Estate administration is the process of winding up a person’s financial affairs following their death.
The process includes ensuring that certain payments are made, including the decedent’s debts, final expenses for disposition of bodily remains and any memorial service or marker, and certain taxes, and then transferring the remaining assets to loved ones or charities according to the wishes expressed in a person’s estate planning documents and according to their beneficiary designations. Depending on the assets involved and the estate planning completed by the decedent, several different matters may be proceeding at the same time.
While a good estate plan can make the passing of a loved one somewhat easier for our beneficiaries, this is inevitably an emotional period for those who are grieving their personal loss. Even with the clearest of estate plans, the administrative process can be time-consuming and frustrating for many. Seeking an attorney or other advisor to assist with an estate administration is often a way to relieve some of the headaches we commonly associate with winding up someone’s life after they pass. With decades of experience in this area, the attorneys and staff at Sessa & Dorsey are prepared to facilitate and coordinate the estate administration process from beginning to end.
Probate administration is the legal process of settling a person’s “probate estate” – all those assets which are in their individual names. In Maryland, this is conducted under the supervision of the Register of Wills and Orphans’ Court of the county in which the decedent lived.
The probate process exists for three main reasons:
- To validate the deceased person’s Will (if any) and prevent fraud;
- To settle the deceased person’s debts, including taxes; and
- To distribute the deceased person’s assets held in their sole name to the intended recipients.
When the decedent has a valid Will, the Personal Representative (typically someone who has been appointed in that Will), is responsible for ensuring that the distributions directed by the Will are carried out. When there isn’t a valid Will, state law provides for the probate process to name a Personal Representative (based on an order of preference) and assets pass to the deceased person’s intestate heirs. Again, this is defined by state law and is generally limited to spouses and/or blood relatives.
One of the primary purposes for using Revocable Living Trusts (“RLTs”) in an estate is to create a simpler process for a person’s loved ones during estate administration. Unlike probate administration, which is a public process and subject to certain reporting requirements and timelines, administration of an RLT after the grantor’s death is instead handled by the successor Trustees privately without court oversight. When done properly, the RLT administration satisfies the purposes of the probate process (listed above) in a more cost-effective and private manner.
As a person’s estate can include several types of assets which may have beneficiary designations, the estate administration process is often not solely a matter of probate and/or RLT Administration. Assets with valid beneficiary designations avoid the probate administration process and are not generally governed by a person’s RLT. Accordingly, the estate administration process often includes coordinating the transfer of retirement accounts (or other accounts with beneficiary designations) and the processing of claims on life insurance policies.
The winding up of a person’s financial affairs may also include tracking down other benefits or refunds which could be due, filing a final income tax return, and/or managing the transition of business operations and interests. There are often certain tax elections to consider which affect how these assets pass to the beneficiaries or whether the beneficiary should consider disclaiming their interest in certain assets.
Within nine months of a person’s death, estates of a certain size must file federal and/or Maryland estate tax returns and pay any tax due. Typically, the Personal Representative of the estate is obligated to file these returns. If there is no Personal Representative, the Trustees of the Revocable Trust or a person’s nearest living relative will often be responsible for filing these returns. In addition to preparing the estate tax returns, the responsible individual must ensure that any taxes are properly paid.
For married couples, under both federal and Maryland law, the estate tax exemptions of the first spouse to die can be transferred to the surviving spouse – assuming the proper returns are filed to elect portability of the first spouse’s unused exemption. This portability is not automatic but is an election that requires the filing of an estate tax return. Accordingly, while the first spouse’s estate may not be required to file a federal and/or Maryland estate tax return, the Personal Representative, Trustee, or another responsible individual may consider filing such estate tax return to elect portability and preserve the first spouse’s exemption amount – significantly impacting the taxability of the surviving spouse’s estate.
Like individuals, Estates and Revocable Trusts (beginning on the date of a person’s death) must file fiduciary income tax returns reporting the income of the Estate and/or Trust earned after death. These fiduciary income tax returns are like an individual’s Form 1040 but with several distinctions – including how certain expenses may be reported or deducted, how income is passed out from the Estate/RLT to the beneficiaries, and how and when some income and expenses are reported.
One important distinction is that estates can report income on a fiscal year-end as opposed to a calendar year-end – beginning on the person’s date of death and ending on the last day of any month before the first anniversary of the person’s death; this means that the estate is allowed to elect its tax year which can change how and when income is treated as taxable for the beneficiary on their individual returns. When a person dies with an RLT, the RLT is generally tied to a calendar year unless it files an election, in connection with the estate’s return, to report income as a combined entity for income tax purposes – so the two separate entities, the estate, and RLT are effectively managed and treated as one for income taxes. Choosing to elect, or not elect, can have significant tax implications and this election should be considered as part of the overall estate administration.
Whether we prepare the estate income tax returns or coordinate with a CPA or other tax preparer, the estate administration is generally not complete until these fiduciary income tax returns are filed.