the filing date for the return does not extend the due date for paying estate tax. Therefore, all estate tax must usually be paid within 9 months of the date of death, regardless of when the estate tax return is filed. The IRS generally has 3 years from the filing date to audit the return and to assess any additional estate tax.
Income Tax Returns
The fiduciary is also responsible for filing income tax returns for the decedent and the decedent’s estate/trust.
The decedent’s “final” federal and state individual income tax returns (IRS Form 1040 and Nebraska Form 1040N) will report the decedent’s income received from January 1 through the decedent’s date of death. Taxes, if any, must be paid by the due date, which is generally April 15 of the calendar year following the decedent’s date of death.
Any income received by the decedent after his or her date of death is reported by the decedent’s estate and/or trust. Since the estate and trust are each separate taxpayers in their own right (separate and apart from the decedent), a new federal tax identification number (known as an “Employer Identification Number” or “EIN”) must be obtained for the estate and/or trust and “fiduciary” income tax returns (IRS Form 1041 and Nebraska Form 1041N) must be filed for the estate and/or trust.
Distributing Assets to the Beneficiaries
After all creditor claims, taxes and other administration expenses have been satisfied, and the decedent’s estate is ready to be closed, the fiduciary can distribute the remaining assets to the beneficiaries. In connection with the distribution, the fiduciary should consider holding back a reasonable “reserve” to pay for any unanticipated debts, taxes, and costs. It is also advisable to obtain a receipt and release from the beneficiaries in connection with any preliminary or final distribution from the estate. In addition, when distributions are made according to a formula described in the decedent’s will or trust, it is best to consult a competent attorney to ensure the transfers are completed properly. Tax consequences of a distribution can sometimes be surprising, so careful advance planning and coordination with tax advisors is important.
If you need any assistance with the post-death administration of an estate or trust, please contact a member of McGrath North’s Tax and Estate Planning Group.